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Chapter 10

Valuation concepts

QuestionAnswer
Actual(realized) rate of return The rate of return on a common stock actually received by stockholders.
bond A long-term debt instrument.
Capital gains yield The pecentage growth(positive or negative) in the value of an investment. It is computed by dividing the change in dollar value of an investment over some period by the investments value at the beginning of the period.
Constant growth model Also called the Gordon model, it is used to find the value of a stock that is expected to experience constant growth.
Discount bond A bond that sells below its par value. This occurs whenever the going rate of interest rises above the coupon rate.
Dividend yield The expected dividend divided by the current price of a share stock.
Expected rate of return The rate of return on a common stock that an individual stockholder expects to receive. It is equal to the expected dividend yield plus the expected capital gains yield.
Growth rate, g The expected rate of change in dividends per share.
Interest rate price risk The risk of changes in bond prices to which investors are exposed due to changing interest rates.
Interest reinvestment rate risk The risk that income from a bond portfolio wil vary because of cash flows must be reinvested at current market rates.
Interest (current ) yield The annual dollar coupon interest paid on a bond divided by the bonds current market price; it represents the current income return on the bond.
Intrinsic value, Po The value of an asset that, in the mind of a particular investor, is justified by the facts. Po may be different from the asset's current market price, its book value or both.
Market price, Po The price at which a stock sells in the market.
nonconstant growth The part of the life cycle of a firm in which its growth is either much faster or is much slower than that of the economy as a whole.
Normal( constant growth) growth that is expected to continue onto the forseeable future at about the same rate as that of the economy as a whole.
Premium bond A bond that sells above its par value. This happens whenever the going rate of interest falls below the coupon rate.
Required rate of return The minimum rate of return on a common stock that stockholders consider acceptable.
Yield to maturity,(YTM) The average rate of return earned on a bond if it is held to maturity.
Zero growth stock A common stock whose future dividends are not expected to grow at all.
Created by: $amoney on 2006-11-08



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