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Stocks

Valuing Stocks

TermDefinition
Dividends Periodic cash payments that firms make to stockholders.
Residual Claimants Investors who have the right to receive the cash that remains after a firm pays all of its bills and makes necessary new investments in the business.
Proxy Statements Documents that describe the issues to be voted on at an annual shareholders meeting.
Proxy Fight An attempt by outsiders to gain control of a firm by soliciting a sufficient number of votes to elect a new slate of directors and effect a change in company policy.
Zero Growth Model The simplest approach to stock valuation that assumes a constant dividend stream.
Gordon Growth Model Values a share of stock under the assumption that dividends grow at a constant rate forever.
Variable Growth Model Assumes that the dividend growth rate will vary during different periods of time, when calculating the value of a firm's stock.
Free Cash Flow (FCF) The net amount of cash flow remaining after the firm has met all operating needs, including capital expenditure and working capital needs. Represents the cash amount that a firm could distribute to investors after meeting all its other obligations.
Weighted Average Cost of Capital (WACC) The after-tax, weighted average required return on all types of securities issued by a firm, where the weights equal the percentage of each type of financing in a firm's overall capital structure.
Liquidation Value The that remains after a firm's assets are sold and its liabilities are paid.
Book Value The value of equity as shown on the firm's balance sheet.
Comparable Multiples A valuation method that calculates a valuation ratio or multiple for each firm in a sample of similar firms, and then uses the average or median pricing multiple for the sample firms to estimate a particular firm's value.
Investment Banks Financial institutions that assist firms in raising long-term debt and equity financing in the world's capital markets, advise corporations about major financial transactions, and are active in secondary markets.
Initial Public Offering (IPO) A corporation offers its shares for sale to the public for the first time.
Seasoned Equity Offering An equity issue by a firm that already has common stock outstanding.
Negotiated Offer A process used by an issuer to hire an investment banker with whom it directly negotiates the terms of the offer.
Lead Underwriter The investment bank that takes the primary role in assisting a firm in a public offering of securities.
Underwrite The investment banker purchases shares from a firm and resells them to investors.
Firm-Commitment Offering An offering in which the investment bank agrees to underwrite the firm's securities, thereby guaranteeing that the firm will successfully complete its sale of securities.
Underwriting Spread The difference between the net price and the offer price of an underwritten security issue.
Prospectus A document that contains extensive details about the issuer and describes the security it intends to offer for sale.
Road Show A tour of major cities taken by a firm and its bankers several weeks before a scheduled offering; the purpose is to pitch the firm's business plan to prospective investors.
Oversubscribe When the investment banker builds a book of orders for stock that is greater than the amount of stock the firm intends to sell.
Broker Market A market in which the buyer and seller are brought together on a "securities exchange" to trade securities.
NYSE Euronext The largest and most prestigious broker market in the world.
Dealer Market A market in which the buyer and seller are not brought together directly, but instead have their orders executed by market makers securities dealers who are market makers in the given security.
Market Makers Security dealers that "make markets" by offering to buy or sell certain securities at stated prices.
Bid Price The price at which a market maker offers to purchase a security; the price at which an investor can sell a security.
Ask Price The price at which a market maker offers to sell a security; the price at which one can purchase a security.
Created by: bj1white