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Ch 7 finance
| Question | Answer |
|---|---|
| for zero growth how do you caluclate value? ordinary perpetuity | Dividend/Rate |
| Constant Growth: when dividend... | grows at a constant rate |
| asset with cash flows that grow at a constant rate forever is called... | growing perpetuity |
| why would a dividend grow at a constant rate? | for some companies, steady growth in dividends is an explicit goal |
| finding dividend at certain period. dividend just paid is 2.30 growth rate is 5 percent per year | 2.30 x 1.05*5 |
| equity= | ownership |
| (constant growth)growth rate must be less than..... | discount rate |
| equity: | |
| stock represents: | ownership shares in a publicly held company |
| two different types of stocks | preferred stock and common stock |
| equity that pays FIXED DIVIDEND and prior claims on earnings/assets in case of liquidation | preferred stock |
| common stock | equity that may pay no dividend or a discretionary dividend. receives RESIDUAL claim on earnings. recieves voting rights. |
| most residual, very last in line, true owners | common stock |
| holders of equity capital | owners of firm |
| have voting rights to elect firm's board of directors and to vote on special issues | common stock |
| who has priority over common stockholders? | preferred stockholders |
| because equity holders are the last to receive distributions, they expect .... | greater returns to compensate them for the additional risk they bear |
| order of dividends paid.... | bondholders, preferred, common |
| unlike debt, ___ ____ is a permanent form of financing. | equity capital |
| equity has no.. | maturity date and never has to be repaid by the firm (ownership has no expiration date) |
| are dividends paid to preferred and common stockholders of the corporation taxable? | no |
| stocks are less likely for bankruptcy why? | because if you don't pay dividend nothing happens |
| maturity on preferred and common stock? | none |
| voting for preferred & common stock | voting rights only for common stock |
| claim on assets prefferred and common | subordinate to debt - claim on assets. residual - common |
| residual claimants | residual owners. true owners of the firm |
| because of the uncertain position, common stockholders expect to be compensated with... | adequate dividends and capital gains |
| common stock can be owned how? | privately owned, closely owned, publicly owned |
| how are small corporations usually owned? | privately or closely owned. if shares are traded, occurs infrequently and in small amounts |
| unlike bonds..common stock may be sold... | without par value |
| par value of common stock is generally low and useless value stated where? | corporate charter |
| where would a low par value be advantegous? | states where certain corporate taxes are based on par value of stock |
| allows common stockholders to MAINTAIN PROPORTIONATE OWNERSHIP in a corporation when new shares are issued | preemptive right (common stock) |
| What do preemptive rights allow? | existing shareholders to maintain VOTING CONTROL and protect against the dilution of their ownership |
| rights offering: | firm grants rights to its existing shareholders, which permits them to purchase additional shares at lower price |
| authorized shares | number of shares of common stock that a firm's corporate charter allows |
| outstanding shares | number of shares of common stock held by the public |
| treasury stock | number of outstanding shares that have been purchased by the firm |
| issued shares | number of shares that have been put into circulation and includes BOTH OUTSTANDING SHARES AND TREASURY STOCK |
| Each share of common stock entitles its holder to... | one vote in election of board of directors on special issues |
| Common stock votes are generally ___ and cast where and when? | assignable. at the annual stockholders meeting |
| many firms have issued two or more classes of... | stock differing mainly in having unequal |
| what pays fixed dividends? & prior claim on firm's earnings and assets in case of liquidation | preferred stock |
| how is dividend expressed for preferred stock? | dollar amount or as percentage of its par value |
| how do common stock and preferred stock differ as far as dividends? | preferred stock's par value may have real significance |
| if a firm fails to pay a preferred stock dividend.... | the dividend is said to be in arrears |
| cumulative preferred stock: | preferred stock dividends must be paid before common (who also receive a dividend) |
| referred to as hybrid securities and why | preferred stocks. possess characteristics of common stock and bonds |
| why are preferred stocks like bonds? | fixed income securities . divididends never change |
| why are preferred stocks like common stock? | they are perpetual securities with no maturity date |
| initial financing for common stock comes from who? | original founders |
| Early stage debt or equity investors are unlikely to make an investment in a firm unless the founders... | also have a personal stake in the business |
| intitial non-founder financing usually comes first from... | private equity investors |
| what does "go public" mean? | issuing shares of stock to a much broader group |
| three alternatives to sell stock in primary market | Public Offering/IPO, Rights Offering, Private Placement |
| Public Rights Offering: | in which it offers its shares for sale to the general public. faster for raising capital. |
| Rights Offering: | in which new shares are sold to existing shareholders (reward original owners) |
| Private Placement: | which the firm sells new securities directly to an investor or a group of investors. very common. |
| IPO's typically made by.... | small, fast growing companies |
| Why IPO's for companies? | require additional capital to continue expansion, have met milestone for going public that was established in a contract to obtain VC funding |
| What must happen to make IPO? | get approval from shareholders, and hire investment bank to underwrite the offering |
| who is responsible for promoting the stock and selling its shares? | investment banker |
| to go public the company must file.... | a registration statement with the SEC |
| Part of the registration statement is the PROSPECTUS which describes... | key aspects of the issue, the issuer, and its management and financial position |
| While waiting for approval, prospective investors can review the firm's..... | RED HERRING: which is a preliminary prospectus |
| After IPO what must happen? | quiet period (restricts company statements) |
| what is a road show | when investment bankers and company officials promote company through series of presentations to potential investors through countries |
| how do road shows help investment bankers? | gauge demand for offering which helps them set initial price |
| After underwriter sets the terms, | the SEC must apprive the offering |
| what do investment bankers specialize in? | selling new securities and advising firms with regard to major financial transactions |
| Underwriting: | involves purchase of security issue from issuing company at agreed on price, and bearing risk of selling it to public at a profit |
| main activity of investment banker | underwriting |
| When are underwriting syndicates typically formed? | when companies bring large issues to the market |
| What happens for a syndicate? | investment bankers underwrites portion of the issue to reduce risk of loss for any single firm and insure wider distribution of shares. CREATES SELLING GROUP WHICH DISTRIBUTES SHARES TO INVESTING PUBLIC |
| SPREAD: | difference between price paid for the securities by the investment banker and selling price in the market place |
| how to investment bankers earn their profit? | return on the spread |
| costs for writing what is highest? | equity, then preferred stock, and then bonds |
| the proceeds from a primary market sale go to the... | corporation (less the spread earned by investment bankers) |
| How (where) firms raise capital from the sale of stock | the primary market |
| does the firm receive any money from secondary market sales of stock? | no |
| how do stockholders expect to be compensated for their investments? | dividends and capital gains |
| what are capital gains? | profits generated when selling shares of stock in the in the secondary market (NYSE, NASDAQ) |
| when do investors purchase shares? | when they feel they are undervalued or sell them when they believe they are overvalued |
| buy stock for $100; sell for $140; what is capital gain? | $40 |
| How should we value a stock? | net all PV of cash flows |
| Common Stock Valuation: What are the cash flows ? | dividends, residual claim on a firm's assets when the company dissolves |
| Companies do not typically dissolve unless.... | forced by bankruptcy |
| in bankruptcy the residual claim is... | $0 |
| Zero Growth Model: Dividend is a ... | perpetuity |
| Zero Growth Model: forumla | Po= dividend/required return |
| Constant Growth Model: formula | dividend/(required return-growth) |
| Constant Growth Model: Calculate Return | r=Dividend/Price+g |
| agency problems occur when a manager acts... | in his or her own best interest rather than interest of the owners |
| one tool commonly used to lessen agency costs: | compensate managers with stock and or stock options. thus, the managers interest become more closely aligned to those of owners |
| The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called | a proxy battle |
| Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy. All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders, preferred stockholders, common | fourth |
| An underwriting syndicate is a group of investment banking firms, each of which will underwrite a portion of a large security issue. | true |
| The __________ are sometimes referred to as residual owners of the corporation. | common stockholders |
| Equity capital can be raised through | retained earnings and the stock market |
| A new public issue of securities is regulated by the | SEC |
| calculate expected annual dividend |
Created by:
cl579544