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Finance Ch. 7
Equity
| Term | Definition |
|---|---|
| Cumulative Dividends | A protective feature on preferred stock that requires preferred dividends not paid in previous years to be disbursed before any common stock dividends can be paid |
| Call Premium | The amount in excess of par value a company must pay when it calls a security. |
| Income Stocks | Stocks of firms that traditionally pay large, relatively constant dividends each year |
| Growth Stocks | Stocks that generally pay little or no dividends so as to retain earnings to help fund growth opportunities. |
| Proxy | A document giving one person the authority to act for another; typically it gives them the power to vote shares of common stock. |
| Preemptive Right | A -provision that gives existing common stockholders the right to purchase new issues of common stock on a pro rata basis before any shares can be offered to other investors. |
| Classified Stock | Common stock that is given a special designation, such as Class A, Class B, and so forth, to meet special needs of the company. |
| Founder's Shares | Stock, owned by the firm’s founders, that has sole voting rights but generally pays out only restricted dividends (if any) for a specified number of years. |
| American depository receipts (ADRs) | “Certificates” traded in U.S. stock markets that represent ownership in stocks of foreign companies and are held in trust by banks located in the countries where the stocks are traded. |
| Euro stock | Stock traded in countries other than the home country of the company, not including the United States |
| Yankee stock | Stock issued by foreign companies and traded in the United States. |
| market price (value) | The price at which a stock currently sells in the market. |
| intrinsic, or theoretical, value | The value of an asset that, in the mind of a particular investor, is justified by the facts; P^0 can be different from the asset’s current market price, its book value, or both. |
| growth rate | The expected annual rate of change in dividends per share. |
| required, rate of return | The minimum rate of return stockholders consider acceptable on a common stock. |
| dividend yield | The next expected dividend divided by the current price of a share of stock, D^1/P0. |
| capital gains yield | The change in price (capital gain) during a given year divided by the price at the beginning of the year; (P^1-P0)/P0. |
| expected rate of return | The rate of return an individual stockholder expects to receive on a common stock. It is equal to the expected dividend yield plus the expected capital gains yield, r^s=D^1/P0+(P^1-P0)/P0 |
| 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 for the remainder of its life |
| nonconstant growth | The part of the life cycle of a firm in which its growth is either much faster or much slower than that of the economy as a whole. |
| P/E ratio | The current per share market price of a stock divided by the earnings per share; P0/EPS0. |
| Economic value added (EVA) | An analytical method that seeks to evaluate the earnings generated by a firm to determine whether they are sufficient to compensate the suppliers of funds—both the bondholders and the stockholders. |
| growth rate, g | The expected annual rate of change in dividends per share |
| required rate of return, rs | The minimum rate of return stockholders consider acceptable on a common stock. |
| expected rate of return, r^s | The rate of return an individual stockholder expects to receive on a common stock. It is equal to the expected dividend yield plus the expected capital gains yield, r^s=D^1/P0+(P^1-P0)/P0. |
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