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Finance Chpt 4

Valuing Stocks

QuestionAnswer
Common Stock
Common Stock Ownership shares in a publicly held corporation.
Primary Market Market for the sale of new securities by corporations.
Initial Public Offering (IPO) First offering of stock to the general public.
Secondary Market Market in which previously issued securities are traded among investors.
Dividend Periodic cash distribution from the firm to the shareholders.
Yield Dividend =(dividend per share/share price) * 100
P/E Ratio Price per share divided by earnings per share.
Book Value Net worth of the firm according to the balance sheet. (i.e., the difference between the value of the assets and the liabilities)
Liquidation Value Net proceeds that could be realized by selling the firm’s assets and paying off its creditors.
Market Value Balance Sheet Financial statement that uses market value of all assets and liabilities.
The difference between a firm’s actual market value and its’ liquidation or book value is attributable to its ... Going Concern Value
Stock Valuation Methods 1. Valuation by comparables Ratios (e.g., price-to-book-value ratio; price-earnings ratio) 2. Price and Intrinsic Value 3. Dividend Discount Model
Intrinsic value (V_0) Present value of future cash flows from a stock or other security. Today’s price will equal the present value of dividend payments plus the present value of future price.
Expected Return (r) The percentage yield that an investor forecasts from a specific investment over a set period of time. Sometimes called the holding period return (HPR).
Dividend Discount Model Computation of today’s stock price which states that share value equals the present value of all expected future dividends.
Constant Growth DDM A version of the dividend growth model in which dividends grow at a constant rate (Gordon Growth Model).
Stock price in the horizon year is often called The terminal value
If a firm elects to pay a lower dividend, and reinvest the funds what happens to the stock price? The stock price may increase because future dividends may be higher.
Payout Ratio Fraction of earnings paid out as dividends.
Plowback Ratio Fraction of earnings retained by the firm.
Sustainable Growth Rate Steady rate at which firm can grow; return on equity x plowback ratio Growth can be derived from applying the return on equity to the percentage of earnings plowed back into operations. Growth rate = return on equity X plowback ratio.
Present Value of Growth Opportunities (PVGO) Net present value of a firm’s future investments. Difference between plowback & stock price
Technical Analysts Investors who attempt to identify undervalued stocks by searching for patterns in past stock prices. Forecast stock prices based on the watching the fluctuations in historical prices
Random Walk Theory Security prices change randomly, with no predictable trends or patterns. Statistically speaking, the movement of stock prices is random (skewed positive over the long term).
Fundamental Analysts Investors who attempt to find mispriced securities by analyzing fundamental information, such as accounting data and business prospects. Research the value of stocks using NPV and other measurements of cash flow.
Efficient Market Market in which prices reflect all available information.
Weak form, Semi-strong form & Strong form Efficiency Weak Form Efficiency - Market prices reflect all historical information Semi-Strong Form Efficiency - Market prices reflect all publicly available information Strong Form Efficiency - Market prices reflect all information, both public & private
Market Anomalies Existing Anomalies - The Earnings Announcement Puzzle (stocks with best earnings news typically Outperform the stocks with the worst earnings news) The New-Issue Puzzle
Behavioural Finance Attitudes towards risk Beliefs about probabilities
Created by: wguate