Principles of corporate finance ch.7 Flashcards

3239990211	What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?	Dividend growth model	0
3240097106	Debt (creditors)	-not an ownership interest -creditor don't have voting rights -interest is considered a cost of doing business and is tax-deductible -creditors have legal recourse if interest or principal payments are missed -excess debt can lead to financial distress and bankruptcy -has a stated maturity date	1
3240099481	Equity (holders of common and preferred stock)	-ownership interest -common stockholders vote to elect the board of directors and on other issues -dividends are not considered a cost of doing business and are not tax deductible -dividends are not liability of the firm until declared. stockholders have no legal recourse if dividends are not declared -an all-equity firm cannot go bankrupt -no state maturity date	2
3240124521	common stock	these stockholder true owners; aka residential oweners; recieve leftovers; can be privatley owned, publicly, and closely owned	3
3240132524	shareholder rights	-voting rights- elect directors "one share one vote" -cumulative voting- board members are elected all at once; good for small share holders -straight voting- each director is elected at one time, cast all votes for each board member, good for large share holders	4
3240134826	differential classes of shares	each class has different voting rights -super voting shares- mutliple votes per share, insiders maintain control, used for defense against host take over, least preference in distruibution of earnings -nonvoting shares- no voting rights, helps to raise capital, do recieve prefernece -proxy voting- grant of authority by a shareholder to someone else to vote for them. Proxy fight- struggle with management and outsiders.	5
3240172855	other rights of common stockholders	preemptive right- shareholders asked first sharing proportionately in divs paid shareing proportionately in any liquidation value voting on matters of importance like a merger	6
3240180531	Dividends	return on shareholder capital -not tax deductible -divs to individuals are considered ordinary income	7
3240187643	Preferred stock	has precedence over common stock in pymts of divs and liquidation -stated value is the value paid if liquidation occurs -fixed and not voting rights	8
3240194800	Cumulative dividends	current preferred dividends plus all arrearages (unpaid divs) paid beofere common stock divs	9
3240200907	Non-cumulative dividends prefferred	doesnt have this and might have a voting right	10
3240202193	venture capital	early stage, privatly raised capital -angle capitalists -highly risky high reward	11
3240208185	going publuic	rapid growing companies that require add. capital -go public by selling stock in Primary market	12
3240212557	Initial Public Offering (IPO)	1st selling to public	13
3240216466	Seasonal offering	publically traded company selling add. shares	14
3240217590	right offering	new shares to exsiting shareholders	15
3240219658	private placement	new securities are sold to private investors	16
3240222910	investment baker	underwriter, sell new issue of securities to public -middleman -once sold to primary market it then is traded in secondary market	17
3240238522	intrinsic value	present value of all future cash flows	18
3240240895	Dividend growth rate	requires a required rate of return as a discount rate -future dividend payments	19
3240242483	corporate valuation model	requires a weighted average cost of capical (WACC)as a discount rate -FCF payments	20
3240256033	P0	estimated intrinsic value per share	21
3240257408	Dt	dividend payment	22
3240259289	D0	est. payment for that period	23
3240260585	D1	estimated paymenty for the next period	24
3240261792	R	requried return of the shareholders (discount rate)	25
3240264686	Zero-Growth rate model	company will not chage its dividend pymts and will pay a certain dividend amount forever. applied to preffereed stock - Formula- D/R	26
3240270884	Constant-Growth Rate	assumes constant dividend growth! -firm will increase its dividend paymentys by a constant % every period. -Used ammoung mature sound companies formula: D1=D0(1+g) Dt=D0(1+g)^t	27
3240283262	P0	current price	28
3240284238	D0	current dividend payment	29
3240285504	D1	dividend payment next period	30
3240286507	R	Required Return	31
3240286508	g	dividend growth rate	32
3240287873	Pt	Dt(1+g)/R-g	33
3240291117	Variable-growth model	non-constant growth rate -divs do not gown constantly but they are expected to settle down to a constant growth rate	34
3240298824	Expected Return	=expected divident yield + expected capital gain	35
3240300576	Expected Return	= expected dividend yield + expected growth rate	36
3240303174	E[R]	=r=D1/P0+g	37
3240307773	expected capital gain	=g=E[P1]-P0/P0	38
3240311235	price/earnigns multiple (P/E)	calc. target price for next period using est. earnings for next year and appropriate P/E ratio	39
3240314112	P1	=E1 P/E	40
3240316130	If P1	stock is overvalued=sell	41
3240317557	if P1>P0	stock is undervalued=buy	42
3240320548	Primary market	securiteis are initally sold using investment banker	43
3240323067	Secondary market	NYSE-New York Stiock Exchange: physical location NASADAQ- Natioal association of securities dealers automated quoation system: online network	44
3240334065	Other ways to trade securities	Regional exchange, Electronic Communcation Networks ECNs, and over the counter markets(not listed on stock market)	45
3240337966	Broker	arranges security transactions among investors, no ownership	46
3240342149	Dealer	buys and sells securities from investors -does take ownership, benefiots from bid-ask spreads	47
3240345377	bid price	price which dealer is willing to buy	48
3240347056	Ask price	price which a dealer is willing to sell	49
3240348492	spread	diff. btw bid and ask prices	50
3240352542	Designated Market Maker (DMM)	used to be called specialists. work on trade floor. acts as a dealer	51
3240355817	floor broker	customer oders to buy and sell stock at the best possible price on the floor exchange	52
3240358621	supplemental liquidity provider	investment firm trading purley on their own account. make a one-side market	53