Chapter 8 Finance
P1
price in one period - P1=(D2+P2)/(1+R)
order flow
the flow of customer orders to buy and sell securities
inside quotes
the highest bid quotes and the lowest ask quotes for a security
member
the owner of a trading license on the NYSE
the price of the stock today
the present value of all of the future dividends
What happens if the growth rate is bigger than the discount rate?
the present value of the dividends keeps getting bigger
Po= current price of stock
(D1+P1)/(1+R)
zero growth
- a share of common stock in a company with a constant dividend is much like a share of preferred stock -we know that the dividend on a share of preferred stock has zero growth and thus is constant through time
designated market maker(DMM)
NYSE members who act as dealers in particular stocks. Formerly know as "specialists"
floor brokers
NYSE members who excite customer buy and sell orders
DMM'S post
a fixed place on the exchange floor where the Dmm operates
dividend yield
a stock's expected cash dividend divided by it current price - D1/Po
common stock
equity without priority for dividends or in bankruptcy
capital gains yield
the dividend growth rate, or the rate at which the value of an investment grows g -rate at which the stock price grows
two stage growth
the idea that is the dividend will grow at a rate of g, for t years and then grow at a rate of g2 thereafter forever Po=(D1/R-g)x[1-(1+g/1+R)^t]+[P/(1+R)^t]
primary market
the market in which new securities are originally sold to investors
secondary market
the market in which previously issued securities are traded among investors
Pt
[Do x (1+g)^t x (1+g)]/(R-g)
per share value
Po=D/R
electronic communications networks (ECNs)
a website that allows investors to trade directly with each other
broker
an agent who arranges security transactions among investors
preferred stock
stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights
Constant Growth
-g= growth rate -Do= dividend just paid -D1=next dividend paid D1=Do(1+g)^t -Po=D1/R-g
A share of common stock is more difficult to value in practice than a bond for at least three reasons
1) with common stock, not even the promised cash flows are known in advance 2) the life of the investment is essentially forever because common stock has no maturity 3)there is no way to easily observe the rate of return that the market requires
some special cases
1)the dividend has zero growth rate 2) the dividend grows at a constant rate 3)the dividend grows at a constant rate after some length of time
Straight voting
a procedure in which a shareholder may cast all votes for each member of the board of directors -directors are all elected at one time
present value
Co(1+g)/(r-g)
cumulative voting
a procedure in which a shareholder may cast all votes for one member of the board of directors -permit minority participation - directors all elected at once
proxy
a grant of authority by a shareholder allowing another individual to vote his or her shares
dividend growth model
a model that determines the current price of a stock as its dividend next period dividend by the discount rate less the dividend growth rate
dealer
an agent who buys and sells securities from inventory
supplemental liquidity providers(SLPs)
investment firms that are active participants in stocks assigned to them. Their job is to make one-sided market.They trade purely for their own accounts
dividends
payments by a corporation to shareholders, made in either cash or stock
non constant growth
reason to consider this case is to allow for "supernormal" growth rates over some finite length of time
R
required return in the market on this investment
over the counter (OTC) market
securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories