FINAN 450 Test 3

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Straight voting

a procedure in which a shareholder may cast all votes for each member of the board of directors

Cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

Dividend yield

a stock's expected cash dividend divided by its current price

Electronic communications networks

a website that allows investors to trade directly with each other

Broker

an agent who arranges security transactions among investors

Dealer

an agent who buys and sells securities from inventory

Average accounting return (AAR)

an investment's average net income divided by its average book value

Members

as of 2006, the owner of a trading license on the NYSE

Common stock

equity without priority for dividends or in bankruptcy

Pro-forma financial statements

financial statements projecting future years' operations

Over-the-counter (OTC) market

securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories

Preferred stock

stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights

Payback period

the amount of time required for an investment to generate cash flows sufficient to recover its initial cost

Stand-alone principle

the assumption that evaluation of a project may be based on the project's incremental cash flows

Erosion

the cash flows of a new project that come at the expense of a firm's existing projects.

Incremental cash flows

the difference between a firm's future cash flows with a project and those without the project

Net present value (NPV)

the difference between an investment's market value and its cost

Internal rate of return (IRR)

the discount rate that makes the NPV of an investment zero

Capital gains yield

the dividend growth rate, or the rate at which the value of an investment grows

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

Discounted payback period

the length of time required for an investment's discounted cash flows to equal its initial cost

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

Opportunity cost

the most valuable alternative that is given up if a particular investment is undertaken

Profitability index (PI)

the present value of an investment's future cash flows divided by its initial cost. Also called the benefit-cost ratio

Discounted cash flow (DCF) valuation

the process of valuing an investment by discounting its future cash flows

Designated market makers

NYSE members who act as dealers in particular stocks. Formerly known as "specialists"

Floor brokers

NYSE members who execute customer buy and sell orders

Sunk cost

a cost that has already been incurred and cannot be removed and therefore should not be considered in an investment decision

DMM's post

a fixed place on the exchange floor where the DMM operates

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 divided by the discount rate less the dividend growth rate

Supplemental liquidity providers

investment firms that are active participants in stocks assigned to them. Their job is to make a one-sided market (i.e., offering to either buy or sell). They trade purely for their own accounts

Dividends

payments by a corporation to shareholders, made in either cash or stock


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