Ch.8 stock valuation
dealer
someone who maintains an inventory of stocks and buys and sells those stocks
three reasons common stock is more difficult to value than a bond
1. 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 observed the rate of return that the market requires
order flow
the flow of customer orders to buy and sell securities the business of the NYSE to attract and process order flow
primary market
newly-issued stocks are initially sold
preferred stock has preference over common stock in the
payment of dividends, distribution of corporate assets
benchmark PE ratio can be determined using
a companies own historical PEs the PEs of a similar company
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 -dividends change at a constant rate
goal of many successful organizations
a steady rate of growth in dividends
which entities declares a dividend?
board of directors
broker
brings buyers and sellers together but does not maintain an inventory
in which ways is preferred stock like a bond
-preferred shareholders receive a stated dividend, similar to interest on a bond -preferred stock sometimes has a sinking fund, giving it a set maturity like bonds -preferred shareholders receive a stated value if the firm liquidates, like bondholders -some preferred stock has credit ratings, like bonds
NASDAQ features
computer network of securities dealers multiple market maker systems
three special cases patterns of dividend growth
constant growth zero growth non-constant growth
in the dividend discount model, the expected return for investors comes from which two sources
dividend yield, growth rate
constant growth model infers
dividends change at a constant rate
expected cash flows to investors in stocks
dividends, capital gains
represents the valuation of stock using a zero-growth model
dividends/ discount rate
a PE ratio that is based on estimated future earnings is known as a
forward PE ratio
requirement of the dividend growth model
g<R
NYSE differs from NASDAQ
has specialists an auction market a physical location
feature of common stock
it has no special preference in bankruptcy it has no special preference in receiving dividends it generally has voting rights
specialist
member who acts as a dealer in a small number of securities
rights of common shareholders
voting rights the right to purchase a proportional share of new stock the right to a proportional share of dividends paid
when calling a stock the advantage to considering the stock price in the distant future as a cash flow is that
when discounted to present value, a stock price in the distant future is nearly zero.