Chapter 8 Finance

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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


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