chapter 7 - finance

Preferred stock has preference over common stock in the:

o Payment of dividends o Distribution of corporate assets

What does the NYSE (New York Stock Exchange) do to sell stocks

The NYSE has a face-to-face auction market and a physical location

If the growth rate is zero, then the capital gains yield is

zero

Target Price

Using a benchmark PE ratio against current earnings yields a forecasted price

The Primary Market

is where stocks are issued for the first time

What are capital gain and dividends to investors in stocks

they are cash flows to investors in stocks

The rights of common stockholders

1 - right to vote on matters of importance 2- right to share proportionally in any residual value in the event of liquidation 3- right to share proportionally in any common dividends paid

what are the 3 special case patterns of dividends growth

1. zero growth 2. Non-constant growth 3. Constant Growth

Cumulative Dividends

If unpaid dividends must be "caught up" before any common dividends can be paid

What can you use to estimate the value of stock

PE ratio and PS ratio

The price of a share of common stock equals

the present value of all expected future dividends

The dividend yield increases if

the stock price decreases

How does NASDAQ sell stock?

NASDAQ has a multiple market maker system and a computer network of securities dealers

Using the zero growth model, what do you need to determine the value of stock?

Need the the discount rate and dividend to determine the value of a stock using the zero growth model

Forward PE ratio

A PE ratio that is based on estimated future earnings

A benchmark PE (price-earnings) ratio can be determined using:

A company's own historical PEs The PEs of similar companies

Dividend growth model

In the dividend growth model, the expected return for investors comes from the growth rate and dividend yield