Finance Chapter 8- Stock Evaluation

cumulative dividend

A feature of preferred stock entitling the stockholder to receive current and unpaid prior-year dividends before common stockholders receive any dividends; arrearage

3 different types of license holders

DMMs, floor brokers, and SLPs

designated market makers (DMMs)

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

floor brokers

NYSE members who execute customer buy and sell orders

hybrid market

NYSE; trading takes place both electronically and face-to-face

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; proxy fight is the battle to replace management

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; can be used to get the stock price at any point in time, not just today; dont use if constant growth rate exceeds the discount rate

straight voting

a procedure in which a shareholder may cast all votes for each member of the board of directors; directors are elected one at a time

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors; usually # of shares times # of directors to be elected; all directors are elected at once

Zero growth

a share of common stock in a company with a constant dividend. Because the dividend is always the same, the stock can be viewed as an ordinary perpetuity with a cash flow equal to "D" every period. The per share value is given by: P=D/R where R is the required rate of return

dividend yield

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

classified boards

directors are placed into different classes with terms that expire at different times

common stock

equity without priority for dividends or in bankruptcy

Target prices

forecast prices based on benchmark PE ratio from previous year and earnings from the coming year

supplemental liquidity providers (SLPs)

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

obvious problem with the dividend-based approach to stock valuation

many companies don't pay dividends; common approach in this case is to make use of the PE ratio- the ratio of a stock's price per share to its earnings per share over the previous year. multiply benchmark PE ratio by earnings to come

dividends

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

note!

required return and discount rate, R, are the same thing (248)

over-the-counter (OTC) market

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

classes of stock

some firms have more than one class of common stock; often the classes are created with unequal voting rights

preferred stock

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

preemptive right

stockholders' right to share proportionally in any new stock sold

the spread

the difference between the bid and ask prices; the basic source of dealer profits

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

two-stage growth

the idea is that the dividend will grow at a rate of g1 for t years and then grow at a rate of g2 thereafter, forever

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

bid price

the price a dealer is willing to pay

ask price (or offer price)

the price at which the dealer will sell

Constant Growth

when the dividend for some company always grows at a steady rate. g is the growth rate. D0 is the dividend just paid. D1 is the next dividend. D1= D0*(1+g). The dividend in the future is Dt=D0*(1+g)^t

forward PE ratio

a PE ratio that is based on estimated future earnings

non constant growth

allows for "supernormal" growth rates over some finite length of time; the growth rate cannot exceed the required return indefinitely, but it certainly could do so for some number of years; example is a company that doesn't pay dividends now but starts in 5 years and the rate increases constantly indefinitely

broker

an agent who arranges security transactions among investors; real estate broker

dealer

an agent who buys and sells securities from inventory; used car dealer

growing perpetuity

an asset with cash flows that grow at a constant rate forever

member

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