Investments Exam (Ch. 5 & 6)
Primary Market
"New-car with sticker still in window" is an example of which market?
Secondary Market
"Used car market" is an example of which market?
Display Book
(SKIP) A chronological record of all limit, stop, and short-sale orders that had been placed with a specialist; also contained an inventory of the specialist's holdings.
Geometric Average Dividend Growth Rate
(SKIP) A dividend growth rate based on a geometric average of historical dividends.
Arithmetic Average Dividend Growth Rate
(SKIP) A dividend growth rate based on an arithmetic average of historical dividends.
Arca
(SKIP) All-electronic securities exchange listing stocks, options, and ETFs.
Clean Surplus Relationship (CSR)
(SKIP) An accounting relationship in which earnings minus dividends equals the change in book value per share.
General Cash Offer
(SKIP) An issue of securities offered for sale to the general public on a cash basis.
dually listed
(SKIP) For ____ _____ stocks, regional exchanges also attract substantial trading volume.
NYSE License Holder
(SKIP) Having a license entitles the holder to buy and sell securities on the floor of the exchange.
Fourth Market
(SKIP) Market for exchange-listed securities in which investors trade directly with other investors, usually through a computer network.
The Global Select Market The Global Market The Capital Market
(SKIP) NASDAQ is actually made up of three separate markets:
Third Market
(SKIP) Off-exchange market for securities listed on an organized exchange.
enterprise value (EV) EBITDA
(SKIP) Perhaps the most common ratio that incudes debt and equity is the _____ _____ to ______ ratio.
SuperDOT System
(SKIP) The NYSE's well-known, now defunct, electronic trading system.
third market
(SKIP) The ___ ____ is an off-exchange market for securities listed on an organized exchange.
fourth market
(SKIP) The ___ ____ is for exchange-listed securities in which investors trade directly with one another, usually through a computer network
Super Display Book System (SDBK)
(SKIP) The new server-based electronic trading system at the NYSE.
Dutch Auction Underwriting
(SKIP) The type of underwriting in which the offer price is set based on competitive bidding by investors. Also known as a uniform price auction.
private equity fund
A ___ ____ ____ might purchase a portion of the business so that others can now manage the company.
debt
A business can increase risk by using ______.
Market Order
A customer order to buy or sell securities marked for immediate execution at the current market price.
Two-Stage Dividend Growth Model
A dividend discount model that assumes a firm will temporarily grow at a rate different from its long-term growth rate.
Sustainable Growth Rate
A dividend growth rate that can be sustained by a company's earnings.
Economic Value Added (EVA)
A financial performance measure based on the difference between a firm's actual earnings and required earnings.
Investment Banking Firm
A firm specializing in arranging financing for companies.
Syndicate
A group of underwriters formed to share the risk and to help sell an issue.
high
A high P/S ratio suggests _____ sales growth
sluggish
A low P/S ratio suggests _____ sales growth.
borrow money
A manager or investor who wants to take a company private probably needs to ____ a significant amount of _____
Residual Income Model (RIM)
A method for valuing stock in a company that does not pay dividends.
Supplemental Liquidity Provider (SLP)
A new class of market maker at the NYSE; located off the floor of the exchange.
Designated Market Maker (DMM)
A new class of market maker at the NYSE; replaced the role of specialists on the exchange floor.
supplemental liquidity provider (SLP).
A newly created class of market maker is called the
20%
A plunge of ___% in the S&P 500 causes all trading to stop for the day.
Red Herring
A preliminary prospectus not yet approved by the SEC.
The firm is creating value for stockholders
A price-book ratio bigger than 1.0 indicates that the firm is doing what?
Rights Offer
A public issue of securities in which securities are first offered to existing shareholders.
floor traders
A small number of NYSE members are ___ ____, who independently trade for their own accounts.
Growth Stocks
A term often used to describe high-P/E stocks.
Value Stocks
A term often used to describe low-P/E stocks.
Dealer
A trader who buys and sells securities from inventory.
Constant Perpetual Growth Model
A version of the dividend discount model in which dividends grow forever at a constant rate and the growth rate is strictly less than the discount rate.
Electronic Communications Network (ECN)
A web site that allows investors to trade directly with each other.
the crash of 2008
Activity in the LBO market came to a standstill after:
7%
All U.S. securities trading halts for 15 minutes when the S&P 500 falls ____% before 3:25 p.m.
Circuit Breakers
All the methods used by stock exchanges during large sell-offs.
investment banking firm fixed commitment best efforts underwriting prospectus SEC prosepctus
An IPO (and an SEO) involves several steps. 1) Company appoints an ____ _____ ____ to arrange financing. 2) Investment banker designs the stock issue and arranges for ___ ___ or ___ ___ _____. 3) Company prepares a ______ (usually with outside help) and submits it to the ___ ____ ___ for approval. Investment banker circulates preliminary _______ (red herring).
Specialists
An exclusive dealer, or intermediary, for a set of securities.
Venture Capital
An important part of the private equity markets.
Initial Public Offering (IPO)
An initial public offering occurs when a company offers stock for sale to the public for the first time.
Broker
An intermediary who arranges security transactions among investors.
active
Around 2005, the LBO market was quite ______.
Constant Growth Model
Assumes that the dividends will grow forever at a constant growth rate (g).
value success
At each stage of financing, the ____ of the founder's stake grows and the probability of ______ rises.
Ground Floor Financing Mezzanine Level Financing
At each stage, enough money is invested to reach the next stage. Those two stages are:
Startup Assets Entrepreneurs track record
Banks are generally not interested in making loans to _________ companies, especially ones : - with no _______(other than an idea). - run by fledgling ______ with no _____ ______.
NYSE Exchange Member
Before 2006, the NYSE exchange members were the owners of the exchange.
limited partnership pool invest management fee profits $200,000 20% managers
Both private equity and hedge funds: - are set up as ___ _____ - _____ money from investors. - ______ this money on behalf of these investors. - use, typically, a 2/20 fee structure (i.e., a 2 percent annual ____ ____ and 20 percent of _______). If you have $1m with them, they will charge you $________ and will take ____% of any of your profits - have built-in constraints to prevent _______ from taking excessive compensation.
Limit Order
Buy at the best price available, but not more than the present limit price. Forgo purchase if limit is not met. Sell at best price available, but not less than the preset limit price. Forgo sale if limit is not met.
Market Orders
Buy or sell at the best price available for immediate execution
short
Buy stop Limit is Used when you have a _____ position and want to protect yourself if the stock price rises.
ROE
Changes in sustainable growth rate likely stem from changes in ____ ___ ____.
stock exchange trading network
Common stock trading typically occurs on either an organized ____ ____ or on a ___ network.
Underwriter Spread
Compensation to the underwriter, determined by the difference between the underwriter's buying price and offering price.
Index Staleness
Condition that occurs when an index does not reflect all current price information because some of the stock in the index have not traded recently.
g and k
Constant Perpetual Growth Model is sensitive to the choice of ___ and ___.
g>k
Constant Perpetual Growth Model no usable when what is greater than what.
pay dividends
Constant Perpetual Growth Model not usable when firms do not:
unrealistic
Constant perpetual growth is often an _______ assumption
Stop order
Convert a market order to buy when the stock price cross crosses the stop price from below
Stop-limit order
Convert to a limit order to buy when the stock price crosses the stop price from below
Stop-Limit Order
Convert to a limit order to sell when the stock price crosses the stop price from above.
Stop Order "Stop-loss"
Convert to a market order to sell when the stock price crosses the stop price fro above. Also known as a "___ ____."
Price-Earnings (P/E) Ratio
Current stock price divided by annual earnings per share (EPS).
Price-Sales (P/S) Ratio
Current stock price divided by annual sales per share.
Price-Cash Flow (P/CF) Ratio
Current stock price divided by current cash flow per share.
Stop Order
Customer order to buy or sell securities when a preset "stop" price is reached.
Limit Order
Customer order to buy or sell securities with a specified "limit" price. The order can be executed only at the limit price or better.
dividends
DDMs use ______, a cash flow only to equity holders
risk
DDMs use an equity beta to account for ____
required return
DDMs use the CAPM to estimate ___ ____.
on the floor of the exchange.
DMMs are located where
FCF
Depreciation and Capital Spending matter in ___ ___ ____
earnings
Depreciation reduces ______ because it is counted as an expense.
expense
Depreciation reduces earnings because it is counted as an _______
compete same price incoming orders
Differences between the Specialist Role and the DMM Role: - DDMs can _______against other exchange members for trades. - Specialists had to step back from a trade if a floor broker order had the ___ ____. - Unlike the former specialist system, however, DMMs do not receive an advance look at ___ _____.
No
Do DMMs have an exclusive right to make markets in their assigned securities?
No
Do negative earnings imply little value?
Prospectus
Document prepared as part of a security offering detailing a company's financial position, its operations, and investment plans for the future.
earnings before interest, taxes, depreciation, and amortization.
EBITDA stands for:
poor
Earnings and cash flows that are far from each other may be a signal of ______ quality earnings
Retained Earnings
Earnings retained within the firm to finance growth.
inverse
Earnings yield is the ___ of the P/E ratio
equity debt cash
Enterprise value is equal to the market value of the firm's ____ plus the market value of the firm's ____ minus _____.
Fundamental Analysis
Examination of a firm's accounting statements and other financial and economic information to assess the economic value of a company's stock.
Securities and Exchange Commission (SEC)
Federal regulatory agency charged with enforcing U.S. securities laws and regulations.
Venture Capital (VC)
Financing for new, often high-risk ventures.
asset equity
Firms in an industry should have about the same _____ betas. Their ___ betas can be quite different.
Financing
Firms other than start-ups might also need _______.
DMM's Post
Fixed place on the exchange floor where the DMM operates.
NYSE 2006
For 200 years, the ______ was a not-for profit NY state cororation, but went public in _____
price weighted index
For a ___ ____ ____ (i.e., the DJIA), higher priced stocks receive higher weights.
value weighted index
For a ___ ____ ____ (i.e., the S&P 500), companies with larger market values have higher weights
specialists
For a long time, most securities listed at the NYSE were divided among _____
Specialists
Formerly, sole dealers in a small number of securities on the floor of the NYSE; often called market makers.
Market Orders Limit Orders Stop Orders Stop Limit Orders
Four types of Orders
debt holders stockholders
Free cash flow can be paid to ______ ______ and to ______.
growth stocks
High-P/E stocks are often referred to as ______ _____
exchange members
Historically, the NYSE had 1,366 _______ ______.
Seasoned Equity Offering (SEO)
If a company already has public shares, this occurs when a company raises more equity.
sold public investment bankers
If a start-up succeeds: - The big payoff frequently comes when the company is ____ to another company or goes ______. - Either way, _____ _______ are often involved in the process.
Withhold further funding
If goals are not met, the venture capitalists do what?
Designated Market Makers (DMMs) Supplemental Liquidity Providers (SLPs)
In 2009, aiming to stay competitive, the NYSE replaced the role of specialists with two classes of market makers:
apparent
In practice however, stock that analysts believe are over/undervalued may in fact be correctly priced for reasons not immediately ______to the analyst.
Cash Flow
In the context of the price-cash flow ratio, usually taken to be net income plus depreciation.
NASDAQ
In the late 1990s, the ______ system opened to electronic communications networks (ECNs)
investors broker dealer securities
In the secondary market, An investor can trade: - Directly with other ______. - Indirectly through a _____ who arranges transactions for others. - Directly with a _____ who buys and sells _______ from inventory.
Stop Limit Orders
Intended to prevent something bad from happening (But, in an active market, the it can hurt you)
Earnings Yield (E/P)
Inverse of the P/E ratio: earnings per share divided by price per share.
borrowing money
Investors can increase portfolio risk by ___ ___.
earnings cash flows value
It is possible that a company has: negative ______ positive ____ _____ a positive _____.
credit markets
LBO market activity levels depend on _____ _____
Leveraged Buyouts
LBO stand for:
order imbalances
Like NYSE specialists, NASDAQ dealers use their inventory as a buffer to absorb buy and sell ___ ______
limit price or lower
Limit Buy can only be executed at:
limit price or higher
Limit Sell can only be executed at:
value stocks
Low-P/E stocks are often referred to as ____ _____
dividend payout ratio profitability asset efficiency debt
Managers can increase the sustainable growth rate by: - Decreasing the ___ ____ ____ - Increasing _______ (Net Income / Sales) - Increasing _____ _____ (Sales / Assets) - Increasing _____(Assets / Equity)
middle market
Many small, regional private equity funds concentrate their investments in "_____ ______" companies.
lowest ask
Market buy will be executed at ___ ____
highest bid
Market sell will be executed at ___ ____.
Price-Book (P/B) Ratio
Market value of a company's common stock divided by its book (or accounting) value of equity.
Beta
Measure of a stock's risk relative to the stock market average.
Dividend Discount Model (DMM)
Method of estimating the value of a share of stock as the present value of all expected future dividend payments.
concerns performance history small and family owned and operated
Middle Market companies include: - Ongoing _____ (Not start ups) - Known _____ ___ - Typically, _____ and ___ ____ and _______
cash flow
Most analysts agree that in examining a company's financial performance, ___ ___ can be more informative than net income
inventories
NASDAQ trading is almost exclusively done through dealers who buy and sell securities for their own _____ .
coat colors
On the floor, ____ ____ indicate the person's job or position.
Floor Brokers
People that execute customer orders to buy and sell stock transmitted to the exchange floor.
debt equity
Practitioners often use ratios involving both ____ and _____
Bid
Price that seller gets
middle-market firms large leveraged buyouts
Private equity also includes:
investment companies
Private equity funds and hedge funds are two types of ___ ____
water mark clawback
Private equity funds generally have: - a high-_____ ____ provision - a "________" provision
Payout Ratio
Proportion of earnings paid out as dividends.
Retention Ratio
Proportion of earnings retained for reinvestment.
DMMs SLPs
Quoting Requirements: _______ must quote bid and ask prices for at least 5% of the trading day. _______ are required to quote bid or ask prices for at least 5% of the trading day.
Expansion cash out
Reasons middle market companies seek more capital - _______ beyond their existing region - Founder wants to "___ ___"
Beta
Risk relative to an average stock
trade
SLPs can _____ the same stocks as the DMMs.
outside the exchange.
SLPs can trade only from offices:
Over-the-counter (OTC) Market
Securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories.
long
Sell Stop Limit is Used when you have a ____ position and want to protect yourself from a price decline.
Circuit Breakers
Sometimes the market wide order flow is such that regulators have deemed that a trading cease for a short time. These trading halts are called ___ ____
Venture Capital (VC)
Start up companies that banks do not want to lend to usually search for ____ _____.
market stocks many index
Stock market Indexes can be distinguished in four ways: - The _____ covered, - The types of _____ included, - How _____ stocks are included, and - How the ____ is calculated (price-weighted, e.g. DJIA, versus value-weighted, e.g. S&P 500).
Value-Weighted Index
Stock market index in which stocks are held in proportion to the aggregate market value of the companies in the index.
Price-Weighted Index
Stock market index in which stocks are held in proportion to their share price.
index divisor
Stock splits can be addressed by adjusting the ____ ____
staleness
Stocks that do not trade during a time period cause index _____ over that time period.
prices
Stop and Limit _____ do not have to be the same. (You could use a stop of $45 with a limit of $44.)
price execution
Stop limit orders guarantee _____, but not _____.
execution price
Stop orders guarantee _____ (if the stock reaches or moves past your stop price), but not _____.
Taking the company private
Suppose a company (or someone else) purchases all the shares of the company held by the public at large? This process is called:
Leveraged Buyouts (LBO)
Taking a company private is called:
Profit Margin Asset Turnover Equity Multiplier
The DuPont formula separates ROE into three parts:
equity
The PE ratio is a(n) ______ ratio
circuit breakers
The SEC is constantly tinkering with ___ _____ and what triggers them
Dividend Discount Model (DDM)
The ____ ____ ____ is a method to estimate the value of a share of stock by discounting all expected future dividend payments.
dow
The _____ is an index of the stock prices of 30 large companies representative of American industry.
NASDAQ
The ______ has more companies listed than the NYSE.
undervalued overvalued
The basic idea behind fundamental analysis is to identify "________" stocks to buy and "________" stocks to sell.
inside quotes
The bid and ask prices for the NASDAQ represent ____ _____.
high
The cost of going private is often _____.
bid-ask spread spread
The difference between the bid and ask prices is called the ___ ____ _____ or simply the _____.
Spread
The difference between the bid and ask prices.
Capital Asset Pricing Model (CAPM)
The discount rate for a stock can be estimated using the ___ ___ ___ ____.
order flow
The fundamental business of the NYSE is to attract and process ___ flow.
investors wishing to buy stocks with investors wishing to sell stocks.
The goal of a secondary market is to match who with who?
historical average growth rate average growth rate sustainable growth rate
The growth rate in dividends (g) can be estimated in a number of ways: - Using the company's ___ ___ ___ ____. - Using an industry median or ___ ___ -__. - Using the ___ ___ ____.
Inside Quotes
The highest bid quotes and the lowest ask quotes offered by dealers for a security.
highest bid lowest bid
The inside quotes include the ____ ____ and the ____ ____.
commission brokers
The largest number of NYSE members are registered as ___ ____.
Primary Market
The market in which new securities are originally sold to investors.
Secondary Market
The market in which previously issued securities trade among investors.
Enterprise Value (EV)
The market value of the firm's equity plus the market value of the firm's debt minus cash.
Dow Jones Industrial Average (DJIA), or "Dow" for short.
The most widely followed barometer of day-to-day stock market activity is the:
Bid Price
The price a dealer is willing to pay.
Ask Price
The price at which a dealer is willing to sell. Also called the offer or offering price.
Bid
The price dealers pay investors
Seasoned Equity Offering (SEO)
The sale of additional shares of stock by a company whose shares are already publicly traded.
Firm Commitment Underwriting
The type of underwriting in which the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares.
Best Efforts Underwriting
The type of underwriting in which the underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility.
Underwrite
To assume the risk of buying newly issued securities from a company and reselling them to investors.
dividend payout ratio ROE
To estimate a sustainable growth rate, you need the (relatively stable) ___ ____ ___ and _____ ___ ___.
financing run
To limit their risk: - Venture capitalists generally provide ______ in stages. - Venture capitalists actively help _____ the company.
Venture Capital Middle Market Leveraged Buyouts
Types of Private Equity Funds:
prospectus
Upon obtaining SEC approval for IPOs or an SEO, company finalizes its ______.
Sell Stop
Use this order when you have a long position and want to protect yourself from a price decline
Buy Stop
Use this order when you have a short position and want to protect yourself if the stock price rises.
risk
Venture Capital refers to financing new, often high-_____, start ups.
fail
Venture capitalists know that many new companies will ____.
profits
Venture capitalists know the companies that succeed can provide enormous ______.
accounting tax
We calculate earnings based on ______ rules and ____ codes.
NI FCF
We can see that it is possible for: ___ ____ < 0 and ___ ___ __> 0
equity
We can still calculate the value of ______ using FCF
beta
We need a ______for assets, not the equity, to account for risk
Ask
What buyers pay
FCF model
What calculates a value for the firm
Dividend Discount Model DDM
What calculates a value of the equity only
stock splits
What causes issues for price-weighted index
Designated Market Makers
What were specialists are now the:
floor broker two-dollar brokers
When commission brokers are too busy, they may delegate some orders to ____ ____, or two dollar brokers, for execution.
limit order
You should never put in a market order, you should put in a:
Market Orders
You specify ticker and quantity Immediate execution at best available price
Limit Orders
You specify ticker, quantity, and price The order will be executed only if trade can be made at the limit price or better
Electronic Communication Networks (ECNs)
__ ___ ____are basically websites that allow investors to trade directly with one another.
commission brokers
___ ____ execute customer orders to buy and sell stocks
Asset betas
___ _____ measure the risk of the company's industry.
Private Equity
____ ___ is used in the rapidly growing area of equity financing for nonpublic companies.
Enterprise Value
____ ____ is equal to the market value of the firm's equity plus the market value of the firm's debt minus cash.
Stop Orders
____ _____ are Intended to prevent something bad from happening (like losing a lot of money).
Venture Capital
____ _____ firms pool funds from various sources, like - Individuals - Pension funds - Insurance companies - Large corporations - University endowments
NYSE
____ is a physical exchnge.
Venture Capital
_____ _____ refers to financing new, often high-risk, start-ups.
NASDAQ
_____ is not a physical exchange. They have computers across the country.
Underwriters
______ place announcements (tombstones) in newspapers and begin selling shares with IPOs and SEOs.
Individual
_______ venture capitalists invest their own money.
Depreciation
_______ — the key to understand how a company can have negative earnings and positive cash flows
Fundamental Analysis
________ _____ is a term for studying a company's accounting statements and other financial and economic information to estimate the economic value of a company's stock.
Designated Market Makers
are assigned a set of securities and are obligated to maintain a fair and orderly market in these stocks
beta (b)
how risky something is
accurately
k and g may be difficult to estimate _____
required rate of return
k=
lower
more expenses = lower _____ paid
Initial Public Offering (IPO)
occurs when a company offers stock for sale to the public for the first time.
Market risk premium
risk premium for an average stock
primary market
the market where investors purchase newly issued securities.
secondary market
the market where investors trade previously issued securities
ask
the price dealers receive form investors
Ask
the price investors pay dealers
bid
the price investors receive from dealers