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.