Chapter 8: Stock Valuation
Excel Future Dividend Calculation
= FV(Dividend Growth Rate, Number of Years, 0, -Current Dividend)
Current Stock Price in Excel
= PV(Required Return, Years until dividend ceases, - Current Dividend)
proxy
A grant of authority by a shareholder allowing another individual to vote his or her shares
NASDAQ
A nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically.
New York Stock Exchange (NYSE)
A physical trading floor and a computer network where stocks are bought and sold. It is the largest stock exchange in the world
Secondary Market
the market in which previously issued securities are traded among investors
Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? Multiple Choice Dual class Cumulative Non-cumulative Preferred Common
Common
Dealers vs Brokers
Dealer: Maintains an inventory ready to buy or sell at any time -> Think "Used car dealer" Broker: Brings buyers and sellers together -> Think "Real estate broker"
Required return =
Dividend Growth Rate + Dividend Yield or Annual Dividend/ Current Price
Which is correct? A. Stocks can only be assigned one dividend growth rate. B. Preferred stocks generally have variable growth rates. C. Dividend growth rates must be either zero or positive. D. All stocks can be valued using the dividend discount models. E. Stocks can have negative growth rates.
E. Stocks can have negative growth rates.
Stock Price at Benchmark PE =
EPS * Benchmark PE
Stock Price Today=
Future Dividend/(required rate of return - dividend growth rate)
Annual dividend yield
divide next year's annual dividend by the current stock price
Dividends
payments by a corporation to shareholders, made in either cash or stock
Features of Preferred Stock
- Dividends paid first -Convertible: shares can be exchanged for common stock -Redeemable: shares can be returned to the corporation at a fixed price -Cumulative: shares receive priority for future dividends if dividends are not paid in a given 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.
Designed Market Maker
NYSE members who act as dealers in particular stocks. Formally known as specialists
Floor Brokers
NYSE members who execute customer buy and sell orders
Find price of stock today
P0 = D1/(R − g)
Stock price in 3 years is
P3 = P0(1 + g)3
The constant dividend growth model is
Pt = Dt × (1 + g)/(R − g)
Find required return of stock
R = (D1/P0) + g
Capital gains yield
The rate at which a stock's price is expected to appreciate
required return on stock
The required return of a stock is made up of two parts: The dividend yield and the capital gains yield. So, the required return of this stock is: R = Dividend yield + Capital gains yield
Features of Common Stock
Voting Rights Proxy voting classes of stock
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
Straight Voting
a procedure in which a shareholder may cast all votes for each member of the board of directors
cumulative voting
a procedure in which a shareholder may cast all votes for one member of the board of directors
Dividend Yield
a stock's expected cash dividend divided by its current price
A decrease in ______ will increase the current value of a stock according to the dividend growth model?
discount rate
Common Stock
equity without priority for dividends or in bankruptcy
Which one of the following represents the capital gains yield as used in the dividend growth model? D1 D1/P0 P0 g g/P0
g
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
Primary Market
the market in which new securities are originally sold to investors
Over the Counter Market
securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories
preffered stock
stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights
Capital Gains Yield
the dividend growth rate, or the rate at which the value of an investment grows
