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
