Finance final (stocks)

Variable-growth model

A dividend valuation approach that allows for a change in the dividend growth rate

Constant-growth model (Gordon model)

A widely cited dividend valuation approach that assumes that dividends will grow at a constant rate, but a rate that is less than the required return (P = D / (r-g)) where g is the growth rate

Equity

Consists of funds provided by the firm's owners (investors or stockholders) that are repaid subject to the firm's performance

Decision making and stock value

Decision action by financial manager > effect on (1) expected return measured by expected dividends and expected dividend growth (2) risk measured by the required return > effect on stock value (P = D1/(r-g))

$30 (cc)

If dividends are to remain constant at $3 and the required rate of return is 10%, using the dividend growth model, what is the stock's intrinsic value?

Debt

Includes all borrowing incurred by a firm, including bonds, and is repaid according to a fixed schedule of payments; must be paid before equity

Consul

Infinite bond

Outstanding shares

Issued shares of common stock held by investors, including private and public investors

Treasury stock

Issued shares of common stock held by the firm (often these shares have been repurchased by the firm)

Authorized shares

Shares of common stock that a firm's corporate charter allows it to issue

Issued shares

Shares of common stock that have been put into circulation (outstanding shares plus treasury stock)

Variable-growth model steps

Step 1- find the value of the cash dividends at the end of each year during the initial growth period, years 1 through (MAKE TIMELINE) Step 2- find the present value of the dividends expected during the initial growth period (USE CF FUNCTION) Step 3- find the present value of the dividends expected during the 2nd growth period (a) find the value of the stock at the end of the initial growth period (b) find the present value of the stock Step 4- add the present value components found in steps 2 and 3 to find the value of the stock

Zero-growth stock

Stock that does not anticipate a dividend change

Preferred stock

Stock that has a permanent divident

Expected dividends, expected dividend growth, risk (cc)

What should financial managers consider when making decisions?

Public offering

When a firm offers its shares for sale to the general public

Rights offering

When a firm sells new shares to existing shareholders

The zero growth model

With zero growth, the value of all share of stock would equal the present value of a perpetuity of D1 dollars discounted at a certain rate (D1/r)

Private placement

The firm sells new securities directly to an investor or a group of investors

Basic common stock valuation equation

The value of a share of common stock is equal to the present value of all future cash flows (dividends) that it is expected to provide