FINC 331-WEEK 5: Stocks
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Ch7-stock-valuation.pdf
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Stock Valuation Defining Stock
Types of Stock
Rules and Rights of Common and Preferred Stock
Stock Markets
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Stock Valuation
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Stock Valuation
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Valuing the Corporation
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• Ownership Nature of Stock
• Control and Preemption
Defining Stock
Stock Valuation > Defining Stock
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• The stock (capital stock) of a company or business entity is equal to the original
capital paid into the business by its founders.
• Stock serves as a security for creditors and investors in the business. While it
may fluctuate in value, it is different from the assets and property of a business.
• A shareholder legally owns share of a stock in a public or private corporation, and
has certain rights with regards to the company because of share ownership.
Ownership Nature of Stock
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1903 stock certificate of the Baltimore and Ohio
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Stock Valuation > Defining Stock
• Shareholders gain certain rights with regards to a business entity when
purchasing stock. These include being able to sell shares, voting rights and
dividends.
• Shareholders have the right of preemption, meaning they have the first chance at
buying newly issued shares of stock before the general public.
• Even if shareholders do have the option of using their preemptive right, they do
not have to exercise it.
Control and Preemption
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Shareholder Meeting
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Stock Valuation > Defining Stock
• Common Stock
• Preferred Stock
Types of Stock
Stock Valuation > Types of Stock
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• Common stock is a form of equity ownership. It is a type of security that is also
known as a voting share or an ordinary share.
• Common stock shareholders will not receive assets after bankruptcy unless the
bondholders, other creditors, and preferred shareholders are paid first. Common
shareholders also do not get dividends unless preferred shareholders receive
them first.
• Common shareholders do receive voting rights. Some shareholders may also be
able to exercise preemptive rights.
Common Stock
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New York Stock Exchange
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Stock Valuation > Types of Stock
• Preferred Stock is a security which has characteristics of both equity and debt
securities.
• Preferred Stock shareholders have rights to dividends and assets (in the case of
bankruptcy) before Common Stock shareholders.
• Preferred stockholders have a number of rights which will vary based on the
business entity, but generally do not carry voting rights.
Preferred Stock
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Bond
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Stock Valuation > Types of Stock
• Claim to Income
• Voting Right
• Purchasing New Shares
• Preferred Stock Rules and Rights
• Provisions of Preferred Stock
• Comparing Common Stock, Preferred Stock, and Debt
Rules and Rights of Common and Preferred Stock
Stock Valuation > Rules and Rights of Common and Preferred Stock
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• Common stock and preferred stock are both forms of equity ownership but carry
different rights and claims to income.
• Preferred stock shareholders will have claim to assets over common stock
shareholders in the case of company liquidation.
• Preferred stock also has first right to dividends.
Claim to Income
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1903 stock certificate of the Baltimore and Ohio
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Stock Valuation > Rules and Rights of Common and Preferred Stock
• Common stock shareholders can generally vote on issues, such as members of
the board of directors, stock splits, and the establishment of corporate objectives
and policy.
• While having superior rights to dividends and assets over common stock,
generally preferred stock does not carry voting rights.
• Many of the voting rights of a shareholder can be exercised at annual general
body meetings of companies. An annual general meeting is a meeting that official
bodies, and associations involving the general public, are often required by law to
hold.
Voting Right
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Shareholder Meeting
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Stock Valuation > Rules and Rights of Common and Preferred Stock
• New share purchase is an important indicator of current shareholder belief in the
health of the company and long term prospects for growth.
• Current Shareholders will often have preemptive rights that give them the right to
purchase newly issued company shares before they go on sale to the general
public.
• New shares can be purchased on exchanges, which offer a platform for the
financial marketplace.
Purchasing New Shares
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Exchanges
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Stock Valuation > Rules and Rights of Common and Preferred Stock
• Preferred stock generally does not carry voting rights, but this may vary from
company to company.
• Preferred stock can gain cumulative dividends, convertibility to common stock,
and callability.
• The rights that come with ownership of preferred stock are detailed in a
"Certificate of Designation".
Preferred Stock Rules and Rights
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VOC stock
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Stock Valuation > Rules and Rights of Common and Preferred Stock
• If a preferred share has cumulative dividends, then it contains the provision that
should a company fail to pay out dividends at any time at the stated rate, then the
issuer will have to make up for it as time goes on.
• Convertible preferred stock can be exchanged for a predetermined number of
company common stock shares.
• Often times companies will keep the right to call or buy back preferred shares at a
predetermined price.
• Participating preferred issues offer holders the opportunity to receive extra
dividends if the company achieves predetermined financial goals.
• Sometimes, dividends on preferred shares may be negotiated as floating; they
may change according to a benchmark interest-rate index.
Provisions of Preferred Stock
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Historical dividend information for Franklin
Automobile Company
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Stock Valuation > Rules and Rights of Common and Preferred Stock
• Common stock and preferred stock fall behind debt holders as creditors that
would receive assets in the case of company liquidation.
• Common stock and preferred stock are both types of equity ownership. They
receive rights of ownership in the company, such as voting and dividends.
• Debt holders often receive a bond for lending and while this does not give the
ownership rights of being a stockholder, it does create a superior claim to a
company's assets in the case of liquidation.
Comparing Common Stock, Preferred Stock, and Debt
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A bond from the Dutch East India Company
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Stock Valuation > Rules and Rights of Common and Preferred Stock
• Market Actors
• NYSE
• NASDAQ
• Market Reporting
Stock Markets
Stock Valuation > Stock Markets
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• Pension funds are important shareholders of listed and private companies.
• Insurance companies are generally classified as either mutual or proprietary
companies.
• A mutual fund is a type of professionally-managed collective investment vehicle
that pools money from many investors to purchase securities.
• An index fund or index tracker is a collective investment scheme (usually a mutual
fund or exchange-traded fund) that aims to replicate the movements of an index
of a specific financial market, or a set of rules of ownership that are held constant,
regardless of market conditions.
• An exchange-traded fund (ETF) is an investment fund traded on stock exchanges,
much like stocks.
• A hedge fund is an fund that can undertake a wider range of investment and
trading activities than other funds. It is generally only open to certain types of
investors specified by regulators.
Market Actors
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Stock Market
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Stock Valuation > Stock Markets
• The origin of the NYSE can be traced to May 17, 1792, when the Buttonwood
Agreement was signed by 24 stockbrokers outside of 68 Wall Street in New York
under a buttonwood tree on Wall Street.
• The New York Stock Exchange (sometimes referred to as "the Big Board")
provides a means for buyers and sellers to trade shares of stock in companies
registered for public trading.
• The New York Stock Exchange is open for trading Monday through Friday from
9:30 am to 4:00 pm ET, with the exception of holidays declared by the NYSE in
advance.
• Traders can gather around the appropriate post. There, a specialist broker acts as
an auctioneer in an open outcry auction market environment to bring buyers and
sellers together and to manage the actual auction.
• To be listed on the New York Stock Exchange, a company must have issued at
least a million shares of stock worth $100 million and must have earned more
than $10 million over the last three years.
NYSE
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NYSE Trading Floor
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Stock Valuation > Stock Markets
• NASDAQ was founded in 1971 by the National Association of Securities Dealers
(NASD), who divested themselves of it in a series of sales in 2000 and 2001.
• NASDAQ quotes are available at three levels: Level 1 shows the highest bid and
lowest offer; Level 2 shows all public quotes of market makers; Level 3 is used by
the market makers and allows them to enter their quotes and execute orders.
• NASDAQ has a pre-market session from 7:00am to 9:30am, a normal trading
session from 9:30am to 4:00pm, and a post-market session from 4:00pm to
8:00pm (all times in ET).
• Three market tiers are NASDAQ Capital Market – Small Cap, NASDAQ Global
Market – Mid Cap, NASDAQ Global Select Market – Large Cap.
NASDAQ
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NASDAQ
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Stock Valuation > Stock Markets
• The is a tool used by investors and financial managers to describe the market and
to compare the return on specific investments.
• An index is a mathematical construct, so it may not be invested in directly.
• A 'world' or 'global' stock market index includes (typically large) companies without
regard for where they are domiciled or traded.
• A 'national' index represents the performance of the stock market of a given
nation—and by proxy, reflects investor sentiment on the state of its economy.
• Stock market indices provide invaluable information for investors and
accountants.
Market Reporting
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Dow Jones Crashes
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Stock Valuation > Stock Markets
• Expected Dividends, No Growth
• Expected Dividends and Constant Growth
• Relationship Between Dividend Payments and the Growth Rate
• Understanding Future Stock Value
• Valuing Nonconstant Growth Dividends
Stock Valuation
Stock Valuation > Stock Valuation
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• Companies generally either retain earnings for investment, or distribute them as
dividend, according to their growth strategy.
• Clientele effects suggests that different dividend levels attract different types of
investors.
• Value investors look for indications that a stock is undervalued. High dividends
are one indication of undervaluation.
• Knowing a firm's cost of capital is needed in order to make better decisions.
Managers make capital budgeting decisions while capital providers make
decisions about lending and investment.
Expected Dividends, No Growth
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Investing trade-offs
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Stock Valuation > Stock Valuation
• Companies are constantly changing, as well as the economy. Solely using
historical growth rates to predict the future is not an acceptable form of valuation.
Calculating the future growth rate requires personal investment research.
• A generalized version of the Walter model (1956), SPM considers the effects of
dividends, earnings growth, as well as the risk profile of a firm on a stock's value.
• The Gordon model or Gordon's growth model is the best known of a class of
discounted dividend models. It assumes that dividends will increase at a constant
growth rate (less than the discount rate) forever.
Expected Dividends and Constant Growth
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Your Dividend
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Stock Valuation > Stock Valuation
• Investors take into account how much capital is distributed to investors, and
conversely how much capital is kept from investors.
• Investors hope that firms will use retained earnings to either maximize their
current operations or invest in such as a way as to lead to higher profits.
• Some firms are unable to distribute earnings, since their funds are tied up in
maintenance, repairs, et cetera.
• On the other hand, some companies can retain earnings and put that money back
to work - i.e., invest in growth opportunities.
Relationship Between Dividend Payments and the Growth Rate
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Dividend
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Stock Valuation > Stock Valuation
• Earnings Per Share is the total net income of the company divided by the number
of shares outstanding; the Profits/Earnings ratio is the stock price divided by the
annual EPS figure.
• Return on Invested Capital measures how much money the company makes each
year per dollar of invested capital and approximates the expected level of growth;
Return on Assets measures the company's ability to make money from its assets.
• To measure Market Capitalization (the value of all of a company's stock), multiply
the current stock price by the fully diluted shares outstanding; Enterprise Value is
equal to the total value the company is trading for on the stock market.
• Enterprise Value (EV) to earnings before interest, taxes, depreciation and
amortization (EBITDA) is one of the best measurements of whether or not a
company should be valued as cheap or expensive.
Understanding Future Stock Value
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Stock Valuation
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Stock Valuation > Stock Valuation
• Limited high-growth approximation: When a stock has a significantly higher
growth rate than its peers, it is sometimes assumed that the earnings growth rate
will be sustained for a short time (say, 5 years), and then the growth rate will
revert to the mean.
• Implied Growth Models: One can use the Gordon model or the limited high-growth
period approximation model to impute an implied growth estimate.
• Imputed growth acceleration ratio: Subsequently, one can divide this imputed
growth estimate by recent historical growth rates.
Valuing Nonconstant Growth Dividends
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Dividend
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Stock Valuation > Stock Valuation
• Valuing the Corporation
• Discounted Dividend vs. Corporate Valuation
Valuing the Corporation
Stock Valuation > Valuing the Corporation
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• Income approaches include Discount or capitalization rates, Capital Asset Pricing
Model (CAPM), Modified Capital Asset Pricing Model, and Weighted average cost
of capital ("WACC").
• The asset approach to business valuation is based on the principle of substitution:
no rational investor will pay more for the business assets than the cost of
procuring assets of similar economic utility.
• The market approach to business valuation is rooted in the economic principle of
competition: in a free market the supply and demand forces will drive the price of
business assets to a certain equilibrium.
Valuing the Corporation
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Valuation
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Stock Valuation > Valuing the Corporation
• P = D1 / ( r - g ). P is the current stock price, g is the constant growth rate in
perpetuity expected for the dividends, r is the constant cost of equity for that
company, and D1 is the value of the next year's dividends.
• The equation can also be understood to generate the value of a stock such that
the sum of its dividend yield (income) plus its growth (capital gains) equals the
investor's required total return.
• There are also problems with the model, such as the presumption of a steady and
perpetual growth rate less than the cost of capital may not be reasonable.
Discounted Dividend vs. Corporate Valuation
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Stock dividend
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Stock Valuation > Valuing the Corporation
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Appendix
Key terms
• bond A bond is an instrument of indebtness of the bond issuers toward the bond holders.
• bond A bond is an instrument of indebtness of the bond issuers toward the bond holders.
• break-even Break-even (or break even) is the point of balance between making either a profit or a loss.
• Callable shares Shares which can be bought back by the issuer at a predetermined price.
• capital gains Profit that results from a disposition of a capital asset, such as stock, bond, or real estate due to arbitrage.
• clientele The body or class of people who frequent an establishment or purchase a service, especially when considered as
forming a more-or-less homogeneous group of clients in terms of values or habits.
• closed-end Closed-end funds (or closed-ended funds) are mutual funds with a fixed number of shares (or units). Unlike open-
end funds, new shares/units are not created by managers, to meet demand from investors, but the shares can only be
purchased (and sold) in the market.
• Common stock Common stock is a form of equity and type of security. Common stock shareholders are at the bottom of the
line when it comes to dividends and receiving compensation in the case of bankruptcy.
• Common stock Common stock is a form of equity and type of security. Common stock shareholders are at the bottom of the
line when it comes to dividends and receiving compensation in the case of bankruptcy.
• Common stock Common stock is a form of corporate equity ownership, a type of security.
• Common stock Shares of an ownership interest in the equity of a corporation or other entity with limited liability. Holders of this
type of stock are entitled to dividends. Importantly, the financial rights for holders of this type of stock are junior to preferred
stock and liabilities.
• Common stock Common stock is a form of equity and type of security. Common stock shareholders are at the bottom of the
line when it comes to dividends and receiving compensation in the case of bankruptcy.
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Stock Valuation
• Convertible preferred stock Convertible preferred stock can be exchanged for a predetermined number of company common
stock shares.
• corporation a group of individuals, created by law or under authority of law, having a continuous existence independent of the
existences of its members, and powers and liabilities distinct from those of its members
• Cumulative Dividends Condition where owners of certain shares will receive accumulated dividends in the case a company
cannot pay out dividends at the stated rate at the stated time.
• DCF models Valuation using discounted cash flows is a method for determining the current value of a company using future
cash flows adjusted for time value. The future cash flow set is made up of the cash flows within the determined forecast period
and a continuing value that represents the cash flow stream after the forecast period.
• discounted cash flow In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using
the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs)–
the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or
price of the cash flows in question.
• dividend Dividends are payments made by a corporation to its shareholder members.
• Dutch auction an event to buy or sell that starts at a high price that is gradually reduced by the auctioneer until someone is
willing to buy
• equity The residual claim or interest to investors in assets after all liabilities are paid. If liability exceeds assets, negative equity
exists and can be purchased through stock.
• FINRA In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a
self-regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD).
Though sometimes mistaken for a government agency, it is a non-governmental organization that performs financial regulation
of member brokerage firms and exchange markets. The government organization which acts as the ultimate regulator of the
securities industry, including FINRA, is the Securities and Exchange Commission.
• GAAP Generally Accepted Accounting Principles refer to the standard framework of guidelines, conventions, and rules
accountants are expected to follow in recording, summarizing, and preparing financial statements in any given jurisdiction.
• Gordon Growth Model Gordon Growth Model is also called the dividend discount model (DDM), which is a way of valuing a
company based on the theory that a stock is worth the discounted sum of all of its future dividend payments.
• liquidation liquidation is the process by which a company (or part of a company) is brought to an end, and the assets and
property of the company redistributed
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Stock Valuation
• market capitalization The total market value of the equity in a publicly traded entity.
• Miller-Modigliani hypothesis The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern
thinking on capital structure. The basic theorem states that, under a certain market price process (the classical random walk), in
the absence of taxes, bankruptcy costs, agency costs, and asymmetric information, and in an efficient market, the value of a
firm is unaffected by how that firm is financed.
• NASDAQ The National Association of Securities Dealers Automated Quotations; this is an electronic stock market.
• net asset value Net asset value (NAV) is the value of an entity's assets less the value of its liabilities, often in relation to open-
end or mutual funds, since shares of such funds registered with the U.S.
• open-end An open-end(ed) fund is a collective investment scheme which can issue and redeem shares at any time.
• Preemption The right of a shareholder to purchase newly issued shares of a business entity before they are available to the
general public so as to protect individual ownership from dilution.
• Preemption The right of a shareholder to purchase newly issued shares of a business entity before they are available to the
general public so as to protect individual ownership from dilution.
• preemptive right a contractual ability to acquire certain property newly coming into existence before it can be offered to any
other person or entity
• Preferred Stock Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher
ranking than common stock.
• Preferred Stock Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher
ranking than common stock.
• Preferred Stock Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher
ranking than common stock.
• Preferred Stock Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher
ranking than common stock.
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Stock Valuation
• Preferred Stock Preferred stock is an equity security that has the properties of both an equity and debt instrument and is higher
ranking than common stock.
• risk premium A risk premium is the minimum amount of money by which the expected return on a risky asset must exceed the
known return on a risk-free asset, or the expected return on a less risky asset, in order to induce an individual to hold the risky
asset rather than the risk-free asset.
• secondary market The financial market in which previously issued financial instruments such as stock, bonds, options, and
futures are bought and sold.
• shareholder A shareholder legally owns at least one share of stock in a company, and has rights with regards to the company
because of this
• Stock The stock of a company represents the original capital paid into the business by its founders. It serves as a security for
investors.
• Stock Exchange A form of exchange that provides services for stock brokers and traders to trade stocks, bonds and other
securities.
• Voting rights Rights which are generally associated with common stock shareholders in regards to business entity matters (
such as electing the board of directors or establishing corporate policy)
• weighted average An arithmetic mean of values biased according to agreed weightings.
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Stock Valuation
Stock Valuation
Stock valuation involves many methods.
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Stock Valuation
Valuation
Business Valuation include different methods.
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Stock Valuation
Your Dividend
DDM can be used to calculate a constant growth company.
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Stock Valuation
Shareholder Meeting
This scene from "The Office" humorously illustrates a shareholder meeting, where the shareholder can exercise their right to vote on company issues or
question company directors.
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Stock Valuation
CAPM
CAPM formula
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Stock Valuation
A bond from the Dutch East India Company
A bond is a financial security that represents a promise by a company or government to repay a certain amount, with interest, to the bondholder.
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Stock Valuation
Investing trade-offs
Value investors trade growth for dividends.
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Stock Valuation
Dividend
The portion of the net income not paid to investors is left for the growth of a company.
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Stock Valuation
Exchanges
New shares can be traded on exchanges such as the Nasdaq, but will usually be offered to current shareholders before being put on sale to the general
public.
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Stock Valuation
1903 stock certificate of the Baltimore and Ohio Railroad
Ownership of shares is documented by the issuance of a stock certificate and represents the shareholder's rights with regards to the business entity.
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Stock Valuation
Shareholder Meeting
This scene from "The Office" humorously illustrates a shareholder meeting, where the shareholder can exercise their right to vote on company issues or
question company directors.
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Stock Valuation
NASDAQ
NASDAQ is the second-largest stock exchange market in the world, as of 2012.
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Stock Valuation
1903 stock certificate of the Baltimore and Ohio Railroad
Preferred and common stock both carry rights of ownership, but represent different classes of equity ownership.
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Stock Valuation
VOC stock
Preferred stock is a security ( a little more modern that this stock from the VOC or Dutch East India Company) that carries certain rights which designate
it from common stock or debt.
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Stock Valuation
New York Stock Exchange
Stocks can be bought and sold on exchanges, like the New York Stock Exchange shown above.
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Stock Valuation
Dow Jones Crashes
DJIA drops signifying recession.
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Stock Valuation
Bond
Preferred Stocks are considered a hybrid security with properties of both stocks and bonds, but are subordinate to bonds when it comes to rights of claim
to company assets.
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Stock Valuation
Stock dividend
Discounted dividend method can be used to value a company.
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Stock Valuation
Historical dividend information for Franklin Automobile Company
Dividends are one of the privileges of stock ownership, and preferred shares get more rights to them than common shares do.
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Stock Valuation
Dividend
DCF model can be used to calculate nonconstant growth dividends.
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Stock Valuation
Stock Market
Different kinds of investors are active in stock market.
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Stock Valuation
NYSE Trading Floor
Buyers and sellers meet and engage in face-to-face transactions at the NYSE, which is an auction-style secondary market.
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Stock Valuation
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Stock Valuation
Which of the following statements regarding what stock in a
company represents is true?
A) Stock represents the original capital invested in the business by its
founders.
B) Ownership of stock represents a stake of ownership in the business
entity.
C) All of these statements.
D) Stock is valued according to market demand and overall business
health.
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Stock Valuation
Which of the following statements regarding what stock in a
company represents is true?
A) Stock represents the original capital invested in the business by its
founders.
B) Ownership of stock represents a stake of ownership in the business
entity.
C) All of these statements.
D) Stock is valued according to market demand and overall business
health.
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Stock Valuation
Which of the following statement accurately describes a
shareholder's preemption rights?
A) The right to vote on directors.
B) The right to acquire certain property coming into existence, such as
stock, before anyone else.
C) The right to purchase new shares issued by the company.
D) The right to claim a company's remaining assets after a liquidation.
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Stock Valuation
Which of the following statement accurately describes a
shareholder's preemption rights?
A) The right to vote on directors.
B) The right to acquire certain property coming into existence, such as
stock, before anyone else.
C) The right to purchase new shares issued by the company.
D) The right to claim a company's remaining assets after a liquidation.
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Stock Valuation
Which of the following benefits is NOT associated with common
stock?
A) The right to vote on corporate objectives and policy.
B) Preemptive rights.
C) Guaranteed dividends.
D) The right to vote on who gets to sit on the company's Board of
Directors.
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Stock Valuation
Which of the following benefits is NOT associated with common
stock?
A) The right to vote on corporate objectives and policy.
B) Preemptive rights.
C) Guaranteed dividends.
D) The right to vote on who gets to sit on the company's Board of
Directors.
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Stock Valuation
Which of the following features is generally NOT associated with
preferred stock?
A) Voting rights.
B) Preference in dividends.
C) Convertability to common stock.
D) Callability at the option of the corporation.
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Stock Valuation
Which of the following features is generally NOT associated with
preferred stock?
A) Voting rights.
B) Preference in dividends.
C) Convertability to common stock.
D) Callability at the option of the corporation.
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Stock Valuation
Which of the following statements about a preferred stockholder's
rights to the company's income is NOT true?
A) When a business is liquidated, preferred shareholders receive funds
equal to the stock's par value.
B) A preferred stock's par value represents the original investment when
the shares were issued.
C) Dividends to common and preferred shareholders are paid at the
same time.
D) The price of both common and preferred shares are subject to market
determinants.
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Stock Valuation
Which of the following statements about a preferred stockholder's
rights to the company's income is NOT true?
A) When a business is liquidated, preferred shareholders receive funds
equal to the stock's par value.
B) A preferred stock's par value represents the original investment when
the shares were issued.
C) Dividends to common and preferred shareholders are paid at the
same time.
D) The price of both common and preferred shares are subject to market
determinants.
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Stock Valuation
Which of the following statements regarding voting rights is NOT
true?
A) Generally each share of common stock equals one vote.
B) Preferred stock generally does not carry voting rights.
C) Shareholders generally get to vote on who is part of the corporate
Board of Directors.
D) Corporate shareholders are prohibited from casting their vote online.
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Stock Valuation
Which of the following statements regarding voting rights is NOT
true?
A) Generally each share of common stock equals one vote.
B) Preferred stock generally does not carry voting rights.
C) Shareholders generally get to vote on who is part of the corporate
Board of Directors.
D) Corporate shareholders are prohibited from casting their vote online.
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Stock Valuation
Which of the following is a reason a shareholder may buy more
shares in a company?
A) All of these answers.
B) To prevent the shareholder's percentage of ownership in the company
from being diluted.
C) The shareholder believes the company is a good investment.
D) The shareholder wishes to maintain his ownership position in the
company.
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Stock Valuation
Which of the following is a reason a shareholder may buy more
shares in a company?
A) All of these answers.
B) To prevent the shareholder's percentage of ownership in the company
from being diluted.
C) The shareholder believes the company is a good investment.
D) The shareholder wishes to maintain his ownership position in the
company.
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Stock Valuation
Which of the following is generally NOT a right granted to owners
of preferred shares?
A) Callability.
B) Convertibility to common shares.
C) Variable dividend amounts.
D) Preference with regards to receiving dividends.
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Stock Valuation
Which of the following is generally NOT a right granted to owners
of preferred shares?
A) Callability.
B) Convertibility to common shares.
C) Variable dividend amounts.
D) Preference with regards to receiving dividends.
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Stock Valuation
A company sells preferred stock with the provision that the
company can repurchase the shares from the shareholder at a
predetermined price. Which of the following describes this stock?
A) Callable preferred stock.
B) Participating preferred stock.
C) Convertible preferred stock.
D) All of these answers.
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Stock Valuation
A company sells preferred stock with the provision that the
company can repurchase the shares from the shareholder at a
predetermined price. Which of the following describes this stock?
A) Callable preferred stock.
B) Participating preferred stock.
C) Convertible preferred stock.
D) All of these answers.
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Stock Valuation
A company goes bankrupt and its assets are to be divided
between its shareholders and debtholders. Which of the following,
from highest priority to lowest, is the correct order of how the
company's assets should be divided?
A) Bondholders, preferred shareholders, common shareholders.
B) Bondholders, common shareholders, preferred shareholders.
C) Preferred shareholders, bondholders, common shareholders.
D) Preferred shareholders, common shareholders, bondholders.
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Stock Valuation
A company goes bankrupt and its assets are to be divided
between its shareholders and debtholders. Which of the following,
from highest priority to lowest, is the correct order of how the
company's assets should be divided?
A) Bondholders, preferred shareholders, common shareholders.
B) Bondholders, common shareholders, preferred shareholders.
C) Preferred shareholders, bondholders, common shareholders.
D) Preferred shareholders, common shareholders, bondholders.
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Stock Valuation
Which of the following is NOT an actor in the stock market?
A) Issuers.
B) Intermediaries.
C) Government regulators.
D) Index fund.
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Stock Valuation
Which of the following is NOT an actor in the stock market?
A) Issuers.
B) Intermediaries.
C) Government regulators.
D) Index fund.
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Stock Valuation
Which of the following statements regarding the New York Stock
Exchange is true?
A) The NYSE is a primary market due to its market capitalization.
B) To be listed on the NYSE, a company must have issued 10 million
shares worth $100 million.
C) The NYSE is an auction market.
D) The NYSE has held true to its traditions and is not automated.
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Stock Valuation
Which of the following statements regarding the New York Stock
Exchange is true?
A) The NYSE is a primary market due to its market capitalization.
B) To be listed on the NYSE, a company must have issued 10 million
shares worth $100 million.
C) The NYSE is an auction market.
D) The NYSE has held true to its traditions and is not automated.
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Stock Valuation
Which of the following statements regarding the NASDAQ is true?
A) The NASDAQ is known as the primary blue-chip stock market,
catering mostly to established companies.
B) The NASDAQ was popular with brokerages because it lowered stock
spreads.
C) All of these answers.
D) The NASDAQ was the world's first electronic stock market.
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Stock Valuation
Which of the following statements regarding the NASDAQ is true?
A) The NASDAQ is known as the primary blue-chip stock market,
catering mostly to established companies.
B) The NASDAQ was popular with brokerages because it lowered stock
spreads.
C) All of these answers.
D) The NASDAQ was the world's first electronic stock market.
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Stock Valuation
Which of the following statements regarding stock indexes is true?
A) A global index measures investor sentiment on the state of a national
economy.
B) An investor can invest directly in a stock index.
C) All of these answers.
D) A stock market index is computed using the prices of selected stocks.
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Stock Valuation
Which of the following statements regarding stock indexes is true?
A) A global index measures investor sentiment on the state of a national
economy.
B) An investor can invest directly in a stock index.
C) All of these answers.
D) A stock market index is computed using the prices of selected stocks.
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Stock Valuation
After reviewing its prospects for the coming year, a company
determines that it has no potential projects for the upcoming year
that would exceed its hurdle rate. What should the company do
with its profits from the current year?
A) Liquidate the company and distribute all of the profits and assets to its
investors.
B) Retain the profits as savings for profitable projects in upcoming years.
C) Distribute the majority of the profits to its investors as a dividend.
D) Invest the profits in the projects anyway and hope that these new
product lines exceed expectations.
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Stock Valuation
After reviewing its prospects for the coming year, a company
determines that it has no potential projects for the upcoming year
that would exceed its hurdle rate. What should the company do
with its profits from the current year?
A) Liquidate the company and distribute all of the profits and assets to its
investors.
B) Retain the profits as savings for profitable projects in upcoming years.
C) Distribute the majority of the profits to its investors as a dividend.
D) Invest the profits in the projects anyway and hope that these new
product lines exceed expectations.
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Stock Valuation
A company a constant growth rate of 3%. The company's risk
adjusted discount rate is 5%. The company has a $2 dividend.
What is the per share value of the stock?
A) $105
B) $51.50
C) $52.50
D) $103
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Stock Valuation
A company a constant growth rate of 3%. The company's risk
adjusted discount rate is 5%. The company has a $2 dividend.
What is the per share value of the stock?
A) $105
B) $51.50
C) $52.50
D) $103
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Stock Valuation
Which of the following statements regarding capital distributions
and investor preferences is correct?
A) Investors seeking higher capital growth may prefer a lower payout
ratio.
B) All of these answers.
C) Firms that require new capital to continue operations have limited
growth potential.
D) Investors seeking high current income and limited capital growth
prefer high dividend payout ratios.
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Stock Valuation
Which of the following statements regarding capital distributions
and investor preferences is correct?
A) Investors seeking higher capital growth may prefer a lower payout
ratio.
B) All of these answers.
C) Firms that require new capital to continue operations have limited
growth potential.
D) Investors seeking high current income and limited capital growth
prefer high dividend payout ratios.
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Stock Valuation
Which of the following statements correctly defines a stock
valuation method?
A) The PEG Ratio is the Forward P/E ratio divided by the expected
earnings growth rate.
B) A company's market cap equals tits outstanding stock times its stock
price plus the company's debt.
C) Return on Invested Capital equals the pro forma net income divided
by the company's total assets.
D) Price to Earnings equals a company's earnings divided by the number
of outstanding shares.
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Stock Valuation
Which of the following statements correctly defines a stock
valuation method?
A) The PEG Ratio is the Forward P/E ratio divided by the expected
earnings growth rate.
B) A company's market cap equals tits outstanding stock times its stock
price plus the company's debt.
C) Return on Invested Capital equals the pro forma net income divided
by the company's total assets.
D) Price to Earnings equals a company's earnings divided by the number
of outstanding shares.
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Stock Valuation
Which of the following is a known limitation associated with
valuing a company with dividends that have a nonconstant growth
rate?
A) An analyst can justify any valuation by fine-tuning the growth/discount
assumptions.
B) The models are sensitive to the differences between the dividend
growth and discount factors.
C) All of these answers.
D) The valuation is based on company comparisons and requires
analysis beyond a simple calculation.
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Stock Valuation
Which of the following is a known limitation associated with
valuing a company with dividends that have a nonconstant growth
rate?
A) An analyst can justify any valuation by fine-tuning the growth/discount
assumptions.
B) The models are sensitive to the differences between the dividend
growth and discount factors.
C) All of these answers.
D) The valuation is based on company comparisons and requires
analysis beyond a simple calculation.
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Stock Valuation
Which of the following statements regarding corporate valuation
approaches is true?
A) The income approaches rely on using discount rates to determine a
company's value.
B) A downside of the asset-based approach of valuing a company is that
it is not objective.
C) The weighted average cost of capital is an approach used to find the
value of a business.
D) One of the variables in the Capital Asset Pricing Model is the cost of
equity.
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Stock Valuation
Which of the following statements regarding corporate valuation
approaches is true?
A) The income approaches rely on using discount rates to determine a
company's value.
B) A downside of the asset-based approach of valuing a company is that
it is not objective.
C) The weighted average cost of capital is an approach used to find the
value of a business.
D) One of the variables in the Capital Asset Pricing Model is the cost of
equity.
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Stock Valuation
A company has cost of equity of 8% and a dividend growth rate of
3%. Its dividends for next year is $2.20 per share. What should
the stock's price be?
A) $44.00
B) $4.40
C) $0.22
D) $27
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Stock Valuation
A company has cost of equity of 8% and a dividend growth rate of
3%. Its dividends for next year is $2.20 per share. What should
the stock's price be?
A) $44.00
B) $4.40
C) $0.22
D) $27
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Stock Valuation
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Stock Valuation
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Stock Valuation
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Stock Valuation
