Chapter 7 Cue Cards

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Theory of finance
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Resumen del Recurso

Pregunta Respuesta
Common Stock Ownership shares in a publicly held corporation
Primary Market Place where sale of new stock first occurs
Initial Public Offering (IPO) First offering of stock to general public
Define Seasoned Issue Sale of new shares by a firm that has already been through an IPO
Define Secondary Market Market in which already already issued securities are traded by investors
Define: Price Earnings Ratio Price per share dividend by earnings per share
Define Dividend Periodic cash distribution from the firm to the shareholders
Define Retained Earnings Profits that are retained in the firm and reinvested in its operations
Define Book Value Net worth of the Firm according to the balance sheet
Liquidation Value Net proceeds that would be realized by selling the firm's assets are paying off its creditors
Market Value Balance Sheet Financial statement that uses market value of assets and liabilities
Difference between firms actual market value and its liquidation/book value Attributable to its "going concern value"
Define Expected Return r = Div1 + P1 - P0 / P0
Formula for Dividend Yield Div1 / P0
Formula for Capital Gains Yield P1-P0 / P0
Define the Dividend Discount Model Share value equals PV of all expected future dividends
Zero Growth Case P0 = Div1/r
Constant Growth Case P0 = Div1 / r - g
Expected Rate of Return from the DDM formula r = D1/P0 + g
What is the Plowback ratio Fraction of earnings retained by the firm is called the Plowback Ratio
Define Payout Ratio Fraction of earnings a company pays out in dividends
Formula for Growth Rate g = ROE x Plowback ratio
How to Calculate: Present Value of Growth Opportunities NPV of Firms Future Investments
Define: Sustainable Growth Rate Steady rate at which firm can grow (Plowback x Return on Equity)
How do you calculate Price-Earning Ratio Stock Price / EPS
What is Technical Analysis Attempting to identify undervalued stocks by searching for patterns in past stock prices
Random Walk Security Prices change randomly, with no predictable trends/patterns
Fundamental Analysis Attempting to find misplaced securities by analyzing fundamental information
What is an efficient market A market where prices reflect all available information
Weak Form Efficiency is a market where prices rapidly reflect all information contained in the history of past prices and volume T/F True
Define Semi-Strong Form Efficiency Market where prices rapidly reflect all publicly available information
Strong Form Efficiency is a market where prices reflect no information that could be used to determine true value of assets T/F False. Reflect all information
What is a market anomalies There are always some puzzles or apparent exceptions of efficient market theory
New Issues Puzzle Researchers found that early gains from buying IPOs often turn to losses
Behavioural Finance: Investors are 100% rational all the time. False Not always 100%
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