Exam 2 Fin300 Updated Sheet

Exam 2 Fin300 Updated Sheet - Ch 8: Stock Valuation Div...

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Ch 8: Stock Valuation Div Discount Model: PV of all future divs (1) Required return (Higher rr= lower price) (2) Profitability of stock profitable company has price (3) Growth in earnings (as long as ROE> required return) *Price/growth have pos. correlation Constant div (zero growth): (1) Pays constant div forever (2) Like preferred stock (3) Price computed using perpetuity (4) 1st div assumed to be at end of 1st period Constant dividend growth (Gordon Growth): Firm will increase the div by constant percent every period (g- growth) General Model: PV of future divs plus the price one can sell the stock at a future point in time Dividend yield: stock’s expected cash div/current price Capital gains yield: div (investment value) growth rate Sustainable growth: Max rate the company can grow w/out issuing equity, and w/out its financial leverage (High div. payout ratio=decrease sust. growth) Business risk: affected by industry; variable sales, operating leverage-fixed operating costs Financial risk: amount of debt (issuing more)—same effect for operating leverage Common stock: (1) promised cash flows not known in advance (2) Life of investment is forever b/c has no maturity (3) No way to observe rate of return the market requires Cumulative voting: is to permit minority participating; directors are elected all at once Straight voting: Directors are elected one at a time Proxy: SH allows someone else to vote his shares ( proxy fight: when a corporation's SH develop opposition to the corporate directors and management) Classes of Stock: helps firm raise equity capital by issuing limited-voting stock while maintaining control Other rights: (1) Share proportion of declared divs (2) Share proportion in remaining assets during liquidation (3) Preemptive right—1st shot at new stock issue to maintain ownership if desired (4) Voting rights at annual/special meeting Dividend Characteristics: (1) Not a liability of the firm until div. has been declared by the Board (2) Firm cannot go bankrupt for not declaring divs. (3) Div pmts not considered a business expense; They are NOT tax deductible (4) The taxation of divs received by individuals depends on the holding period (5) Divs received by corps have a min of 70% exclusion from taxable income Preferred Stock: (1) Stated dividend that must be paid b4 divs can be paid to common SH (2) Divs are not a liability of the firm and preferred divs can be deferred indefinitely (3) Most preferred divs are cumulative—any missed preferred divs have to be paid before common dividends can be paid (4) Generally DO NOT carry voting rights Dealer: maintains an inventory and stands ready to buy and sell (Bid price=willing to pay; Ask price=buy)=Diff=spread Broker: brings buyers and sellers together NYSE: (1) largest stock market in the world (auction) (2) 1,366 members “own” seats (3) commission brokers: execute customer orders to buy/sell stocks (i.e. Merrill Lynch) (4) Specialists: assigned dealer for small set of
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This note was uploaded on 04/06/2008 for the course FIN 300 taught by Professor Mucklow during the Fall '08 term at Wisconsin.

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Exam 2 Fin300 Updated Sheet - Ch 8: Stock Valuation Div...

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