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ch09 - 1 Chapter 9 Stock Valuation Learning Objectives 1 2...

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Chapter 9 Stock Valuation Learning Objectives 1. List and describe the four types of secondary markets. 2. Explain why many financial analysts treat preferred stock as a special type of bond rather than as an equity security. 3. Describe how the general dividend-valuation model values a share of stock. 4. Discuss the assumptions that are necessary to make the general dividend-valuation model easier to use, and use the model to compute the value of a firm’s stock. 5. Explain why g must be less than R in the constant-growth dividend model. 6. Explain how valuing preferred stock with a stated maturity differs from valuing preferred stock with no maturity, and calculate the price of a share of preferred stock under both conditions. I. Chapter Outline 9.1 The Market for Stocks Equity securities are certificates of ownership of a corporation. Households dominate the holdings of equity securities, owning about 35 percent of outstanding corporate equities. A. Secondary Markets 1
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In secondary markets, outstanding shares of stock are bought and sold among investors. An active secondary market enables firms to sell their new debt or equity issues at a lower funding cost than firms selling similar securities that have no secondary market. B. Secondary Markets and Their Efficiency In the United States, most secondary market transactions are conducted on one of the many stock exchanges. In terms of total volume of activity and total capitalization of the firms listed, the NYSE is the largest in the world and NASDAQ is the second largest. The NASDAQ is one of the world’s largest electronic stock markets, listing over three thousand companies. NASDAQ is an acronym for National Association of Securities Dealers Automated Quotation System. In terms of the number of companies listed and shares traded on a daily basis, NASDAQ is larger than the NYSE. Firms listed on the NYSE tend to be, on average, larger in size and their shares trade more frequently than firms whose securities trade on NASDAQ. The largest markets outside of the United States include the Tokyo Stock Exchange, NYSE Euronext, the London Stock Exchange, the Shanghai 2
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Stock Exchange, the Hong Kong Stock Exchange, and the Toronto Stock Exchange. There are four types of secondary markets, and each type differs according to the amount of price information available to investors, which in turn affects the efficiency of the market. 1. Direct Search The secondary markets farthest from our ideal of complete price information are those in which buyer and seller must seek each other out directly. It is too costly to perform a thorough search among all possible partners to locate the best price. Securities that sell in direct search markets are usually bought and sold so infrequently that no third party, such as a broker or dealer, finds it profitable to serve the market.
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