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121 Cards in this Set
- Front
- Back
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Which of the following is known as a hybrid security?
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Preferred Stock
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The present value of the stream of expected cash flows discounted at an appropriate required rate of return is called what?
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Intrinsic Value
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For purposes of the Gordon Model, dividends that are "recently paid", "currently being paid", or "paid today" all refer to
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Do
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The chapter discusses how not all stocks pay dividends. In these cases, it doesn't make sense to use dividends in the Gordon Model. What does the text state analysts use in the numerator of the Gordon Model instead of dividends?
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Free cash flow to the firm
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The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.
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Gordon Growth Model
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A form of equity which receives preferential treatment in the payment of dividends is called _____ stock.
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preferred
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The control issues involved in running a company are collectively known as:
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corporate governance
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The text discusses start-up firms. What types of equity investors does the text mention invest in start-up firms.
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Angels and VCs
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Each stock is listed and identified by is own unique symbol known as the:
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Ticker Symbol
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The highest price of a stock over the last year
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52 week high
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The lowest price of a stock over the last year
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52 week low
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A physical trading floor and a computer network where stocks are bought and sold
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American Stock Exchange AMEX
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In real estate, the denominator of the Gordon Model, r-g
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Cap Rate
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A type of equity on the balance sheet which represents ownership sold to common share holders at par value and which usually has voting rights
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Common Stock
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The assumption that dividends or free cash flows will grow forever at a constant rate
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Constant Growth Model
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The structure, rules, and regulations for owners and managers of a firm
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Corporate Governance
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A preferred stock characteristic where if a firm fails to pay preferred dividends on year, it must catch up and pay all preferred dividends before any common stock dividend can be paid
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Cumulative Dividends
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That day's closing price as reported in the financial press
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Day's closing price
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That day's highest trade price as reported in the financial press
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day's high
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That day's lowest trade price as reported in the financial press
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Day's low
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The most recent dividend paid by the firm
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Dividend
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The dividend yield stated as a percent in the financial press
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Dividend percent yield Yld%
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A preferred stock characteristic where common stock dividends cannot be paid until the preferred dividends are paid
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Dividends in arrears
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Ownership in an asset such as a company. Often another name for stock
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equity
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Another name for fixed-income securities
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Fixed-return securities
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An economic model to compute the value of equity assuming constant dividend growth = D1/(r-g)
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Gordon growth model
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a security like preferred stock that has characteristics like stock and bonds
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hybrid security
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the value of an asset computed with an economic model
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intrinsic value
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an economic model to compute the value of equity assuming multiple growth rates
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multi-stage growth model
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a computer network where stocks are bought and sold
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Nasdaq
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that day's change in price as reported in the financial press
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Net day's change (net chg)
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a physical trading floor and a computer network where stocks are bought and sold
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New York Stock Exchange
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The price of a stock divided by its earnings
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PE ratio
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a type of equity viewed as a hybrid security
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preferred stock
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an asset (such as stock) which earns its return after fixed-income assets (such as bonds) are paid
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residual claim
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how many round lots of the stock traded that day as reported in the financial press
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round lots traded (vol 100s)
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proof of equity ownership in a firm
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stock
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a one to four letter code identifying a company on its exchange
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ticker symbol
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an economic model to compute the value of equity assuming two growth rates
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two-stage model
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Securities that are not fixed-income securities
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variable-return securities
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According to the reading, what is risk
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risk is uncertainty
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What is the relationship between risk and correlation?
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Lower correlation leads to lower risk
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Which is not a part of the build-up method for finding the required rate of return?
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Large-Cap risk premium
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the employees of Textile, Inc. just voted to go on strike.
This is an example of? |
A diversifiable risk
The risk of an individual firm can be diversified by forming a portfolio of stocks along with Textile. |
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The risk premium for an individual security is computed by:
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multiplying the security’s beta by the market risk premium
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Standard deviation measures _____ risk.
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total
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Systematic risk is measured by:
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beta
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The intercept point of the security market line is the rate of return which corresponds to:
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Risk free rate of return
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Companies or securities with betas greater than 1
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Aggressive Assets
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A financial analyst's best guess at a future financial measure
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Analyst's Estimate
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The sum of the bond yield and the equity risk premium, a component of the buildup method
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Base Equity Rate
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The measure of systematic risk determined by a regression line
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Beta
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Another word for market risk
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Beta Risk
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a technique to estimate the cost of equity
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build-up method
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capital asset pricing model, a linear model that relates risk and return: Re=Rf + Beta(Rm-Rf)
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CAPM
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how related one's asset's returns are to another asset's returns
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correlation
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companies or securities with betas less than 1
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defensive assets
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another name for unsystematic risk
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diversifiable risk
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decreasing risk by combining assets that are not perfectly correlated
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diversification
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a model in which the investor is fairly compensated for risk and the security is properly priced
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equilibrium model
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the additional return demanded or received above the firm's bond yield, a component of the build-up method
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equity risk premium
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the hypothesized or "best guess" estimate of future prices/returns under different scenarios
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expectational data
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firm-specific risk
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another name for unsystematic risk
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a return based on past prices and cash flows
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historical data
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idiosyncratic risk
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another name for unsystematic risk
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risk that cannot be diversified away
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market risk
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a component of the build-up method for small firms
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micro-cap risk premium
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a return that includes inflation
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nominal return
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non-diversifiable risk
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another word for market risk
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an approximation measure for something else
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proxy
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a return with inflation taken out of it
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real return
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another name for the discount rate. the minimum return an investor requires to invest in an asset
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required rate of return
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how much an investor gets out of an investment divided by how much the investor put into the investment
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return
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a graphical representation of all possible returns of an investment
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return distribution
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the possibility that the realized or actual return will differ from our expected return
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risk
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a theoretical concept of the rate an investor would receive investing in a riskless asset. often approximated with t-bill rate
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risk free rate
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the required return in addition to the risk free rate demanded or received by investors or risky assets
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risk premium
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an index managed by Standard and Poor's designed to approximate the total stock market
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S&P 500
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Security market Line, a graphical representation of the CAPM
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SML
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the measure of total risk
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standard deviation
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a component of the build-up method for start-up firms
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start-up risk premium
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another word for market risk
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systematic risk
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the notion that the size of the risk premium is based on market risk
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systematic risk principle
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combined systematic and unsystematic risk
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total risk
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risk that can be diversified away
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unsystematic risk
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standard deviation squared
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variance
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What does the cost of capital depend upon?
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the sources of financing for capital, and the associated costs
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From which viewpoint does the text NOT teach how to think about the cost of capital?
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for auditors
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What are the primary methods of computing the cost of common stock according to the text?
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Gordon Growth Model
CAPM Build up |
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When is it appropriate to use WACC in an NPV decision?
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When we are extending the firm
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The return that shareholders require on their investment in the firm is called the:
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cost of equity
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The proportions of the market value of the firm’s assets financed via debt, common stock, and preferred stock are called the firm’s:
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capital structure weights
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The costs incurred by the firm when new issues of stocks or bonds are sold are called:
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flotation costs
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The overall cost of capital for a retail store:
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reflects the return investors require on the total assets of the firm.
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The pre-tax cost of debt for a firm:
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is equal to the yield to maturity on the outstanding bonds of the firm.
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The explicit interest rate that you pay on the debt in the cost of capital
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Borrowing cost
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the market value of common stock
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C
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short for capital budgeting analysis
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Capital budgeting
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how much it costs a firm (in percentage terms) to finance its operations through debt and/or equity
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cost of debt
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how much it costs a firm (in percentage terms) to use equity financing
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cost of equity
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how much it costs a firm (in percentage terms) to finance its operations through debt and/or equity
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cost of capital
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the market value of debt
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D
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how a firm builds the liability and equity side of the balance sheet to finance its investments
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financing decision
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the costs a firm must pay to raise external financing
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flotation costs
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the savings a firm gets by using debt to write off the interest expense
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interest tax shield
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how a firm builds the asset side of the balance sheet by allocating funds, time, and other resources
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investment decision
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the market value of preferred stock
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P
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the cost of capital before taking out the interest tax shield
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Pre-tax cost
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the market value of the entire financing structure
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V
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weighted average cost of capital. the average cost of financing a firm in percentage terms
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WACC
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an average in which each element has a specific weight assigned
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Weighted Average
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What are the two sources of income from buying a stock?
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dividends
capital gains |
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holding period return
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what you get out
what you put in |
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What are the three synonyms for diversifiable risk?
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unsystematic
firm-specific idiosyncratic |
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What are the three synonyms for market risk?
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systematic
nondiversifiable beta |
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What is the slope of the market line?
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beta
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What kind of graph is the characteristic or capital market line?
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scatterplot
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What is the slope of the security market line?
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Rm-Rf
Risk premium |
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What are the four parts of the build up equation?
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bond yield
equity risk micro-cap risk start-up risk |
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Are there flotation costs for internal or external common stock?
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external
opportunity costs for internal |
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Are market values or historical values better to use?
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market values
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