Exam 3

Front 1

preferred stock

Back 1

a hybrid security with characteristics of both common stock and bonds. Preferred stock is similar to common stock in that it has no fixed maturity date, the nonpayment of dividends does not bring on bankruptcy, and dividends are not deductive for tax purposes. Preferred stock is similar to bonds in that dividends are limited in amount.

Front 2

cumulative feature

Back 2

a requirement that all past, unpaid preferred stock dividends to be paid before any common stock dividends are declared.

Front 3

protective provisions

Back 3

provisions for preferred stock that protect the investor's interest. The provisions generally allow for voting in the event of nonpayment of dividends, or they restrict the payment of common stock dividends if sinking-fund payments are not met or if the firm is in financial difficulty.

Front 4

convertible preferred stock

Back 4

preferred shares that can be converted into a predetermined number of shares of common stock, if investors so choose.

Front 5

call provision

Back 5

a provision that entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods.

Front 6

sinking-fund provision

Back 6

a protective provision that requires that firm periodically to set aside an amount of money for the retirement of its preferred stock. This money is then used to purchase the preferred stock in the open market or through the use of the call provision, whichever method is cheaper.

Front 7

common stock

Back 7

shares that represent the ownership in a corporation.

Front 8

limited liability

Back 8

a protective provision whereby the investor is not liable for more than the amount he or she has invested in the firm.

Front 9

proxy

Back 9

a means of voting in which a designated party is provided with the temporary power of attorney to vote for the signee at the corporation's annual meeting.

Front 10

proxy fight

Back 10

a battle between rival groups for proxy votes in order to control the decisions made in a stockholder's meeting.

Front 11

majority voting

Back 11

voting in which each share of stock allows the shareholder one vote, and each position on the board of directors is voted on separately. As a result, a majority of shares has the power to elect the entire board of directors.

Front 12

cumulative voting

Back 12

voting in which each share of stock allows the shareholder a number of votes equal to the number of directors being elected. The shareholder can then cast all of his or her votes for a single candidate or split them among the various candidates.

Front 13

preemptive right

Back 13

the right entitling the common shareholder to maintain his or her proportionate share of ownership in the firm.

Front 14

right

Back 14

a certificate issued to common stock holders giving them an option to purchase a stated number of new shares at a specified price during a 2-10 week period.

Front 15

internal growth

Back 15

a firm's growth rate resulting from reinvesting the company's profits rather than distributing them as dividends.

Front 16

profit-retention ratio

Back 16

the company's percentage of profits retained. 1 minus the percentage of profits paid out in dividends.

Front 17

dividend-payout ratio

Back 17

dividends as a percentage of earnings. The percentage of profits paid out in dividends.

Front 18

expected rate of return

Back 18

The rate of return investors expect to receive on an investment by paying the current market price of the security.

The arithmetic mean or average of all possible outcomes where those outcomes are weighted by the probability that each will occur.

Front 19

Preferred Stock Characteristics

Back 19

Multiple periods of preferred stock
Preferred stock's claim on assets and income
Cumulative dividends
Protective provisions
Convertibility
Retirement provisions
perpetuity
creditors

Front 20

Value of Preferred Stock =

Back 20

V_ps=D/R_p
Value of preferred stock = Dividend paid/assumed required rate of return

Front 21

Internal Growth=

Back 21

g=ROE*pr
the growth rate of future earnings and the growth in the common stockholders' investment in the firm
= the return on equity (net income/common book value)
* the company's percentage of profits retained, or profit-retention rate

Front 22

Common Stock Value=

Back 22

V_cs=D_1/(R_cs-g)
common stock value
= dividend in year 1
/(required rate of return
-growth rate)

Front 23

D_1=

Back 23

D_0(1+g)

Front 24

Percentage of profits retained=

Back 24

% Profits Retained = 1-(DPS/EPS)

= 1
-(dividends per share
/earnings per share)

Front 25

Expected Cash Flows

Back 25

The Total Dollar Gain in accordance with outcome probabilities.

Front 26

risk

Back 26

potential variability in future cash flows.

Front 27

treasury bills carry only systematic risk? 3%

Back 27

maybe?

Front 28

Risk-free rate=
Average Risk-free rate=

Back 28

=Nominal Returns - Inflation
=Treasury Bils

Front 29

Risk premium=

Back 29

=Nominal Returns - Treasury Bills

Front 30

company-unique risk

Back 30

unsystematic risk

Front 31

unsystematic risk

Back 31

the risk related to an investment return that can be eliminated through diversification. Unsystematic risk is the result of factors that are unique to the particular firm. Also called company-unique risk or diversifiable risk.

Front 32

systematic risk

Back 32

(1) the risk related to an investment return that cannot be eliminated through diversification. Systematic risk results from factors that affect all stocks. Also called market risk or nondiversifiable risk.

(2) The risk of a project form the viewpoint of a well-diversified shareholder. This measure takes into account that some of the project's risk will be diversified away as the project is combined with the firm's other projects, and, in addition, some of the remaining risk will be diversified away by shareholders as they combine this stock with other stocks in their portfolios.

Front 33

diversifiable risk

Back 33

unsystematic risk

Front 34

nondiversifiable risk

Back 34

systematic risk

Front 35

holding-period return

Back 35

the return an investor would receive from holding a security for a designated period of time. For example, a monthly holding-period return would be the return for holding a security for a month.

Front 36

return=

Back 36

= (end/beg) - 1

Front 37

Sd of Return
(Standard Deviation of Returns)

Back 37

Sqrt(

Front 38

weighted average cost of capital

Back 38

A composite of the individual costs of financing incurred by each capital source. A firm's weighted cost of capital is a function of (1) the individual costs of capital, and (2) the capital structure mix.

Front 39

financial policy

Back 39

the firm's policies regarding the sources of financing it plans to use and the particular mis (0roportions) in which they will be used.