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67 Cards in this Set
- Front
- Back
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Dividend Growth Model |
A model that determines the current price of a stock as its dividend next period divided by the discounted rate less the dividend growth rate |
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Dividend Yield |
A stock's expected cash dividend divided by its current price |
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Capital Gains Yield |
The dividend growth rate, or the rate at which the value of an investment grows |
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Common Stock |
Equity without priority for dividends or in bankruptcy |
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Cumulative Voting |
A procedure in which a shareholder may cast all votes for one member of the board of directors |
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Straight Voting |
A procedure in which a shareholder may cast all votes for each member of the board of directors |
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Proxy |
A grant of authority by a shareholder allowing another individual to vote that shareholder's shares. |
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Dividends |
Payments by a corporation to shareholders, made in either cash or stock |
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Preferred Stock |
Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights |
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member |
As of 2006, a member is the owner of a trading license on the NYSE |
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Designated Market Maker (DMM) |
NYSE members who act as dealers in particular stocks. Formerly known as "specialists" |
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Floor Brokers |
NYSE members who execute customer buy and sell orders |
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Supplemental Liquidity Providers (SLPs) |
Investment firms that are active participants in stocks assigned to them. Their job is to make a one-sided market (ie offering to either buy or sell). They trade purely for their own accounts |
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Order Flow |
The flow of customer orders to buy and sell securities |
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DMM's Post |
A fixed place on the exchange floor where the DMM operates |
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Inside Quotes |
The highest bid quotes and the lowest ask quotes for a security |
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Electronic Communications networks (ECNs) |
Websites that allow investors to trade directly with one another |
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Net Present Value (NPV) |
The difference between an investment's market value and its costs |
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Discounted Cash Flow (DCF) valuation |
The process of valuing an investment by discounting its future cash flows |
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Payback Period |
The amount of time required for an investment to generate cash flows sufficient to recover its initial costs |
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Average Accounting Return (ARR) |
An investment's average net income divided by its average book value |
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Internal Rate of Return (IRR) |
The discount rate that makes the NPV of an investment zero |
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Net Present Value profile |
A graphical representation of the relationship between an investment's NPV and various discount rates |
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Multiple Rates of Return |
The possibility that more than one discount rate makes the NPV of an investment zero |
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Mutually Exclusive Investment Decisions |
A situation where taking one investment prevents the taking of another |
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Profitability Index (PI) |
The present value of an investment's future cash flows divided by its initial cost. Also, benefit-cost ratio |
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Incremental Cash Flows |
The difference between a firm's future cash flows with a project and those without the project |
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Stand-alone Principle |
The assumption that evaluation of a project may be based on the project's incremental cash flows |
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Sunk Cost |
A cost that has already been incurred and cannot be recouped and therefore should not be considered in an investment decision |
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Opportunity Cost |
The most valuable alternative that is given up if a particular investment is undertaken |
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Erosion |
The cash flows of a new project that come at the expense of a firm's existing projects |
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Pro Forma Financial Statements |
Financial statements projecting future years' operations |
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Depreciation Tax Shield |
The tax saving that results from the depreciation deduction, calculated as depreciation multiplied by the corporate tax rate |
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Accelerated Cost Recovery System (ACRS) |
Deprecation method under U.S. tax law allowing for the accelerated write-off of property under various classifications |
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Forecasting Risk |
The possibility that errors in projected cash flows will lead to incorrect decisions. Also estimation risk |
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Scenario Analysis |
The determination of what happens to NPV estimates when we ask what-if questions |
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Sensitivity Analysis |
Investigation of what happens to NPV when only one variable is changed |
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Managerial Options |
Opportunities that managers can exploit if certain things happen in the future. AKA "real" options |
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Contingency Planning |
Taking into account the managerial options implicit in a project |
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Strategic Options |
Options for future, related business products or strategies |
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Capital Rationing |
The situation that exists if a firm has a positive NPV projects but cannot obtain the necessary financing |
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Soft Rationing |
The situation that occurs when units in a business are allocated a certain amount of financing for capital budgeting |
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Hard Rationing |
the situation that occurs when a business cannot raise financing for a project under any circumstances |
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Risk Premium |
The excess return required from an investment in a risky asset over that required from a risk-free investment |
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Variance |
The average squared difference between the actual return and the average return |
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Standard Deviation |
The positive square root of the variance |
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Normal Distribution |
A symmetric, bell-shaped frequency distribution that is completely defined by its average and standard deviation |
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Geometric Average Return |
The average compound return earned per year over a multiyear period |
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Arithmetic Average return |
The return earned in an average year over a multiyear period |
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Efficient Capital Market |
Market in which security prices reflect available information |
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Efficient Markets Hypothesis (EMH) |
The hypothesis that actual capital markets, such as the NYSE, are efficient |
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Expected Return |
Return on a risky asset expect in the future |
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Portfolio |
Group of assets such as stocks and bonds held by an investor |
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Portfolio Weight |
Percentage of a portfolio's total value in a particular asset |
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Systematic Risk |
A risk that influences a large number of assets. Also market risk |
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Unsystematic Risk |
A risk that affects at most a small number of assets. AKA Unique or asset-specific risk |
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Principle of Diversification |
Spreading an investment across a number of assets will eliminates some, but not all, of the risk |
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Systematic Risk Principle |
The expected return on a risky asset depends only on that asset's systematic risk |
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Beta Coefficient |
Amount of systematic risk present in a particular risky asset relative to that in an average risky asset |
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Security Market Line (SML) |
Positively sloped straight line displaying the relationship between expected return and beta |
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Market Risk Premium |
Slop of the SML, the difference between the expected return on a market portfolio and the risk-free rate |
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Capital Asset Pricing Model (CAPM) |
Equation of the SML showing the relationship between expected return and beta |
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Cost of Capital |
The minimum required return on a new investment |
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Cost of Equity |
The return that equity investors require on their investment in the firm |
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Cost of Debt |
The return that lenders require on the firm's debt |
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Weighted Average Cost of Capital (WACC) |
The weighted average of the cost of equity and the after tax cost of debt |
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Pure Play Approach |
Use of a WACC that is unique to a particular project, based on companies in similar lines of business |
