corporate finance 2

primary market

Market for the sale of new shares by corporations

secondary market

Market in which previously issued shares are traded among investors

common stock

Ownership shares in a publicly held corporation

Electronic Communication Networks

A number of computer network stock exchanges that connect traders with each other

Exchange-Traded Funds

Portfolios of stocks that can be bought or sold in a single trade.

Book value 

Net worth of the firm according to the balance sheet.

Dividend

Periodic cash distribution from the firm to the shareholders.

Market Value Balance Sheet.

Financial statement that uses market value of assets and liabilities.

Valuation by Comparables.

Identifying similar firms as potential comparables and then examining how much investors in these comparable companies pay per dollar of earnings or book value.

what is the P/E Ratio?

Price per share divided by earnings per share.

P/B Ratio.

Price per share divided by book value per share.

constant growth for restated p0 formula

div1 / r - g

non constant growth 

p0 = (div1 / 1 + r) + (div 2 / 1 + r)

D0

represents dividend just paid

payout ratio

div / eps 

d1 

div1 (1+g)

d2

d0 (1+g) (1+g)

d3

d0 (1+g) (1+g) (1+g)

dividend + price appreciation

if a company pays $8 dividend forever

• perpeutuity pu=cf/r if r =10%

• pv = price =

8/.10=80

expected return rate formula 

DIV1 + p1 - p0 / p0

price appretiation formula

p1 - p0 / p0

dividend yield

div1 / p0

when having a constant dividend growth g is the…

rate of growth

p0=

DIV1 + P1 / 1 + r

g=

growth rate of the dividend

capitalization rate =

(Div1 / P0) + g

ROE (return on equity)

eps / book equity per share

payout ratio

Ratio of dividends to earnings per share.

plowback ratio

Fraction of earnings retained by the firm.

Valuing a Business or Project

computed as the discounted value of free cash flows out to a valuation horizon (H)

valuation horizon is sometimes called…

terminal value