Stock Valuation

These flashcards cover key vocabulary and concepts related to stock valuation, particularly focusing on common stock, dividend models, and the required return on investments.

Common Stock Valuation

Valuing common stock is more difficult than valuing bonds due to unknown future cash flows and the perpetual life of the investment.

Present Value of Future Dividends

The method to determine the price of a share of stock by calculating the present value of all future dividends.

Zero Growth Stocks

Common stocks with a constant dividend, much like preferred stocks, viewed as a perpetuity.

Constant Growth Model

Model that assumes dividends grow at a steady rate less than the discount rate, allowing calculation of stock price using a specific formula.

Non-Constant Growth

When dividends do not occur at the start but grow at a constant rate after a few years.

Required Rate of Return (r)

The minimum return required by an investor to consider an investment, calculated using dividend yield and capital gains yield.

Price Earnings Ratio (P/E)

A ratio used by financial analysts to evaluate a company's current share price relative to its earnings per share.

Dividend Yield

The ratio of a company's annual dividend compared to its share price.

Dividend Growth Rate (g)

The annual percentage increase in a company's dividend, crucial for calculating the value of future dividends.

Market Price

The current price at which shares are bought and sold in the stock market, serving as a benchmark for stock valuation.