Financial Management Midterm 2

Stock Issuers

A corporation sells part of itself to investors; gov can’t do this

What’s the diff between stocks and bonds

Stocks: owner, Dividends, usually quarterly, more risk and payment not mandatory

Bonds: Coupon payment, semi-annually, less risk as payments are mandatory and paid first before stockholders

What are the owner rights?

Right to dividends, Right to a pro-rated shares of the assets if firm is liquidated, and right to vote to matters of great importance e.g. proxies

What are 2 type of primary markets?

Initial Public Offering (IPO) and seasoned Equity Offering (SEO)

What are the 2 type of Secondary markets

Auction Market and Dealer Market

Who is in control or a auction market?

Specialist in which they get commission

Who is in control of a dealer market?

Market Maker in which they get mark up’s

What does PE mean?

Pricing Per Share/Earnings per Share

What is a Price?

It’s the PV of expected future cash flow

What is a dividend discount model

A valuation tool that only apply to those firm that actually pay a dividends

What is a earning?

Net Income and the money left over goes toward retained earnings or dividends

What is a growth rate?

The rate at which the firm will grow due to earnings being reinvested into the firm. Dividends are often assumed to grow at this rate (called g)

What is a Payout Ratio?

earnings that the firm paid out to stockholders as Dividends

What is a plowback Ratio?

The % of earnings that the firm retains order to reinvest within the firm with the intention of making itself grow

Growth Stocks

Tend to pay little to no dividends, which means they plow back most of their earnings in order to grow their firm. Investors hope to earn money through capital appreciation (buy low sell high)

Income Stocks

Tend to pay very high dividends, which means plowback is very little. The firm does not grow much and investors hope to earn through the dividends that are paid

what is a net working capital (NWC)

Your required rate of return also known as the opportunity cost of capital. You get it from comparing investments of similar risk and it’s the basis for all the work we will do