Finance Quiz 4 Terms

Stock Valuation

Determining the current value of a share based on its expected future benefits.

Common Stock

Ownership shares that generally include voting rights and potential dividends.

Preferred Stock

Stock that has priority over common stock for dividends and liquidation distributions.

Dividend

A distribution of company profits or assets to shareholders.

Required Return

The minimum return investors demand for the risk of an investment.

Dividend Growth Model

A stock valuation method based on dividends growing at a constant rate.

Dividend Yield

The percentage return investors receive from dividend income.

Capital Gains Yield

The percentage return from an increase in stock price.

Total Return

The combined return from dividend income and stock price changes.

Zero Growth Stock

Stock that pays the same dividend indefinitely.

Constant Growth Stock

Stock whose dividends increase at a steady rate forever.

Nonconstant Growth

A dividend pattern in which growth rates change over time.

Supernormal Growth

Unusually rapid growth that lasts for a limited period.

Two-Stage Growth Model

A stock valuation method using an initial growth phase and a permanent growth phase.

Growing Perpetuity

A stream of payments that increases at a constant rate forever.

Price-Earnings Ratio (PE)

A valuation multiple comparing stock price with earnings per share.

Price-Sales Ratio (PS)

A valuation multiple comparing stock price with sales per share.

Earnings Per Share (EPS)

The earnings attributable to each outstanding common share.

Benchmark PE Ratio

A reference valuation multiple used to estimate an appropriate stock price.

Forward PE Ratio

The stock price divided by expected future earnings per share.

Shareholder Rights

Ownership privileges including voting, dividends, and claims on remaining assets.

Board of Directors

Representatives elected by shareholders to oversee corporate management.

Straight Voting

A system where shareholders vote separately for each director position.

Cumulative Voting

A system allowing shareholders to concentrate votes on specific director candidates.

Proxy Voting

Authorizing another party to cast shareholder votes.

Classified Board

A board with directors divided into groups serving staggered terms.

Preemptive Right

A shareholder's right to buy new shares to maintain their ownership percentage.

Dual-Class Stock

Different classes of shares that carry unequal voting rights.

Cumulative Preferred Stock

Preferred shares whose unpaid dividends accumulate until paid.

Dividends in Arrears

Unpaid cumulative preferred dividends carried forward from previous periods.

Noncumulative Preferred Stock

Preferred shares whose skipped dividends do not accumulate.

Primary Market

The market where newly issued securities are sold to investors.

Secondary Market

The market where existing securities are traded among investors.

Securities Dealer

A participant who trades securities using their own inventory.

Securities Broker

An intermediary who arranges trades on behalf of investors.

Bid Price

The highest price a buyer is currently willing to pay.

Ask Price

The lowest price a seller is currently willing to accept.

Bid-Ask Spread

The difference between the quoted ask and bid prices.

Market Maker

A dealer who provides buy and sell quotes to facilitate trading.

Liquidity

The ability to trade an asset quickly without substantially affecting its price.

NYSE

A major U.S. exchange combining electronic trading with floor-based market activity.

Nasdaq

An electronic stock exchange using a multiple-market-maker system.

Over-the-Counter (OTC) Market

A dealer-based marketplace for securities traded outside traditional exchanges.

Capital Budgeting

The process of evaluating and selecting long-term investment projects.

Initial Investment

The cash outlay required to begin a project.

Net Cash Flow

Cash inflows minus cash outflows during a period.

Present Value

The current worth of cash flows expected in the future.

Discount Rate

The required return used to convert future cash flows into present values.

Discounted Cash Flow (DCF) Valuation

An investment valuation method based on present values of projected cash flows.

Net Present Value (NPV)

The present value of future project cash flows minus the initial investment.

NPV Rule

Accept projects with positive NPV and reject projects with negative NPV.

Positive NPV

A result indicating a project is expected to increase firm value.

Negative NPV

A result indicating a project is expected to decrease firm value.

Payback Period

The time required for a project's cash inflows to recover its initial investment.

Payback Rule

Accept projects when their payback period meets a predetermined cutoff.

Discounted Payback Period

The time needed for discounted cash inflows to recover the initial investment.

Discounted Payback Rule

Accept projects when their discounted payback period meets the required cutoff.

Average Accounting Return (AAR)

A measure of average accounting income relative to average book investment value.

Internal Rate of Return (IRR)

The discount rate at which a project's NPV equals zero.

IRR Rule

Accept conventional independent projects when IRR exceeds the required return.

Modified Internal Rate of Return (MIRR)

A return measure using specified financing and reinvestment rates.

Profitability Index (PI)

The present value of future cash inflows relative to initial investment.

Independent Projects

Projects that can be accepted or rejected without affecting one another.

Mutually Exclusive Projects

Projects where selecting one prevents selecting another.

Conventional Cash Flows

A cash flow pattern with an initial outflow followed by inflows.

Nonconventional Cash Flows

Cash flows whose signs change more than once over a project's life.

Multiple IRRs

A situation where a project can have more than one internal rate of return.

Reinvestment Rate Assumption

An assumption about the rate earned on cash flows received before a project's end.

Capital Rationing

A situation where limited investment funds prevent accepting every desirable project.

NPV Profile

A graph showing how a project's NPV changes at different discount rates.

Market order

You agree to trade at the current quote / price and order executes at current quote / price

Limit order

You stipulate a limit price and will not execute until price goes above / below limit price

Limit Order Books (LOB)

Unexecuted limit orders create

Stock Valuation

The stock price today will equal all future dividends paid