Chapter 7: Valuing Stocks

Common Stock

a share of ownerships that has rights to common dividends, voting, mergers, and other major events

Ticker Symbol

abbreviation assigned to a publicly traded company

Straight Voting

as many votes as shares held, shareholders must vote for each director separately

Cumulative Voting

votes = number of open spots x number of shares owned

Annual Meeting

shareholders vote on directors and other proposals and ask managers questions

Proxy

written authorization for someone else to vote with your shares

Proxy Contest

two or more people competing to collect proxies to prevail in the matter up for shareholder votes

Preferred Stock

preference over common shares in payment of dividends and in liquidation

Cumulative Preferred Stock

preferred stock where a dividend payment is missed, obligation to preferred dividends before common dividends

Non-Cumulative Preferred Stock

preferred stock where missed dividends do not accumulate and only the current dividend is owed before common dividends must be paid

Equity Cost of Capital

expected return rate available in the market on other investments that have risk equivalent to that associated with the firms shares

Dividend Yield

percentage return an investor expects to earn from the dividend paid

Capital Gain

amount by which the selling price of an asset exceeds its purchase price

Total Return

sum of a stocks dividend yield and its capital gain rate

Dividend-Discount Model

values shares of a firm according to the present value of the future dividends the firm will pay

Constant Dividend Growth Model

model for valuing stocks by viewing dividends as a constant growth perpetuity

Dividend Payout Rate

the fraction of a firms earnings that the firm pays out as dividends each year

Retention Rate

fraction of the firms earnings that the firm retains

Share Repurchase

firm using cash to buy back its own stock

Total Payout Model

method that values all of the firms equity rather than a single share

Discounted Free Cash Flow Model

estimates a firms enterprise value by discounting its future free cash flow

Weighted Average Cost of Capital (WACC)

cost of capital that reflects the risk of the overall business, which is the combined risk of the firms equity and debt

Enterprise Value

value of the firms operations + debt - cash

EBIT

earnings before interest and taxes; how much is made from its core operations before deductions

Method of Comparables

estimates the value of a firm based on other comparable firms that are expected to generate similar cash flows in the future

Valuation Multiple

ratio of a firms value to some measure of the firms scale or cash flow

Trailing Earnings

firms earnings over the last 12 months

Forward Earnings

firms earnings anticipated in the next 12 months

Trailing P/E

firms P/E ratio calculate using its trailing earnings

Forward P/E 

firms P/E ratio calculate using its forward earnings (generally preferred)