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FIN3244 FINAL EXAMCHAPTERS 11, 12, 13CHAPTER 11: COMMON STOCKS TERMS TO KNOW:  Residual owners : Owners/Stockholders of a firm, who are entitled to dividend income and a prorated share of the firm’s earnings only after all other obligations, have been met. (As residual owners, holders of common stock have no guarantee that they will receive any return on their investment) Routine decline : stock prices that 5% or more in an index. Considered “routine” since they typically occur several times a year. Correction: a drop of 10% or more in an index. Bear market: severe market declines of 20% or more. Occur every three to four year. Equity capital (equity securities ): evidence of ownership position in a firm, in the form of sharesof common stock Publicly traded issues : shares of stocks that are readily available to the general public and are bought and sold in the open market; issuers range from giants, like AT&T and Microsoft, to much smaller regional or local firms Public offering : the sale of a firm’s securities to public investors Rights offering : an offer of new shares of stock to existing stockholders on a pro rata basis Stock spin-off : conversion of one of a firm’s subsidiaries to a stand-alone company by distributionof stock in that new company to existing shareholders Stock split : a maneuver in which a company increases the number of shares outstanding by exchanging a specified number of new shares of stock for each outstanding share (3-for-2 split, three new shares are exchanged for every two old shares outstanding); company uses this when it wants to enhance its stock’s trading appeal by lowering its market price Treasury stock : shares of stock that have been sold and subsequently repurchased by the issuing firm Classified common stock : common stock issued by a company in different classes, each of which offers different privileges and benefits to its holders. Round lot : 100 shares of stock or multiples thereof. Odd lot : transaction involving fewer than 100 shares. Par value : the stated, or face, value of a stock (not used much today except accounting) Book value : the amount of stockholders’ equity in a firm; equals the amount of the firm’s assets minus the firm’s liabilities and preferred stock Market value : the prevailing market price of a security Investment value : the amount that investors believe a security should be trading for, or what they think it’s worth Earnings per share (EPS) : the amount of annual earnings available to common stockholders, as stated on a per-share basisoEPS=Net profit after taxes− preferred dividendsnumber of shares of common stock outstandingo if a firm reports a new profit of $1.25 million, pays $250,000 in dividends to preferred stockholders, and has 500,000 shares of common stock outstanding, it has an EPS of $2 (($1,250,000 - $250,000)/$500,000) Date of record : the date on which an investor must be a registered shareholder to be entitled to receive a dividend Payment date : the actual date on which the company will mail dividend checks to shareholders Ex-dividend date : three business days up to the date of record; determines whether one is an official shareholder and thus eligible to receive a declared dividend Cash dividend : payment of a dividend in the form of cash; tend to increase over time as companies’ earnings growo Dividend yield : a measure that relates dividends to share price and puts common stock dividends on a relative (percentage) rather than absolute (dollar) basisdividend yiel d=annual dividendsreceived per sharecurrent market price of the stocko Dividend payout ratio : the portion of earnings per share (EPS) that a firm pays out as dividendsdividend payout ratio=dividends per shareearnings per share Stock dividend : payment of a dividend in the form of additional shares of stock; really have no value Dividend reinvestment plan (DRIP ): plan I which shareholders have cash dividends automatically reinvested into additional shares of the firm’s common stock; if a company is good enough to invest in, then its good enough to reinvest in Blue-chip stocks : financially strong, high-quality stocks with long and stable records of earnings and dividendso Growth stocks: Nike, Procter & Gamble, Home Depoto High-yielding: AT&T, Chevron, McDonald’s Income stocks : stocks with long and sustained records of paying higher-than-average dividends Growth stocks : stocks that experience high rates of growth in operations and earningso Netflix, eBay, Starbucks Tech stocks : stocks that represent the technology sector of the marketo Microsoft, Dell, Yahoo! Speculative stocks : stocks that offer the potential for substantial price appreciation, usually because of some special situation, such as new management or the introduction of a promising new producto Sirius XM Radio, DreamWorks Animation, Under Armour Cyclical stocks : stocks whose earnings and overall market performance are closely linked to the general state of the economyo Alcoa, Caterpillar, Genuine Parts Defensive stocks : stocks that tend to hold their own, and even do well, when the economy starts to faltero Public utilities, beverages, food, drugs, Wal-Mart Mid-cap stocks : medium-sized stocks, generally with market values of less than $4 or $5 billion but more than $1 billiono Abercrombie & Fitch, Dollar Tree, Nordstrom Small-cap stocks : stocks that generally have market values of less than $1 billion but can offer above-average returnso Callaway Golf, California Pizza Kitchen, Winn-Dixie, Shoe CarnivalCHAPTER 12: ANALYZING COMMON STOCKS TERMS TO KNOW : Security analysis : the process of gathering and organizing information and then using it to determine the intrinsic value of a share of common stock Intrinsic value : the underlying or inherent value of a stock, as determined through fundamental analysis (undervalued, fairly priced, or overvalued) depends on:o Estimates of the stocks future cash flows (e.g., the amount of dividends you expect to receive over the holding period and the estimated price of the stock at time of sale)o The discount rate used to translate those future cash flows into a present valueo The risk associated with future performance, which helps define the appropriate discount rate Top-Down Approach


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FSU FIN 3244 - FINAL EXAM

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