Finance Test 5 Flashcards
(51 cards)
Fund Capital
equity capital in a not for profit corp, typically obtained from contributions and grants and by retaining earnings; often called net assets on balance sheet
Preemptive Right
the right that gives current shareholders the opportunity to purchase any newly issued shares
How do common stock investors usually receive returns?
they are buying the right to a proportionate share of the residual earnings of the corporation. they get it from the net income
How do common stockholders exercise their right of control?
they have the right to elect a firm’s board of directors, who will in turn manage the business
What is the purpose of preemptive right?
it protects the present stockholders’ position of control and it protects the stockholders against dilution of value should new shares by issues at less than the current market price.
Classified Stock
the term used to distinguish between stock classes when a business uses more than one type of common stock
Give one reason for using classified stock
obtain funds from outside sources
rights offering
the mechanism by which new common stock is offered to existing shareholders
public offering
the sale of newly issued securities to the general public through an investment banker
What is a private placement and what are its primary advantages over a public offering?
securities are sold to one or a few investors, most common with bonds, but they also occur with stock. Advantages of priv place are lower admin costs and greater speed because the shares do not have to go through the securities and exchange commission
what are the employee stock purchase plans?
companies have plans that allow employees to purchase stock of the employing firm on favorable terms
Dividend Reinvestment Plan (DRIP)
a plan under which the dividends paid to a stockholder are automatically reinvested in the company’s common stock.
What is a direct purchase plan?
allow stockholders to purchase additional stock directly from the company. grew out of DRIP
What are the sources of equity available to not for profit firms?
they raise equity capital through govt grants and charitable contributions
Are not for profit corps at a disadvantage when it comes to raising equity capital?
their initial start up have decreases over the years making not for profit corps to rely more on profits and outside contributions
Dividend Yield
the annual dividend divided by current stock price
What are three approaches to valuing common stocks and when do each apply?
Start up business, young business, mature business
Does the holding period matter when using the dividend valuation model?
expect to hold the stock for a finite period and then sell it.
What are some assumptions of the constant growth model?
the expected dividend growth rate is constant for all years
What are the key features of constant growth regarding dividend yield and capital gains yield?
expected dividend yield is a constant and the expected capital gains yield is also constant
security market equilibrium
value exceeds its current price
what securities are most likely to be in equilibrium?
bonds of the US treasury and the bonds and stocks of major corporations are generally in equilibrium
Efficient markets hypothesis
the theory that stocks are always in equilibrium and it is impossible for investors to consistently earn excess returns (beat the market)
What two conditions must hold for markets to be efficient?
all info relevant to the values of the securities traded can be obtained easily and at low cost
the market contains many buyers and sellers who act rationally on the info
