Finance 221 Study Guide – Exam 2

A stock is expecting 4 years of non-constant growth in dividends followed by a constant growth rate in year 5 and beyond. How would you go about finding the value of this stock today? Find the present value of the next 4 expected dividends plus the present value of the expected year 4 constant growth stock value.
Which of the following measures the expected capital gains yield for a constant growth stock? The expected constant growth rate
What is the value of a share of common stock using the Corporate Valuation Approach for a company that has outstanding debt and preferred stock? The firm value minus the market value of debt and preferred stock, all divided by the number of shares of common stock
Annual Report A report issued annually by a corporation (contains basic financial statements as well as analysis of firms past operations and future prospects *the most important report that corporations issue to stockholders
What are the two sections of the annual report? Verbal section (letter from chairperson) and four basic financial statements
What are the four basic financial statements on the annual report? Balance Sheet, Income Statement, Statement of Cashflows, Statement of Stockholders’ equity
Stockholders’ equity Represents the amount that stockholders paid the company when shares were purchased and the amount of earnings the company has retained since its origination (=Paid-in capital +Retained Earnings)
Retained Earnings Represents the cumulative total of all earnings kept by the company during its life
Why are current assets often called working capital? current assets “turn over”, they are used and then replaced
Net working capital =Current assets – Liabilities
Net Operating Working Capital (NOWC) Current assets – (Current Liabilities – Notes Payable)
What is true for an undervalued stock? The stock’s required return is less than its expected return
Earnings per share Net income/common shares outstanding
Dividends per share Dividends paid to common stockholders/common shares outstanding
Book value per share Total common equity/common shares outstanding
Operating Income (EBIT) Earnings from operations before interest and taxes (EBIT) = Sales revenues – operating costs
Why is EPS (earnings per share) often called “the bottom line”? Denoting that of all items on the income statement, EPS is the one that is the most important to stockholders
What is EBITDA? Earnings before interest, taxes, depreciation, and amortization

Leave a Reply

Your email address will not be published. Required fields are marked *