Finance 325 Chapter 8

8.1a-What are the relevant cash flows for valuing a share of common stock? 1. The dividend has a zero growth rate2. The dividend grows at a constant rate3. The dividend grows at a constant rate after some length of time
8.1b- Does the value of a share of stock depend on how long you expect to keep it? depends upon dividend growth pattern. Value of stock will vary only with the change in required return. If constant- the value of stock increases with the time of holding the stock
8.3a- What is the difference between securities broker and a securities dealer? Dealer- maintains an inventory and stands ready to buy and sell at any timeBroker-brings buyers and sellers together but does not maintain an inventory
8.3b-Which is bigger, the bid price or the ask price? Why? Bid price- price the dealer is willing to payAsk price- the price at which the dealer will sell Usually the ask price is more.
8.3c-How does NASDAQ differ from the NYSE? How transactions actually take place on each exchange. NYSE- an auction style market, where brokers purchase stocks on behalf of firms or clients and trades actually take place between individuals on the floor of the exchange
Common Stock Equity without priority for dividends or in bankruptcy
Cumulative Voting A procedure in which a shareholder may cast all votes for one member of the board of directors
Straight Voting A procedure in which a shareholder may cast all votes for each member of the board of directors
Proxy A grant of authority by a shareholder allowing another individual to vote his or her shares
Classes of stock Some firms have more than one class of common stock, usually created with unequal voting rights;
Dividends payments by a corporation to shareholders, made in either cash or stock
Preferred Stock Stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights
Primary market The market in which new securities are originally sold to investors
Secondary Market The market in which previously issued securities are traded among investors
Dealer An agent who buys and sells securities from inventory
Broker An agent who arranges security transactions among investors
NYSE The New York Stock Exchange, the Big Board, measured in terms of the total value of shares listed, it is the largest stock market in the world
DMMS (specialists) NYSE members who act as dealers in particular stocks. Formerly known as “specialists.”
Floor brokers NYSE members who execute customer buy and sell orders, emphasis on getting the best price possible
Floor traders Small number of NYSE members, independently trade for their own accounts. They try to anticipate temporary price fluctuations and profit from them by buying low and selling high.
order flow The flow of customer orders to buy and sell securities
OTC Securities market in which trading is almost exclusively done through dealers who buy and sell for their own inventories

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