11.8: Key Terms

amortization

the process of spreading business costs in accounting; similar to depreciation, but differs in that it generally refers to intangible assets such as patents or copyrights

capital employed

also known as funds employed; the total amount of capital used for the acquisition of profits by a firm or on a project

common stock

a security that represents partial ownership of a corporation

comparable company analysis (comps)

a method for valuating a company using the metrics of other businesses of similar size in the same industry

depreciation

the process of spreading business costs in accounting; similar to amortization, but differs in that it generally refers to fixed, tangible assets such as buildings, machinery, furniture, fixtures, and equipment

discounted cash flow (DCF)

a method for estimating the value of an investment based on the present value of its expected future cash flows

dividend

a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits or reserves

dividend discount model (DDM)

a quantitative method for predicting the price of a company’s stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value

dividend yield

a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price, expressed as a percentage

earnings per share (EPS)

the ratio of a company’s profits to the outstanding shares of its common stock; serves as an indicator of a company’s profitability

EBIT

short for earnings before interest and taxes; an indicator of a firm’s profitability before the effects of interest or taxes; also referred to as operating earnings, operating profit, and profit before interest and tax

efficient markets

markets in which costs are minimal and prices are current, fair, and reflective of all available relevant information

enterprise value (EV)

a company’s total value; often used as a more comprehensive alternative to equity market capitalization

enterprise value (EV) multiples

also known as company value multiples; ratios used to determine the overall value of a company and, by extension, the value of its common stock

equity multiples

metrics that calculate the expected or achieved total return on an initial investment

Gordon growth model

a methodology used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate

growth rate

the rate at which the dollar amount of dividends paid on a specific stock holding increases

intangible assets

assets that are not physical in nature, such as goodwill, brand recognition, and intellectual property (i.e., patents, trademarks, and copyrights)

intrinsic value

the value of a firm’s stock based entirely on internal factors, such as products, management, and the strength of company brands in the marketplace

market capitalization

the value of a company traded on the stock market, calculated by multiplying the total number of shares by the current share price

NASDAQ (National Association of Securities Dealers Automated Quotations)

short for National Association of Securities Dealers Automated Quotations; an American stock exchange based in New York City, ranked second behind the New York Stock Exchange in terms of total market capitalization of shares traded

net book value

also called net asset value (NAV); the total assets of a company minus its total liabilities

NYSE (New York Stock Exchange)

the world’s largest stock exchange by market capitalization of its listed companies, based in New York City; often referred to as the “Big Board”

perpetuity

in terms of investments, an annuity with no end date

precedent transaction analysis (precedents)

a method for valuating a company in which the price paid for similar companies in the past is considered an indicator of the company’s current value

preferred stock

stock that entitles the holder to a fixed dividend, the payment of which takes priority over payment of common stock dividends

price-to-book (P/B) ratio

also called the market-to-book (M/B) ratio; a metric used to compare a company’s market capitalization, or market value, to its book value

price-to-cash-flow (P/CF) ratio

a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share

price-to-earnings (P/E) ratio

a ratio that indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings

price-to-sales (P/S) ratio

a ratio that indicates how much investors are willing to pay for a company’s stock per dollar of that company’s sales

required return

the minimum return an investor expects to achieve by investing in a project

secondary markets

markets where investors buy and sell securities they already own

stock value

also called intrinsic value; the fundamental, objective value of a share of stock