The price of most collectibles is determined by the supply curve?
False.
Supply is fixed. Price is determined by the demand curve.
Alternative investments
Collectibles: Assets that are categorized by “there is an abundant mkt”. I.e. coins. An active mkt.
Non-collectibles: Unique items. no active mkt. race horses, sports teams.
Natural Resources: Timber, oil, gas rights. There is a 15% depletion allowance. 15% of distribution is non-taxable.
Rights represent a “use them or lose them” distribution
True
Limited Partneship
General Partner –> Limited Partner
General Partner takes on the risk
Rights have an exercise price ____ current mkt price and are issued for short term. Warrants are issued at a price _____ current market price and are longer term.
1 - Below
2 - Above
Warrants
- Warrants are usually issued in conjunction with debt.
- Have an exercise price above current mkt price.
- Longer life expectancy. around 10 years.
Rights
- Rights are given to shareholders for free. To allow shareholders to buy more stock and keep their pro-rata percentage ownership.
- Right to exchange ratio (i.e. 5 rights to 1 share)
- Usually have a very short life (1-2 months).
- Rights are transferable, sellable or exercisable.
Dividends in arrears?
Preferred stock shares are issued with a guarantee of a dividend payment, so if a company fails to issue those payments as promised, the total amount owed to the investors is recorded on its balance sheet as dividends in arrears.
If a company has dividends in arrears, it usually means it has failed to generate enough cash to pay the dividends it owes preferred shareholders.
Nearly all preferred stock is cumulative, why?
If the stock is non-cumulative common stock holders can sometimes strip preferred shareholders of their dividends.
With cumulative preferred stock, the company must keep track of the dividends it chooses not to pay to its preferred shareholders. … By contrast, if a company issues noncumulative preferred stock, its preferred shareholders have no future right to receive dividends that the company chooses not to pay
Fundamentals of dividends
- All dividends have to be declared by the board of directors.
- A board of directors is responsible for setting a decoration date, a record date, and a payment date.
- The ex-dividend date is dictated by stock exchange rules.
Record Date
Date by which a shareholder has to own the share the receive the dividend. T + 2 = settlement.
Ex-dividend date
The first date at which a shareholder can buy the stock and not receive the dividend.
A growth stock is one in which there is rapid price appreciation?
False: There is an expected appreciation.
Growth Stock vs Value Stock
Growth -
- High P/E ratio
- High growth in earnings
Value -
- Relative value ratio’s are lower
- Lower growth rate in earnings
- Lower P/E ratio
P/E Ratio
Share price of a stock / actual or anticipated earnings per share
Price to current ratio
* Based on actual earnings of prior 4 quarters. Factual and preferred method.
Price to future earnings ratio
* Do not know what future earnings are and can lead to circular reasoning.
4 methods of determining a fair price of a stock?
- Price earnings ratio
- Price cash flow ratio
- Price sales ratio
- Price book ratio
Gordan Growth Model
- The most basic model for estimating intrinsic value.
- Dividends grow at a constant rate (g) forever.
- Assumes that growth rate (g) is less than the required rate of return.
Vo = D1 / (r-g) Vo = intrinsic value
D1 = Do (1+g) r = required rate of return
D1 = next years dividend
g = growth rate of dividends
Intrinsic Value
Present value of expected cash flows that accrue to the owner of security
