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Chapter 9 � Stocks and Their Valuations

Chapter 9 � Stocks and Their Valuations - 10-ch 7...

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10-ch 7 8-ch 8 7-ch 9 Yield curve- ch 6 Equations given: Capital asset pricing model- CAPM V(p) K(s) CV(a) Practice exam 2- 1-10, 22-25 Chapter 9 – Stocks and Their Valuations Rights of Stockholders Voting Rights:   stockholders can attend annual meeting or  vote by “proxy”; if dissatisfied, outsiders can  solicit proxies in an attempt to overthrow  management (proxy fight).   A “takeover” involves one corporation taking  over another by buying a majority of the  outstanding stock. Preemptive Right: right of current stockholders to purchase  any additional shares issued by the firm;   allows current stockholders to maintain  control and prevent a dilution of their  value in the firm. Closely held vs. publicly held stock. Types of stock market transactions:
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1) Secondary market – the market for outstanding shares 2) Primary market – the market for newly issued shares 3) IPO market – the first issuance of shares to the public Advantages to a firm of issuing stock: 1) Doesn’t obligate the firm to payments (vs. legal obligation to pay  bond interest). 2) Stock has no maturity value; never has to be repaid. 3) Cushions creditors against losses since there’s no obligation,  and thus, increases the creditworthiness of the firm;  this can  lead to an improved bond rating which can lower the firm’s cost  of debt. Disadvantages to a firm of issuing stock: 1) Dilutes control, voting power 2) Gives the s/h’s right to share in profits; if debt used instead, more  earnings would be available to s/h’s.
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