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CH 9 STOCKSSTOCK VALUATIONVALUE OF A SHARE OF CS= PV of future cash flows= PV dividends + PV (future price)PV = Present ValueRIGHTS OF THE COMMON STOCKHOLDER:1.VOTING:about once a year you are asked to vote on certain issues such as electing the board of directors. Most shareholder’s don’t do this, you can allow the current board to vote your shares (voting by proxy).2.PRE EMPTIVE RIGHT: exists to allow current stockholders the right to maintain their percentage of ownership when new shares of stock are sold.a.Extremely important if you’re a current stock holderb.EXAMPLE:you own 20 shares out of a company that has 50 shares, if the company wanted to rise more money so they decided to sell another 50 shares, wouldn't it make sense you’d get the first opportunity to buy some of those first?3.LIQUIDATION VALUE: you’d be last in line to receive anything (happens when a companygoes out of business)a.“Pennies on the dollar”b.Rare example, a company decides to go out of business sell all of it assets because it’s assets would be worth more than the value of the stock, you’d get cash for those assets which would be more than your shares.4.DIVIDENDS: a.Just because you own common stock doesn’t mean you are guaranteed a dividend (most companies do this).b.But older more established companies like to reward their shareholders through dividends.i.That’s why newer companies don't do this cause they need all their cash. They reinvest their all of their profits to get the company growing so stockholders are rewards by increase in stock price.SOME FIRMS MAY HAVE DIFFERENT CLASSES OF COMMON STOCK:●A SHARES: could be founding shares, voted on differently than share available to outsiders (customers), founded by families or small group of people○RARE example: sometimes pay a dividend●B SHARES: ○RARE example: sometimes don’t pay a dividend●A or B doesn’t mean anything just is a way to distinguish them.
PREFERRED STOCK:is considered a “hybrid” security (mix of stock and bond features but is considered ownership) with some of the following features:●CUMULATIVE:all dividends in arrears (past due) must be paid before any common stock dividend can be paid.