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Unformatted text preview: 8a. Stock valuation These slides discusses characteristics of common stock holding period returns the dividend growth model of stock valuation Features of common stock Ownership of common stock also gives the rights to: a proportionate share in dividends proportionate share of residual assets (after liabilities have been paid) in the event of a liquidation vote on stockholder matters of great importance (e.g., merger) the right to purchase any new stock sold (preemptive right) 2 Board of directors Shareholders are the owners of the firm. Shareholders elect directors who hire and oversee management. Directors are elected each year at an annual meeting ( one share, one vote ). A proxy is the grant of authority by a shareholder to someone else to vote her share. Much of the voting in large public corporations is done by proxy. A proxy fight is a struggle between two groups to obtain proxy vot- ing rights of as many shareholders as possible. The usual scenario is management versus an outside group trying to replace it. 3 Classes of common stock Some firms issue more than one class of common stock with different voting rights. Ford Motor Company, for example, has Class B com- mon stock. This stock is held by the Ford family and is not publicly traded. It represents 40% of the voting power though only 10% of shares outstanding. The reason for issuing different classes of stock is to ensure that the desired group maintains control. In principle, the NYSE does not allow companines to create classes of publicly traded common stock with unequal voting rights, but some exceptions have been made. Many non-NYSE companies have multiple classes of com- mon stock. 4 Dividends In contrast to bond coupons, dividends are not a liability of the firm until a dividend has been declared by the Board Consequently, a firm cannot go bankrupt for not declaring dividends In contrast to bond coupons, dividend payments are not con- sidered a business expense, therefore, they are not tax de- ductible Dividends received by individuals are taxed as ordinary in- come Dividends received by corporations have a minimum 70% exclusion from taxable income If corporation A owns less than 20% of corporation B stock, then 30% of the dividends received from corpo- ration B are taxable. If A owns between 20% and 80% of B, then 20% of the dividends received are taxable. If A owns more than 80%, a consolidated statement can be filed and dividends received from B are essentially untaxed 5 Holding period returns Similar to bonds, holding period returns are composed of: dividend yield capital gain 6 Example IBMs stock closed at $112.98 on Aug 8, 2007 and $75.33 on Aug 8, 2006. IBM paid out the following dividends: Nov 8, 2006 $0.30 Feb 7, 2007 0.30 May 8, 2007 0.40 Aug 8, 2007 0.40 What was the return to holding IBM stock over this period?...
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slides08a - 8a. Stock valuation These slides discusses...

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