FIN300 Stocks.docx - Stock valuation Value of a share of CS...

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Stock valuation Value of a share of CS = PV of all of future cash flows = PV dividends + PV of future price Rights of the common stockholder: 1. Voting – commonly to elect the board of directors (proxy: allowing the current board to vote your shares (b/c most don’t even bother to vote)) 2. Pre-emptive right – important if you are a current stockholder – the preemptive right exists to allow current stockholders the right to maintain their % of ownership when new shares of stock are sold. a. You own 20 shares out of 50, if firm wanted to raise more $ and they decided to sell another 50 shares, it makes sense that you would be given the opportunity to purchase 20 shares first. This way you still own your 40% of the company in shares. 3. Liquidation value – if firm decides to go out of business, common stockholder would be last in line to receive anything. (pennies on the dollar) 4. Dividends – common stockholders are not guaranteed a dividend, but most older established companies like to reward their shareholders with dividends. New companies – do not expect dividends, but reinvest all of their profits to keep the company going Some firms may have different classes/shares of common stock: - A shares - B shares - Berkshaw Hathaway has A and B shares – B shares are much more affordable. Companies that are founded by families or small group of people might vote differently, A shares may pay dividend while B shares don’t. Preferred stock is considered a “hybrid” security (a mixture of features of bonds & stock, safer than common) with some of the following features: 1. Cumulative – all dividends in arrears must be paid before any common stock dividend can be paid. a. Dividend is important to preferred stockholders because as an owner, they have no voting right, no say in how co. is run, so dividend is essentially a way of keeping their mouth shut. b. When preferred stockholder cancels preferred dividend, it is still owed – company must still pay preferred dividends before paying common 2. Participating – the preferred stockholder may share in an extra of bonus dividend with the common stockholder a. It is the common stock that can go up or down over time (hopefully slowly increasing/decreasing), preferred stock is usually fixed. If company has had an extremely good year, you may be getting a bonus dividend for that period (but common stockholder tends to get it first) 3. Callable – the firm can notify the stockholder and force them to sell back the stock (retire the stock) 4. Convertible – the preferred stockholder may convert their preferred stock into a specified number of common stock shares a.

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