Chapter 08 IM 10th Ed

Chapter 08 IM 10th Ed - CHAPTER 8 Stock Valuation CHAPTER...

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                                                                                                                                                                                                                CHAPTER 8 Stock Valuation                                                                                                                                                                                                                 CHAPTER ORIENTATION This chapter continues the introduction of concepts underlying asset valuation began in Chapter 7. We are specifically concerned with valuing preferred stock and common stock. We also look at the concept of a stockholder’s expected rate of return on an investment. CHAPTER OUTLINE I. Preferred Stock A. Features of preferred stock 1. Owners of preferred stock receive dividends instead of interest. 2. Most preferred stocks are perpetuities (non-maturing). 3. Multiple classes, each having different characteristics, can be issued. 4. Preferred stock has priority over common stock with regard to claims on assets in the case of bankruptcy. 5. Most preferred stock carries a cumulative feature that requires all past unpaid preferred stock dividends to be paid before any common stock dividends are declared. 6. Preferred stock may contain other protective provisions, such as granting voting rights in the event of non-payment of dividends. 7. Preferred stock may contain provisions to convert to a predetermined number of shares of common stock. 8. Some preferred stock contains provisions for an adjustable rate of return. 9. If there is a participation feature, it allows preferred stockholders to participate in earnings beyond the payment of the stated dividend. 10. Payment-in-kind (PIK) preferred stock, grants the investor additional preferred stock instead of dividends for a given period of time. Eventually cash dividends are paid. 205
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11. Retirement features for preferred stock are frequently included. a. Callable preferred refers to a feature which allows preferred stock to be called, or retired, like a bond. b. A sinking fund provision requires the firm periodically set aside an amount of money for the retirement of its preferred stock. B. Valuation of preferred stock (V ps ): The value of a preferred stock equals the present value of all future dividends. If the stock is nonmaturing, where dividends are expected in equal amount each year in perpetuity, the value may be calculated as follows: V ps = = II. Common Stock A. Features of Common Stock 1. As owners of the corporation, common shareholders have the right to
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Chapter 08 IM 10th Ed - CHAPTER 8 Stock Valuation CHAPTER...

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