FINA Text BK - MODULE 06 - Common

FINA Text BK - MODULE 06 - Common - MODULE 06 COMMON AND...

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06: Page 1 of 38 MODULE 06 COMMON AND PREFERRED STOCK Learning how to value a bond in Module 5 prepared you for most calculations in this module. The major hurdle to get over in this module is terminology. Becoming a professional is 80 percent knowing the jargon, so be ready to learn lots of jargon. Here, you will look at the way some investors value common and preferred stock. The process relies heavily on the mathematics of finance and the time value of money, so have your business-financial calculator at the ready as you plow through the material. In addition to number crunching, the module will introduce you to some of the features of common and preferred stock and the markets in which they trade. After looking at these issues from the perspective of an investor, the module changes about midway to that of a financial manager. In this part, you will learn about the dilemma surrounding retaining earnings, dividend policy, and issuing new shares. Each is a part of equity cash flows, company events that simultaneously impact cash and shareholder equity. When you finish this module, you should be able to do the following: 1. Recognize the difference between centrally located stock exchanges and others. 2. Read a stock quotation and describe stock market behavior. 3. Define the difference between a put contract and a call contract and recognize when each is profitable to use. 4. Calculate intrinsic value of a share of common stock using a discounted cash flow model and the constant-growth model. 5. Calculate intrinsic value of a share of preferred stock using the adjusted constant- growth model. 6. Understand the difficulty of valuing privately held shares and recognize some of the terminology associated with technical analysis. 7. Identify equity cash inflows and outflows arising from dividends and new issues and recognize the signal each type sends to investors. 8. Recognize dates associated with dividend distributions for companies with common stock trading on listed exchanges; determine the expected change in stock price when a company announces a cash dividend. 9. Identify and discuss the influences on a company's dividend policy; calculate replacement values and distributable earnings as determinants of dividend policy. THE STOCK MARKETS The stock markets are markets for common and preferred stocks and for derivative securities. A derivative security is one whose value is derived from the performance of another security rather than from that of a productive asset. For example, a share of common stock is not a derivative because it’s a claim on the assets of a company. A bond is not a derivative because it’s a claim on the assets of a company. The stock markets help people buy, sell, price, select, and finance equity securities in which they invest or trade. It embodies brokers, dealers, investment bankers, security analysts, portfolio managers, professional investment advisers, and banks and other financial institutions. It also includes the exchanges, the
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This note was uploaded on 05/10/2010 for the course FINA 3770 taught by Professor Chandy during the Fall '08 term at North Texas.

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FINA Text BK - MODULE 06 - Common - MODULE 06 COMMON AND...

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