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Lecture 8_Valuing Stocks

Lecture 8_Valuing Stocks - Session 8 Valuing Stocks...

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Session 8: Valuing Stocks Financial Management 3320 Fall 2010 Indraneel Chakraborty SMU Cox School of Business
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2 What is Finance? It is the discipline that studies the pricing of real and financial assets and the financial decisions of individuals and corporations Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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3 Another asset class: stocks We want to understand the major features of common and preferred stocks Voting rights & dividends Debt versus Equity We want to learn how to price stocks Dividend growth model Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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4 Main features of Common Stock Common Stock is a claim on the income generated by the firm It entitles the holder to dividends at the management’s discretion Common Stock is also a (residual) claim on the assets of the firm It provides higher but riskier return than other assets It can be sold hopefully at a price higher than it was bought for: Capital Gain Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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5 Main features of Common Stock Voting rights: To elect board & approve charter changes Directors are elected at annual shareholders’ meeting General idea: One share one vote # of votes = # of shares * # of directors to elect Cumulative voting : Directors are elected all at once and shareholder may cast all votes for one director Straight voting : Directors are elected one at a time and shareholder may cast all votes for each director Proxy voting: a shareholder grants someone the authority to vote on his/her behalf Crucial in big companies with millions of shareholders Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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6 A crucial feature of Common Stock: Dividends Dividends are payments (in cash or stock) made by a firm to its shareholders Dividends are not a liability of the firm until a dividend has been declared by the Board Firms cannot go bankrupt for not declaring dividends Dividends and Taxes Dividend payments are not considered a business expense, so are not tax deductible Dividends received by individuals are taxed as ordinary income Dividends received by corporations have a 70% exclusion from taxable income Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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7 Debt versus Equity Companies issue both stocks and bonds to raise money Unlike bonds, which entitle the holder to interest and par payments, common stock gives the holder an ownership in the firm No maturity date on a stock; it exists as long as the firm does No upper limit on dividend payments Financial Management SMU Cox School of Business © 2010 Indraneel Chakraborty
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8 Debt versus Equity Equity
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