04%20stocks - tocks - 1 FNAN 301 Financial Management...

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Unformatted text preview: tocks - 1 FNAN 301 Financial Management Stocks tocks - 2 Topics Covered Overview of stocks Rate of return on stocks Valuing common stocks Finite stream of cash flows Infinite stream of cash flows Dividend discount model No growth Constant growth Non-constant growth tocks - 3 Overview of Stocks Patriot Theaters owns and operates 145 movie theaters in the Mid-Atlantic Region The firm wants to expand into New England, but needs money One way that it can raise money is by selling (also called issuing) equity (also called stock) tocks - 4 Overview of Stocks The primary market is the market for the sale of new securities by the corporation Primary stock market involves a company raising money by selling shares to investors The secondary market is the market in which previously issued securities are traded among investors Secondary stock market involves one investor selling shares to another investor Company gets no money from transactions in the secondary market tocks - 5 Overview of Stocks There are two types of equity Common Preferred tocks - 6 Overview of Stocks Key characteristics of common equity Ownership interest in corporation Common stockholders, also called shareholders, own the firm Shares of common stock are ownership shares in a corporation If the firm has issued a certain number (K) of stock shares, then each share entitles owner of that share to a 1/K ownership proportion of the firm Common stockholders run the company This is typically done indirectly Elect Board of Directors who appoint management Vote on big issues like mergers Common stockholders have a claim on all residual cash flows Shareholders are at the back of a line that has employees, suppliers, government, lenders, etc. ahead of them Stocks tend to be risky because they have the last claim Stocks offer opportunity for substantial returns because shareholders get everything after all obligations are paid Common equity has no maturity, so it can exist forever tocks - 7 Overview of Stocks Common shares often pay dividends, which are cash distributions from the firm to its shareholders Common dividends do not have to be paid like bond payments Common shareholders have no legal recourse to force company to pay dividends Common dividends frequently change over time Generally reflect company performance Increase as firm does well or grows Cut when firm does poorly, especially when firm does very poorly Can be zero, but can not be negative Regular dividends are typically paid quarterly The amount paid each quarter, if anything, is determined quarterly by the Board of Directors Common dividends are not tax deductible for the firm like bond interest payments tocks - 8 Overview of Stocks Key characteristics of preferred equity (p. 1 of 2) Preferred stockholders have limited say in running the company...
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04%20stocks - tocks - 1 FNAN 301 Financial Management...

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