5 - Chapter 8: Stock Valuation Comparing Debt and Equity...

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Chapter 8: Stock Valuation
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Comparing Debt and Equity Debt Not an ownership interest Creditors do not have voting rights Interest is considered a cost of doing business and is tax deductible Creditors have legal recourse if interest or principal payments are missed Excess debt can lead to financial distress and bankruptcy Equity Ownership interest Common stockholders vote for the board of directors and other issues Dividends are not considered a cost of doing business and are not tax deductible Dividends are not a liability of the firm and stockholders have no legal recourse if dividends are not paid An all equity firm can not go bankrupt
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Chapter Outline Features of common stocks and preferred stocks Valuation of common stocks and preferred stocks Stock Market
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Feature of Common Stock Voting Rights Proxy voting Classes of stock Other Rights Share proportionally in declared dividends Share proportionally in remaining assets during liquidation Preemptive right first shot at new stock issue to maintain proportional ownership if desired
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Dividend Characteristics Dividends are not a liability of the firm until a dividend has been declared by the Board Consequently, a firm cannot go bankrupt for not declaring dividends Dividends and Taxes Dividend payments are not considered a business expense, therefore, they are not tax deductible Dividends received by individuals are taxed as ordinary income Dividends received by corporations have a minimum 70% exclusion from taxable income
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Preferred Stock Features Preference in dividend payment and in the distribution of assets in the event of liquidation. Shareholder rights Limited voting privilege. Collect dividends before dividend payments to shareholders. Have stated liquidation value. Collect stated liquidation value before distribution of assets to common shareholders but after payments to bondholders.
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Preferred Stock Features Semi Debt? Cumulative and Non-cumulative Dividends. Stated dividend value. Paid before dividend payments to stockholders Unpaid preferred stock dividends are not a liability of the firm but may earn voting rights in return.
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5 - Chapter 8: Stock Valuation Comparing Debt and Equity...

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