ch08 a - Chapter8 StockValuation CommonStock...

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Chapter 8 Stock Valuation
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Common Stock Is a  variable-income  security. Dividends may be increased or decreased,  depending on earnings. Represents  equity   or ownership. Includes  voting rights . Limited liability : liability is limited to amount of  owners’ investment. Priority : lower than debt and preferred.  
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Common Stock Characteristics Claim on Income  - a stockholder has a claim on  the firm’s residual income. Claim on Assets  - a stockholder has a residual  claim on the firm’s assets in case of liquidation. Preemptive Rights  - stockholders may share  proportionally in any new stock issues.  Voting Rights  - right to vote for the firm’s board of  directors.
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Preferred Stock A hybrid security : It’s like common stock - no fixed  maturity. Technically, it’s part of equity capital. It’s like debt - preferred dividends are fixed. Missing a preferred dividend does not constitute default,  but preferred dividends can be  cumulative .
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Preferred Stock Usually sold for $25, $50, or $100 per share. Dividends are fixed either as a dollar amount or  as a percentage of par value.  Example :  In 1988, Xerox issued $75 million of  8.25% preferred stock at $50 per share. $4.125 is the fixed, annual dividend per share.
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Preferred Stock Features Firms may have  multiple classes  of  preferreds, each with different features.  Priority : lower than debt, higher than 
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ch08 a - Chapter8 StockValuation CommonStock...

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