Financial Markets (2nd part)

Financial Markets (2nd part) - Financial Markets (2nd part)...

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Financial Markets (2 nd part) Preferred stock and Common stock
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Preferred shares Characteristics 1. Half-way between Bonds and common shares (Difficult to put them in one or other category) 2. Higher risk than Bonds, lower than common shares 3. Higher yield than bonds, lower than common 4. Priority over common shareholders for dividends 5. Priority over shareholders for residual value 6. Perpetual dividends (annually, semi-annually, quarterly) 7. No right to vote except in some cases
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Preferred shares pricing Reminder The price of an asset is the present value of it’s payment promises. Price = PV of the anticipated cash flows K : Yield (required return)
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Common shares Characteristics 1. Ownership 2. Market value of the company 3. Right to vote (often by delegation) 4. Vote in proportion of number of shares 5. Residual value (if there is any) 6. Perpetual dividends (rarely fix, often irregular) 7. Dividends in cash or in shares 8. Dividends based on the decision of board of directors
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Financial Markets (2nd part) - Financial Markets (2nd part)...

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