Lecture 5 - Stocks

Lecture 5 - Stocks - Required Reading The following...

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1 Finance - I (MGCR 341) – Prof. de Mot a STOCKS 2 Finance - I (MGCR 341) – Prof. de Mot a Required Reading The following sections in Chapter 9 , “ Valuing Stocks from Berk and De Marzo , Corporate Finance : Sections 9.1 and 9.2. Subsection “Share Repurchases and the Total Payout Ratio ” in Section 9.3 (pages 250-251 in the book). Subsection “The Price-Earnings Ratio ” in Section 9.4 (pages 256-257 in the book). 3 Finance - I (MGCR 341) – Prof. de Mot a World Market Capitalization (2009 - $Billions) 4 Finance - I (MGCR 341) – Prof. de Mot a Number of Public Firms Market Public Firms ** United States 7036 Europe (EU, UK, Switzerland & Scandinavia) 4788 Japan 3644 Emerging Markets (Asia, Latin America, Eastern Europe, Mid East and Africa) Total: 15522 China: 3255 India: 1924 Australia, New Zealand & Canada 3358 Global 32816 ** Publicly traded firms with a market capitalization greater than $5 million on January 1, 2010 for non-US firms and all publicly traded companies for US firms . 5 Finance - I (MGCR 341) – Prof. de Mot a Holdings of Corporate Equity Insurance Companies 7.4 Mutual Funds, etc. 21.0 Rest of World 10.4 Other 3.2 Pension Funds 21.1 Households 36.8 Percent of Holdings 6 Finance - I (MGCR 341) – Prof. de Mot a Common Stocks: Represents a share of ownership in a corporation ( i.e. , equity) without priority for dividends or in bankruptcy. 0 1 Period P 0 Div 1 + P 1 Cash where P 0 :Current stock price P 1 Expected stock price in period 1 Div 1 : Expected dividend per share paid in period 1
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2 7 Finance - I (MGCR 341) – Prof. de Mot a Stock Price and Returns Stock Prices: where r E is the required return on the equity. That is, the expected return of other investments available in the market with equivalent risk. Stock Returns: { 3 2 1 Yield Gains Capital 0 0 1 Yield Dividend 0 1 P P P P Div r E + = ) 1 ( 1 1 0 E r P Div P + + = 8 Finance - I (MGCR 341) – Prof. de Mot a Example A share of Dot.com will pay a dividend per share of $100 next year. The expected price today of the share in a year is $1,000 and the required rate on return is 20%. What is the current price of the share? Answer 0 1 Year $100+$1,000 ; % 9 . 10 66 . 916 100 Yield Dividend = = 66 . 916 $ 2 . 0 1 000 , 1 100 0 = + + = P % 1 . 9 66 . 916 66 . 916 000 , 1 Yield Gains Capital = = 9 Finance - I (MGCR 341) – Prof. de Mot a Characteristics of Common Stocks Residual Claim: Common shareholders have a claim to firm’s cash-flows and assets only after all obligations to creditors and preferred stockholders are met. Limited Liability: Shareholders may lose their investment, but no more. Voting Rights: Common stockholders are entitled to vote for the board of directors, who, in turn, hire management to carry out their directives. The general rule is “one share one vote”. Other rights: The right to share proportionally in dividends paid. The right to vote on some matters of great importance, e.g., mergers. Preemptive Right: Stockholders may have the right to share proportionally in any new stock sold.
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Lecture 5 - Stocks - Required Reading The following...

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