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Equity Test 1 - Equity Test 1 Types of Equity Claims o...

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Equity Test 1 Types of Equity Claims o Common stock – security that indicates ownership of a corp. by holding an equity share of the corp. Rights of the equity holders: Rights to dividends Voting rights Right to ultimate distribution of assets upon liquidation Right to buy newly issued shares proportional to their pre- issue ownership – preemptive rights Minority shareholder rights; class action lawsuits Limited liability rule: legal protection given stockholders whereby they are responsible for the debts and obligations of the corp. only to the extent of their capital contributions Issues related to common stock Multiple share classes: companies may offer different classes of shares. Most commonly used with entrepreneurial companies, where founders give themselves more rights based on stock to keep controlling interest in the company. Stock splits – an increase in the number of outstanding shares of a company’s stock price of stock adjusts to reflect the stock split Reverse split – reduces the number of outstanding shares and increases the per-share price Stock repurchase o Purpose Take advantage of undervaluation Distribute extra cash Increase leverage Fend off takeovers Counter the dilution effects of stock options o Forms Open market repurchases – most common Privately negotiated Dutch auctions Single price tender offers o Preferred Stock Similar to both a stock and bond Has no voting rights Dividend amount is pre-specified o Common stock holders cannot receive dividend until preferred stock holders’ dividends are paid
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Tax disadvantage for issuing firm – interest is paid with before tax earnings but dividends are paid after tax Preferred stock higher risk higher return o Derivatives – financial instruments that derive they value from some underlying stock, bond, commodity, or other asset Options: Call option – option that gives holder the right, but not obligation, to purchase an asset for a predetermined price at or before the expiration date of the option o See notes for mathematical example – Lecture 1 Put option – gives the owner the right to sell a specified asset at a specific price before a specified date o See notes for examples – Lecture 1 Futures – contract to buy or sell a pre-specified amount of an asset in a designated future date at a specific price Indexes o Overall market indexes Dow Jones – price weighted S&P 500 – value weighted Wilshire 5000 – value weighted NYSE composite – value weighted Value line composite – equal weighted Nasdaq composite – value weighted Russell 1000 (3000) – value weighted o Small stock Russell 2000 – value weighted o Global MSCI – value weighted o FOR MORE INFORMATION ON VALUE VS. PRICE WEIGHTED… GO TO LECTURE 1 NOTES PAGE 11 END LECTURE 1 Primary and Secondary Markets o
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