FIN3244 FINAL EXAM REVIEW CHAPTER 11 COMMON STOCK TERMS TO KNOW Residual Owners lenders Publicly Traded Issues sold in the open marker Public Offering its stock at a certain price Rights Offering o Their claim is subordinate to the claims of other investors such as o The shares that are readily available to the general public and bought and o The corporation offers the investing public a certain number of shares of o Existing stockholders are given the first opportunity to buy the new issue Right but not the obligation to purchase new shares in proportion to his or her current ownership Ex If a stockholder currently owns 1 of the firms stock and the firm issues 10 00 additional shares the rights offering will give them the opportunity to purchase 1 100 shares of the new issue If they don t want to use the rights they can sell it Stock Spin Off Stock Split Treasury Stock o When a company gets rid of one of its subsidiaries or divisions o In declaring a spit a firm merely announces that it will increase the number of shares outstanding by exchanging a specified number of new shares for each outstanding share of stock o Simple shares of stock that have been issued and subsequently repurchased by the issuing firm Classified Common Stock o When a firm issues different classes of common stock each of which entitles holders to different privileges and benefits Par Value o Stated or face value of stock o Except for accounting purposes its relatively useless o Because it has little to no meaning to investors many stocks today are issued as no par or low par stocks have par values of a penny or two Book Value equity in the firm o Another accounting measure representing the amount of stockholders o Indicates the amount of stockholder funds used to finance the firm o Calculated by subtracting the firms liabilities and preferred stock from its assets o Can be converted to a per share basis by dividing it by the number of common shares outstanding Market Value o The prevailing market price of an issue o Easiest to calculate indicates how the market participants as a whole have assessed the worth of a share of stock o If we multiply market price of stock by the number of shares outstanding we can also find the market value of a firm itself AKA its market capitalization o Of considerable importance to stockholders Investment Value o Most important measure for a stock holder indicates the worth investors place on stock what they think it should be traded for DRIP Dividend reinvestment plan o Corporate sponsored programs shareholders can have their cash dividends automatically reinvested into additional shares of the company s common stock Partial participation is available o Most common investment strategy Buy and hold to gain capital Buy and hold retirement college funds Current income Quality Long term Growth o Investment strategy high dividends that tend to increase over time o Investment strategy seeks capital gains as primary source of return NOTES Common stock enables investors to participate in the profits of a firm Every shareholder is a part owner of the firm and s such has a claim on the wealth created by the company As residual owners holders of common stock have no guarantee that they will receive any return on their investments The market has bad days months but those are the exception to the rule Stock returns take into account both price behavior and dividend income If you would of invested 10 000 in in the S P500 in 1950 it would have been work 6 1 million by 2000 and by the end of 2008 down to 4 1 million given average market performance The advantages of stock ownership o Substantial return opportunities Over the last century high grade corporate bonds earned annual returns that were about half as large as the returns on common stocks o Stocks typically outperform bonds o Provide protection from inflation Overtime their returns exceed the inflation rate o Easy to buy and sell and the transaction costs are modest o Price and market information is widely disseminated in the news and financial media o The unit cost of a share of common stock is usually within the reach of most individual investors Bonds carry minimum denominations of 1 000 The disadvantages of stock ownership o Risk is the most significant o The earning and general performance of stocks are subject to wide swings so its difficult to value common stocks o The sacrifice in current income Many types of investments and bonds pay higher levels of current income and do so with much greater certainty In most years the dividend yield on stocks is less than half the coupon yield on bonds Stock spin off o An example would be when Ralston Purina spun off its Energizer subsidiary and made it its own new stand alone company distributing stock in that company to its existing stockholders o An example in a 2 for 1 stock split two new shares are exchanged for Stock split each old share Corporations sometimes find it desirable to reduce the number of shares by buying back their own stock generally because they view it as undervalued in the marketplace A round lot is 100 shares of stock or multiples thereof o The sale of 400 shares of stock would be a round lot transaction o Trading 250 shares would be a round and odd lot o Relatively high costs of odd lots makes I better to deal in round lots An odd lot transaction is less than 100 o Ex 75 shares is an odd lot transaction The main transaction cost is the brokerage fee paid by both the buyer and seller Common stock Dividends o Many investors particularly younger ones put little value on dividends To a large extent that s because capital gains provide a much bigger source of return than dividends o Dividends provide a nice cushion when the market stumbles o New tax laws put dividends on the same plane as capital gains Both are now taxed at the same max 15 tax rate 2009 not recent o Board decides whether the firm will pay dividends and how much by Firms earnings EPS earnings per share EPS Net Profit after taxes Preferred Dividends of shares of common stock outstanding Firms growth prospect Firms cash position Meeting all legal and contractual constraints Certain market effects and responses o Important Dates when board decided to declare a dividend Date of record Date of Payment Date on which the investor must be a registered shareholder of the firm to be entitled to a dividend Generally follows date of record by a week or two Actual date on which company will mail dividend checks
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