FIN3244 FINAL EXAM CHAPTERS 11 12 13 CHAPTER 11 COMMON STOCKS Routine decline Residual owners Publicly traded issues a drop of 10 or more in an index Public offering Rights offering Stock spin off evidence of ownership position in a firm in the form of shares severe market declines of 20 or more Occur every three to four year shares of stocks that are readily available to the general public and are stock prices that 5 or more in an index Considered routine since they Owners Stockholders of a firm who are entitled to dividend income and a Correction Bear market Equity capital equity securities the sale of a firm s securities to public investors an offer of new shares of stock to existing stockholders on a pro rata basis conversion of one of a firm s subsidiaries to a stand alone company by distribution TERMS TO KNOW prorated share of the firm s earnings only after all other obligations have been met As residual owners holders of common stock have no guarantee that they will receive any return on their investment typically occur several times a year of common stock bought and sold in the open market issuers range from giants like AT T and Microsoft to much smaller regional or local firms of stock in that new company to existing shareholders exchanging a specified number of new shares of stock for each outstanding share 3 for 2 split three new shares are exchanged for every two old shares outstanding company uses this when it wants to enhance its stock s trading appeal by lowering its market price firm offers different privileges and benefits to its holders 100 shares of stock or multiples thereof minus the firm s liabilities and preferred stock they think it s worth Earnings per share EPS stated on a per share basis the amount of stockholders equity in a firm equals the amount of the firm s assets shares of stock that have been sold and subsequently repurchased by the issuing a maneuver in which a company increases the number of shares outstanding by the stated or face value of a stock not used much today except accounting the amount that investors believe a security should be trading for or what common stock issued by a company in different classes each of which the amount of annual earnings available to common stockholders as Round lot Odd lot Par value Book value transaction involving fewer than 100 shares Market value Investment value the prevailing market price of a security Classified common stock Treasury stock Stock split o EPS Net profit after taxes preferred dividends number of sharesof common stock outstanding o if a firm reports a new profit of 1 25 million pays 250 000 in dividends to preferred stockholders and has 500 000 shares of common stock outstanding it has an EPS of 2 1 250 000 250 000 500 000 the date on which an investor must be a registered shareholder to be entitled to the actual date on which the company will mail dividend checks to shareholders Date of record receive a dividend Payment date three business days up to the date of record determines whether one is an Ex dividend date official shareholder and thus eligible to receive a declared dividend companies earnings grow Cash dividend payment of a dividend in the form of cash tend to increase over time as o Dividend yield dividends on a relative percentage rather than absolute dollar basis a measure that relates dividends to share price and puts common stock dividend yield annual dividendsreceived per share current market price of the stock the portion of earnings per share EPS that a firm pays out as o Dividend payout ratio dividends Stock dividend Dividend reinvestment plan DRIP dividend payout ratio dividends per share earnings per share payment of a dividend in the form of additional shares of stock really have no value automatically reinvested into additional shares of the firm s common stock if a company is good enough to invest in then its good enough to reinvest in and dividends financially strong high quality stocks with long and stable records of earnings plan I which shareholders have cash dividends Blue chip stocks o Growth stocks Nike Procter Gamble Home Depot o High yielding AT T Chevron McDonald s Income stocks Growth stocks stocks with long and sustained records of paying higher than average dividends stocks that experience high rates of growth in operations and earnings Tech stocks stocks that represent the technology sector of the market o Netflix eBay Starbucks o Microsoft Dell Yahoo Speculative stocks because of some special situation such as new management or the introduction of a promising new product stocks that offer the potential for substantial price appreciation usually o Sirius XM Radio DreamWorks Animation Under Armour stocks whose earnings and overall market performance are closely linked to the Cyclical stocks general state of the economy o Alcoa Caterpillar Genuine Parts Defensive stocks stocks that tend to hold their own and even do well when the economy starts to falter Mid cap stocks but more than 1 billion Small cap stocks above average returns o Public utilities beverages food drugs Wal Mart medium sized stocks generally with market values of less than 4 or 5 billion o Abercrombie Fitch Dollar Tree Nordstrom stocks that generally have market values of less than 1 billion but can offer o Callaway Golf California Pizza Kitchen Winn Dixie Shoe Carnival CHAPTER 12 ANALYZING COMMON STOCKS Security analysis TERMS TO KNOW determine the intrinsic value of a share of common stock analysis undervalued fairly priced or overvalued depends on Intrinsic value the process of gathering and organizing information and then using it to the underlying or inherent value of a stock as determined through fundamental o Estimates of the stocks future cash flows e g the amount of dividends you expect to receive over the holding period and the estimated price of the stock at time of sale o The discount rate used to translate those future cash flows into a present value o The risk associated with future performance which helps define the appropriate discount rate Top Down Approach fundamental analysis of a specific company begins with economic analysis moves to industry analysis and then to o Economic analysis o Industry analysis assesses the general state of the economy and its potential effects on businesses deals with the industry within which a particular company operates looks at the overall outlook for that industry and at how companies compete against each other in that industry looks
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