Share Dividends Per Share Stock Price Dividend Yield FORMULAS After Tax Cash Flow After tax income PLUS depreciation Avg Tax Rate Taxes paid Taxable income Book Value Per Share Total Stockholders equity preferred shares Outstanding shares Corporate Bond Taxation Corporate Bond Yield 1 Tax Bracket Net Yield pick the corporate bond if it yields higher than the municipal bond after tax Default Risk Premium Long Term Govt bonds Long Term Corp bonds Dividend Payout Ratio Dividends Per Share EPS OR Dividends Net Income Dividend Payout Dividends paid of shares Dividend Yield EACS Difference in R E Total Dividend Payout Total Dividend Payout Outstanding Shares Dividends Per EPS EACS Outstanding Shares OR Net Income Shares Outstanding Expected Rate of Return 2 yr security yield 1 yr security yield x 2 Flotation Cost Firms net profit Cost to firm Homeowners Equity Problems homeowners equity interest rate 1 tax bracket Liquidity Premium Small firm return common stock return Maturity Premium Long Term Govt bonds T Bill Net Cash Flow Net income after taxes depreciation expense Nominal Quoted Rate real rate expected inflation real rate expected inflation P B Ratio Outstanding Shares Total Stockholders Equity Preferred Price Per Share P E Ratio Stock price EPS R E EACS Div Paid OR Net Income After Tax Dividends Paid Stock vs Bond Premium Long Term Bond Common Stocks Underwriter Spread Total cost and fees revenue made by firm not bank Tax on interest paid Interest expense tax bracket DEFN Accelerated Depr Used for tax purpose Capital Market Long term securities corp stocks bonds Treasury bonds traded on NYSE AMEX NASDAQ Capital Structure Long Term Debt and Stockholders Equity Default Risk Premium Risk that the issuer of securities does not meet interest or principal payment on time Dividends Generally paid on a quarterly basis Expectations Theory For a given holding period the average expected yield on all combinations of maturities will be equal Rising interest rates rising yield curve Used when investors PREDICT that interest rates will rise Look for predict External Equity New issues of stock Financial Structure Long Term Debt Short Term Debt and Stockholders Equity Half Year Convention Assumes that property is placed in service around the middle of the first year IRS only allow for HALF of the regular depreciation to be expensed within the first year EX of depreciation to be expensed Under the double declining method a firm ought to depreciate 40 in the first year However the IRS will only 20 Inflation Risk Premium When investors estimate the fair return for a short term T Bill Interest of Debt Paid every six months Internal Equity Retained earnings of a firm Liquidity Premium Added risk premium for securities that are not actively traded low volume Today s long term rates reflect the average of intervening short term rates PLUS a premium investors demand for holding long term securities instead of short term securities Maturity Premium Added risk premium for long term securities Market Segmentation Theory Supply and Demand in each segment decides interest rates in each segment Methods of Distribution Negotiated Purchase most common I can guarantee a price as of the day before the date of your stock offer Competitive bid for companies with regulatory issues i e utilities Commission or Best Efforts small high risk firms Prevents I Bank from being stuck with unsold shares Money Market OTC very liquid short term securities i e T Bills Comm paper CD s T Bills IOU s from the gov Comm Paper IOU s from corporations CD s IOU s from banks OTC Market Quotation system Broker Dealers negotiate prices for clients National Market biggest firms Small Cap Market smaller firms Pink Sheets very small firms national quotation bureau Real rate of return Compensation to investors for passage of time Rights offering Privileged Subscription the sale of discounted secondary offerings to existing shareholders Straight Line Depr Used for financial reporting Yield Curve Snap shot of interest rates on treasury securities Tax savings by using debt instead of equity Interest expense of debt tax bracket Krf K IRP K x IRP WHEREAS Krf Nominal Rate K Real Rate IRP Expected Inflation Compute the flotation cost as a percent from the following data KIKI Pizza corporation sold 500 000 shares of stock at a price of 35 per share the firm only nets 30 per share after paying for underwriter spread Legal fees and other expenses are 1 million Firm net 30 x 500 000 1 000 000 14 000 000 Cost to firm 5 x 500 000 1 000 000 3 500 000 Float Cost 3 500 000 14 000 000 25 SALES COGS GROSS PROFIT Cash Expense Depr Expense Operating Income Dividend Income Less Exclusion 70 Interest Expense Taxable Income Taxes Non Taxable Dividend Income Net Income after Tax Dividend Paid Retained Earnings