Stock Valuation Prepared by Keldon Bauer FIL 240 Capital Market Instruments The capital market is the market for financial instruments that mature in more than a year There are two forms of capital Debt The right to an agreed cash flow Bonds notes etc Equity The ownership interest in the business therefore the residual cash flow Common and preferred stock Debt versus Equity Voice in Management Voice of lenders limited by contract Equity investors have voting rights for the board of directors Claims on Income and Assets Debt Contractual claimant Equity Residual claimant Maturity Tax Treatment Characteristics of Common Stock Right to residual income Valuation implications Classes of stock Voting rights Target stock Common Stock Ownership Private corporation Closely held corporation Publicly traded corporation Board of directors Fiduciary responsibility Non profit corporation Board of directors trustees Institutional Ownership of Common Stock Shareholder activism Voting Rights of Common Stockholders Proxies Charter changes Board of directors Proxy battle Board of Director Elections Majority voting Cumulative voting Pros Cons of Equity Financing Pros Lower financial risk No legal obligation to repay No bankruptcy risk associated with equity Cons Dilution of earnings and control More expensive including floatation Signaling Technical Issues Par Value Authorized shares Outstanding shares Treasury shares Issued shares Raising Equity Capital Investment Bankers Publicly Held Venture Capitalist Privately or Closely Held Organization Investment stages Deal Structure Pricing Angel Capitalist Privately or Closely Held Issuing Common Stock Initial public offering IPO Investment banker Prospectus Syndicate Underwriting versus Best Efforts Pricing new issues Rights and Warrants Preemptive rights Subscription price Rights on period Ex rights Warrants Common Stock Dividends International Stocks Listing on foreign exchanges American Depository Receipts ADRs
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