Chapter 77.1 Characteristics of Common Stock7.1 (A) Ownership7.1 (B) Claim on Assets and Cash Flow (Residual Claim)7.1 (C) Vote (Voice in Management)7.1 (D) No Maturity Date7.1 (E) Dividends and Their Tax Effect7.1 (F) Authorized, Issued, and Outstanding Shares7.1 (H) Preemptive Right7.2 Stock Markets7.2 (A) Primary Markets7.2 (B) Secondary Markets7.2 (C) Bull Markets and Bear Markets7.3 Stock ValuationTable 7.1 Differences between Bonds and Stocks7.3 Stock Valuation (continued)Slide 19Slide 20Slide 217.3 (A) The Constant Dividend Model with an Infinite Horizon7.3 (A) The Constant Dividend Model with an Infinite Horizon (continued)7.3 (B) The Constant Dividend Model with a Finite Horizon7.3 (B) The Constant Dividend Model with a Finite Horizon (continued)Slide 267.3 (C) The Constant Growth Dividend Model with an Infinite Horizon7.3 (C) The Constant Growth Dividend Model with an Infinite Horizon (cont’d)Slide 29Slide 30Slide 31Slide 327.3 (D) The Constant Growth Dividend Model with a Finite Horizon7.3 (D) The Constant Growth Dividend Model with a Finite Horizon (continued)Slide 35Slide 367.3 (D) The Constant Growth Dividend Model with a Finite Horizon (continued)7.3 (E) Nonconstant Growth Dividends7.3 (E) Nonconstant Growth Dividends (continued)7.3 (E) Nonconstant Growth Dividends (continued)Slide 417.4 Dividend Model Shortcomings7.5 Preferred Stock7.5 Preferred Stock (continued)7.6 Efficient Markets7.6 (A) Operational Efficiency7.6 (B) Informational Efficiency7.6 (B) Informational Efficiency (continued)ADDITIONAL PROBLEMS WITH ANSWERS Problem 1ADDITIONAL PROBLEMS WITH ANSWERS Problem 1 (ANSWER)ADDITIONAL PROBLEMS WITH ANSWERS Problem 2ADDITIONAL PROBLEMS WITH ANSWERS Problem 2 (ANSWER)ADDITIONAL PROBLEMS WITH ANSWERS Problem 2 (ANSWER continued)ADDITIONAL PROBLEMS WITH ANSWERS Problem 3ADDITIONAL PROBLEMS WITH ANSWERS Problem 3 (ANSWER)ADDITIONAL PROBLEMS WITH ANSWERS Problem 3 (ANSWER continued)ADDITIONAL PROBLEMS WITH ANSWERS Problem 4ADDITIONAL PROBLEMS WITH ANSWERS Problem 4 (ANSWER)ADDITIONAL PROBLEMS WITH ANSWERS Problem 4 (ANSWER–continued)ADDITIONAL PROBLEMS WITH ANSWERS Problem 5 (A)ADDITIONAL PROBLEMS WITH ANSWERS Problem 5 (A) (ANSWER)ADDITIONAL PROBLEMS WITH ANSWERS Problem 5 (B)ADDITIONAL PROBLEMS WITH ANSWERS Problem 5 (B) (ANSWER)Table 7.2 Coca-Cola Annual DividendsTable 7.3 Annual Dividend Growth for Coca-ColaTable 7.4 Recent Dividend History of Five FirmsTable 7.5 Ranking of Stock Risk Levels Based on Expected ReturnsTable 7.6 Recent Annual Dividends of Five Other FirmsCopyright © 2010 Pearson Prentice Hall. All rights reserved.Chapter 7Stocks and Stock ValuationCopyright © 2010 Pearson Prentice Hall. All rights reserved.7-21. Explain the basic characteristics of common stock.2. Define the primary market and the secondary market.3. Calculate the value of a stock given a history of dividend payments.4. Explain the shortcomings of the dividend pricing models.5. Calculate the price of preferred stock. 6. Understand the concept of efficient markets.Learning ObjectivesCopyright © 2010 Pearson Prentice Hall. All rights reserved.7-37.1 Characteristics of Common Stock•Major financing vehicle for corporations. •Provides holders with an opportunity to share in the future cash flows of the issuer. •Holders have ownership in the company.•Unlike bonds, no maturity date and variable periodic income.Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-47.1 (A) Ownership•Share in the residual profits of the company.•Claim to all its assets and cash flow once the creditors, employees, suppliers, and taxes are paid off. •Voting rights –participate in the management of the company–Elect the board of directors, which selects the management team that runs the company’s day-to-day operations.Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-57.1 (B) Claim on Assets and Cash Flow (Residual Claim)•In case of liquidation…–Shareholders have a claim on the residual assets and cash flow of the company.–Known as “residual” rights.Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-67.1 (C) Vote (Voice in Management)•Standard voting rights: Typically, one vote per share provided to shareholders to vote in board elections and other key changes to the charter and bylaws. •Can be altered by issuing several classes of stock.–Non-voting stock, which is usually for a temporary period of time. –Super voting rights, which provide the holders with multiple votes per share, increasing their influence and control over the company.Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-77.1 (D) No Maturity Date•Considered to be permanent financing•Infinite life, i.e., no maturity date•No promised date when investment is returned.Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-87.1 (E) Dividends and Their Tax Effect•Companies pay cash dividends periodically (usually every quarter) to their shareholders out of net income. • Unlike coupon interest paid on bonds, dividends cannot be treated as a tax-deductible expense by the company. •For the recipient, dividends are considered to be taxable income. •More material on dividends and dividend policy is covered in Chapter 17.BCopyright © 2010 Pearson Prentice Hall. All rights reserved.7-97.1 (F) Authorized, Issued, and Outstanding Shares•Authorized shares:maximum number of shares that the company may sell, as per charter. (•Issued shares:the number of shares that has already been sold by the company and are either currently available for public trading (outstanding shares) or held by the company for future uses such as rewarding employees (treasury stock).Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-10•Non-dividend paying, non-voting shares being held by the issuing firm right from the time they were first issued OR •Shares that have been later repurchased by the issuing firm in the market. 7.1 (G) Treasury StockCopyright © 2010 Pearson Prentice Hall. All rights reserved.7-117.1 (H) Preemptive Right •A privilege that allows current shareholders to buy a fixed percentage of all future issues before they are offered to the general public.•Enables current common stockholders to maintain their proportional ownership in the company.Copyright © 2010 Pearson Prentice Hall. All rights reserved.7-127.2 Stock MarketsStocks are traded in two types of markets: 1. the primary or “first sale” market2.