Cash Flows
(51.0K)
The market value of a share of common stock is equal to the present value of all of its future dividend cash flows, D, discounted at the appropriate discount rate, R. The appropriate discount rate, R, is based on __________. CONCEPT CHECK
Some Special Cases
Zero Growth
(52.0K)
If the future cash flows, D, are not expected to change, then the present value, P0 equals D/R.
Constant Growth
(54.0K)
If the future cash flows are expected to change at a constant rate, g, then P0 equals D1/(R - g). The dividends of Yabbadabba, Inc. common stock are expected to be $1.00 annually forever. If the required return on Yabbadabba common stock is 10%, then the current market price should be __________ . Suppose that, due to the actions of a new management team, Yabbadabba's dividends are now expected to grow at a 5% annual rate. (That is, D1 = $1.05, D2 = $1.1025, etc.) Prove to yourself that the current market price should be $21.00. CONCEPT CHECK
Components of the Required Return The required return is composed of the dividend yield and the capital gains yield. Specifically, R = D1/P0 + g. For a constant growth stock, g is equal to __________. CONCEPT CHECK
Shareholder Rights Shareholders control the corporation through their right to elect members of the Board of Directors who, in turn, are empowered to hire and fire the operating managers of the firm. The voting procedure is either straight (KEY TERM) or cumulative (KEY TERM).
Proxy Voting A proxy is the grant of authority by a shareholder to someone else to vote the shareholder's shares. The democratic nature of the corporate form of organization is explored further at http://www.corpgov.net.
Classes of Stock Some firms issue multiple classes of common stock (often with unequal voting rights), usually for the purpose of maintaining control of the firm within one class.
Other Rights By dint of their ownership, common shareholders have four rights: to share proportionally in dividends paid, to share proportionally in remaining assets in the event of liquidation, to vote on matters of importance to the firm, and to share proportionally in the issuance of additional common stock (the "preemptive right.")
Dividends
(52.0K)
Until declared, a common stock dividend is not a liability of the corporation. The amount of the dividend is determined by the board of directors. Dividends paid are not tax-deductible (unlike interest expense). However, dividend income received by a corporation that owns stock in another corporation is, under certain circumstances, excludable from the recipient's taxable income in full or in part.
Stated Value Unlike common stock, preferred stock generally bears a stated liquidation value. (KEY TERM)
Preferred stock dividends can be either cumulative (KEY TERM) or noncumulative (KEY TERM).
Is Preferred Stock Really Debt? Like debt, preferred stock carries a fixed payment, a fixed claim in liquidation, is sometimes callable, may be convertible into common stock, and sometimes has a sinking fund. Unlike debt, preferred shareholders cannot force the firm into bankruptcy for nonpayment of dividends, and dividends paid are not deductible.
Dealers and Brokers Securities transactions involve dealers (KEY TERM) and brokers (KEY TERM). Dealers offer to purchase securities at a stated bid price, and offer to sell them at a stated ask price. The difference between the bid and the ask prices constitute gross profit for the dealer, and is called the "bid-ask spread." Bid-ask spreads can be found at http://www.bloomberg.com.
Organization of the NYSE
Members The New York Stock Exchange (NYSE) is owned by its approximately 1,400 members, who, in turn, own "seats" on the exchange. Members act as commission brokers (KEY TERM), specialists(KEY TERM), floor brokers (KEY TERM), or floor traders (KEY TERM).
Operations The lifeblood of the NYSE is order flow - the flow of customer orders to buy and sell securities.
Nasdaq Operations Nasdaq is a computer network of securities dealers act as market-makers in selected securities and disseminate timely security price quotes to subscribers. Nasdaq is, therefore, a dealer, rather than an auction, market.
Stock Market Reporting
(60.0K)
Daily securities price quotes are available in numerouspublished sources (most notably, The Wall Street Journal). Intraday price quotes are available at numerous sites on the WorldWideWeb.
(51.0K)