Characteristics Of Common Equity (Common Stocks)
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Characteristics Of Common Equity (Common Stocks)

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Characteristics Of Common Equity (Common Stocks) Characteristics Of Common Equity (Common Stocks) Presentation Transcript

  • CHARACTERISTICS OF COMMON STOCKS
  • THE CORPORATE FORM
    • FEATURES OF THE CORPORATE FORM
      • common stock with limited liability
      • charter issued to begin
      • stock certificates
        • ownership claim
        • transfer agent conducts title change
        • registrar issues certificates
  • THE CORPORATE FORM
    • FEATURES OF THE CORPORATE FORM
      • voting
        • cumulative voting system does not give majority owner control
        • majority voting system: straight voting and allows majority owner control
  • THE CORPORATE FORM
    • FEATURES OF THE CORPORATE FORM
      • takeovers
        • usually done with a tender offer by a bidder to a target firm
        • bidder usually offers to buy at a stated price some or all of the shares held by current stockholders
        • WHITE KNIGHT is a firm making a better offer
        • GREENMAIL is an attempt to buy share held by bidder at above-market price
  • THE CORPORATE FORM
    • FEATURES OF THE CORPORATE FORM
      • ownership v. control
        • know as principal-agent problem
        • stockholder motive is to maximize wealth
        • agent may make decisions for other reasons
        • a solution:
          • give management stock options giving incentive to maximize their own wealth as well as stockholders
  • COMPONENTS OF STOCKHOLDERS’ EQUITY
    • Par Value
        • the value authorized by the charter for initial capital stock
  • COMPONENTS OF STOCKHOLDERS’ EQUITY
    • Book Value Formula:
          • Cumulative retained earnings
          • +Capital Contributed in
          • excess of par
          • +Common stock
          • BOOK VALUE OF THE EQUITY
  • COMPONENTS OF STOCKHOLDERS’ EQUITY
    • Reserved and Treasury Stock
        • some corporations repurchase some of the stock outstanding
        • this becomes known as treasury stock
  • CASH DIVIDENDS
    • DEFINITION: the portion of profits paid in cash to the stockholders
      • Process of Payment
        • declaration date
        • date of record
        • ex-dividend date
        • payment date
  • STOCK DIVIDENDS AND SPLITS
    • STOCK DIVIDENDS AND SPLITS
      • Stock Dividend
        • issued in place of a cash payment
        • a 5% stock dividend results in
        • example: 5% of 100 shares = 5 shares
  • STOCK DIVIDENDS AND SPLITS
    • Stock Split
        • new shares issued after the split
        • example: a 2 for 1 split (par=$1)
        • a 200 share holder receives 400 new shares
        • at $.50 par
        • thus, there is no dilution of the shareholder’s equity position
  • STOCK DIVIDENDS AND SPLITS
    • EX-DISTRIBUTION DATES
      • similar to ex-dividend date
      • 2 business days before the date of record
  • STOCK DIVIDENDS AND SPLITS
    • REASONS FOR STOCK DIVIDEND AND SPLITS
      • some believe splits signal the stock is undervalued in the market
      • splits will bring market price to a more desirable (usually lower) range
      • following a split, research shows investors receive a positive abnormal return
  • STOCK DIVIDENDS AND SPLITS
    • PREEMPTIVE RIGHTS
      • a legal right interpreted differently depending upon the country
      • in the U.S. the stockholders have an inherent legal right to maintain the proportion of ownership they may control
      • when new shares are issued
        • current owners must be given first right of refusal
  • COMMON STOCK BETAS
    • Role of Beta
        • DEFINITION: it is a measure of a stock’s sensitivity to future market movements
  • COMMON STOCK BETAS
    • Calculation using linear regression the model equation is specified
      • r i =  r I  i
      • where r i is the return of stock i
      •  is the average return of stock i
      •  is the stock i’s beta
      • r I is the return on the index
      •  i is the error term
  • COMMON STOCK BETAS
    • the standard error of beta indicates the extent of standard deviation of the estimates
  • COMMON STOCK BETAS
    • correlation coefficient indicates how closely the stock’s returns were explained by the index returns
  • COMMON STOCK BETAS
    • coefficient of determination represents the proportion of variance in the stock’s return to variance in the index’s returns
  • COMMON STOCK BETAS
    • 1-the coefficient of determination represents the amount of the stock’s variance that cannot be explained by variances in the index returns
        • i.e. nonsystematic risk