This document discusses different types of stocks including preferred stock and common stock. It provides details on: - Preferred stock features such as cumulative dividends, participating features, voting rights, and call and sinking fund provisions. It also discusses preferred stock valuation using the present value formula. - Common stock as the ultimate ownership in a corporation with rights to income, voting, and potential preemptive rights. It discusses common stock valuation using the dividend discount and constant growth dividend discount models. - Examples are provided to demonstrate the calculations for valuing preferred and common stock.

1. Stocks and Their Valuation
Prepared by:
Jammie Ann Felipe

2.  A hybrid form of financing
 A type of stock that promises a (usually)
fixed dividend but at a discretion of the
board of directors.
 It has preference over a common stock
in the payment of dividends and claims
on asset (but up to a maximum of Par
Value of the stock)
Preferred Stock

3. Cumulative Dividends Feature
- A requirement that all cumulative
unpaid dividends on the preferred
stock be paid before a dividend may
be paid on the common stock.
Preferred Stock and its Features

4. Participating Feature
- allows preferred stockholders to
participate in the increasing
dividends if the common
stockholders receive increasing
dividends.
Preferred Stock and its Features

5. Voting Rights (In Special
Situations)
- Given usually if corporation is
unable to pay preferred stock
dividends during a specified period.
Preferred Stock and its Features

6. Call Provision
Sinking Fund
Conversion
Retirement of Preferred Stock

7.  Present Value
V = DP
KP
where DP Dividend Payout
KP Discount Rate /
Required Return
Preferred Stock Valuation

8. Example: Compute for Present Value
If ABC Corporation had a 9 percent,
$100-par-value preferred stock , issue
outstanding and required return was 14
percent .
V = DP
KP
V = $9 / 0.14
= $ 64.29
Preferred Stock Valuation

9. Securities that represent the
ultimate ownership (and risk)
position in a corporation.
Common Stock

10.  Authorized shares – the maximum
number of shares that a company can
issue without amending its charter
 Issued shares – sold authorized shares
of common stock
 Outstanding shares – number of shares
issued and actually held by the public
Common Stock

11. Right to Income
Voting Rights
Right to purchase new shares
(maybe) – preemptive rights
Rights of Common Shareholders

12.  Present Value
V = D1 + D2 + … + Pn___
(1+r)1 (1+r)2 (1+r)n
Where D is Dividend
P is Selling Price
Common Stock Valuation

13.  Constant Growth
Dividend Discount Model
ˆ 

31 2
0 1 2 3
s s s s
DD D D
P = + + +...+
(1+r ) (1+r ) (1+r ) (1+r )
V = D1__
r – g or
R = D1 + g
V

14.  Example:
Suppose that LKN, Inc.’s dividend per
share at t=1 is expected to be $4, that is
expected to grow at 6% rate forever, and that
the appropriate discount rate is 14%, what is
the infinite stock value?
 V = D1__
r – g
V = $4 / (0.14 – 0.06)
= $50
Dividend Discount Model

15.  Non Constant Rate
 The dividend stream will be in perpetuity
Dividend Discount Model
2.00 2.002.00
0 1 2 3
rs = 13%
V = D / R
= $ 2 / 0.13
= $ 15.38

16. End