1. 05/28/13
NUR HAFIZAH
BINTI ABD NASIR
COMMON STOCK
MR MOHAMED
ARIFF BIN ABDUL
RAHMAN
BACHELOR OF
ACCOUNTING (HONS)
INTAN
ZAIRISDIANA
BINTI IDRIS
NOOR NAIN
SHASILAH BT
MOHD SIDEK
4. 05/28/13
• Is a security that represents
ownership in a corporation.
• Holders of common stock
exercise control by electing a
board of directors and voting
on corporate policy.
5. TYPES OF COMMON STOCK
1) Blue chips
Blue-chip stocks refer to companies of high quality with
a long, historical track record of earnings, dividend payout
and some measure of growth.
These established companies have developed leadership
positions in their respective industries and, because of their
importance and large size, have stable earnings and
dividend records.
Penny stocks are speculative, low-priced stocks that
generally trade on the over-the-counter markets and
pink sheets.
That trade at low prices per share.
2) Penny
6. 3) Cyclical
Company shares are affected significantly by economic
trends over time.
Manufacture what are termed as durable goods
Examples of cyclical stocks are stocks issued by capital
equipment companies, home builders an also auto companies.
Generally, cyclical stocks move higher during an upswing in
the economic cycle and decline during
economic downturns.
Company shares are affected significantly by economic
trends over time.
Manufacture what are termed as durable goods
Examples of cyclical stocks are stocks issued by capital
equipment companies, home builders an also auto companies.
Generally, cyclical stocks move higher during an upswing in
the economic cycle and decline during
economic downturns.
4) Defensive
Tend to maintain more of their value during
economic downturns.
However, they may lag the market during an economic
upswing. Defensive companies manufacture nondurable
consumer goods.
Examples of defensive industries: beverages, food,
household products.
Tend to maintain more of their value during
economic downturns.
However, they may lag the market during an economic
upswing. Defensive companies manufacture nondurable
consumer goods.
Examples of defensive industries: beverages, food,
household products.
7. 5) Growth
Types of stock relating to entrepreneurial companies
experiencing a faster rate of growth than their sector.
They are generally identified by lower dividend yields
and are commonly involved in company takeovers .
6) Emerging
growth
Small company and have the potential for substantial
future growth.
In order to support their growth and expansion , the
company need to raise additional capital.
Did not have to pay dividends.
8. CHARACTERICTICS OF COMMON STOCK
1) Voting rights
Shareholders vote for issues that can give affecting to the corporation,
with each share entitling the owner to one vote
Shareholders are also asked to vote on events such as mergers and
acquisitions, changes in the company's capitalization , stock splits and
other unusual actions.
2) Dividends
Common stockholders have the right to receive dividends wen and if declared
by the board of directors.
They decide whether the company can make a profit distribution and how
large that distribution is.
Corporations must pay dividends on a quarterly basis and normally paid in
9. 3) Merger consideration3) Merger consideration
When a corporate merger is approved by shareholders, they have
the right to receive financial consideration for their own shares.
Shareholders will receive a cash payment for their shares
Normally, shareholders must vote to approve a merger before
they receive any such consideration.
4) Dissolution and Liquidation
If any of a corporation is dissolved or liquidated, its common
shareholders will have final claim on its assets.
the claim of assets is known as secondary to the claims of
creditors, bondholders and preferred stockholders.
10. 5) Price volatility
Investors in common stocks should be aware that they
are one of the riskiest types of investments.
No return is guaranteed to the shareholder, and the
price of common shares may fluctuate greatly because
of the upside down of the price.
11. 05/28/13
ADVANTAGES OF COMMON STOCK
• Common stock has a potential high return of dividends compare to others
type of stock. The annual returns on investment can go as high as 100%
depend on the company performance.
• The potential loss from stock purchased with cash is limited to the total
amount of the initial investment.
• Stocks offers limited legal liability.
• These stocks have a very high liquidity.
• Stocks offers two ways for their owners of benefit, by capital gains and
with dividends.
12. 05/28/13
DISADVANTAGES OF
COMMON STOCK
• Since common stock represents ownership of a business, stockholder are
the last to get paid, like all other owners. A company must first pay its
employees, supplies, creditors, maintain its facilities and pay its taxes.
• The shareholder do not enjoy all of the rights & privileges that the
owners of privately held companies do.
• Investors in a company may not know all that there is to know about the
company. The limited information can cause difficult investment decision
making.
• Stock prices tend to be volalite.
• Stock values can sometimes change for no apparent reason, which can be
quite frustrating for the investor who is trying to anticipate the stock’s
behaviour based on the actual performance of the company.
15. 05/28/13
FORMULA FOR COMMON STOCK
( CONSTANT GROWTH )
D1
K- g
Growth
Dividend
per year
Percent
rate of
return
16. 05/28/13
FORMULA FOR COMMON STOCK
( VARIABLE GROWTH )
D1 + D2 + D3 + D4 + D5
(1+k)₁ (1+k)₂ (1+k)₃ (1+k)4 (1+k)5-1 ( k-g )
Where,
D = Dividend per year
k = Percent rate of return
g = Growth
17. 05/28/13
a) ENUJA Corp. has maintained a dividend rate of RM5 per share for
many years. The same dividend rate is expected to be in future years.
If investors requires a 15 percent rate of return on similar investment,
determine the present price of the company’s stock
EXAMPLE QUESTION
STEP 1 : EXTRACT
INFORMATION
1. Dividend, D = RM 5
2. k = 15 %
STEP 2 : CALCULATION
PROCESS
FORMULA = DIVIDEND
K
= RM 5
0.15
= 33.33
(Zero growth)
18. 05/28/13
b) X-CELL Corp. paid cash dividend of RM2.50 per share last year. The
dividend of the company is expected to grow at an annual rate of 10
percent. What is the fair price of the company’s stock if the investors
require 15 percent return?
STEP 1 : EXTRACT INFORMATION
1. Dividend, Do = RM 2.50
= Do (1 + g)
= 2.50 (1 + 0.1)
D1 = 2.75
2. Growth, g = 10 %
3. k = 15 %
D0 (2.50) D1 (2.75)
Formula how to
find D1 , D2 , D3
…..
STEP 2:CALCULATION PROCESS
FORMULA = D1__
K- g
= 2.75___
0.15- 0.1
=55
( constant growth)
19. 05/28/13
c) B2B & Co. paid RM2 dividend per share for its shareholders
last year. The dividend is expected to grow at annual rate of
16% for the next two years, and at annual rate of 12% for year
three and four. The dividend then expected to drop at a
normal growth of 8%. If the required rate of return is 18%,
determine the market price of B2B & Co. stock today.
STEP 1 : EXTRACT INFORMATION
1. Dividend, Do = RM 2.00
2. Growth, g = 16% (next two years)
= 12% (next 3 & 4 years)
= 8% (forever)
3. k = 18 %
21. 05/28/13
STEP 2 : CALCULATION PROCESS
FORMULA :
= D1__ + _D2_ + _ D3 + D4_ + ___ D5 ____
(1+k)1 (1+k)2 (1+k)3 (1+k)4 (1+k)5-1 (k-g)
= 2.32__ + 2.691_ + 3.014 + 3.376_ + _3.646___
(1+0.18)1 (1+0.18)2 (1+0.18)3 (1+0.18)4 (1+0.18)5-1 (0.18-0.08)
= 1.996 + 1.933 + 1.834 + 1.741 + 18.806
= 26.26
k ( required rate of return ) = 18% @ 0.18 g ( growth ) = 8% @ 0.08
ATTENTION!!
THE LAST
CALCULATIO
N YOU NEED
TO ADD THIS
FORMULA
(1+k)n-1(k-g)
ATTENTION!!
THE LAST
CALCULATIO
N YOU NEED
TO ADD THIS
FORMULA
(1+k)n-1(k-g)
22. d) Diamond & Co. paid RM3 dividend per share for its
shareholders last year. The dividend is expected to grow at annual
rate of 16% for the next two years. The dividend then expected to
drop at a normal growth of 10%. If the required rate of return is
20%, determine the market price of Diamond & Co. stock today.
STEP 1 : EXTRACT INFORMATION
1. Dividend, Do = RM 3.00
2. Growth, g = 16% (next two years)
= 10% (forever)
3. k = 20 %
24. g (growth) = 10%@0.10K(required rate of return) = 20%@0.20
FORMULA :
= D1__ + _D2_ + D3
(1+k)1 (1+k)2 (1+k)3-1 (k-g)
= 3.48_ + 4.0368_ + 4.4405
(1+0.20)1 (1+0.20)2 (1+0.20)3-1 (0.20-0.10)
= 2.9 + 2.8033 + 25.6973
= 31.4006
ATTENTION!!
THE LAST
CALCULATIO
N YOU NEED
TO ADD THIS
FORMULA
(1+k)n-1 (k-g)
ATTENTION!!
THE LAST
CALCULATIO
N YOU NEED
TO ADD THIS
FORMULA
(1+k)n-1 (k-g)
25. FORMULA
MUST
REMEMBER
FORMULA FOR COMMON
STOCK ( ZERO GROWTH )
Dividend
K
FORMULA FOR COMMON
STOCK ( CONSTANT GROWTH)
D1
K-g
FORMULA FOR
COMMON STOCK
( VARIABLE GROWTH )
D1 + D2 + D3 + D4 + D5
(1+k)₁ (1+k)₂ (1+k)₃ (1+k)4 (1+k)5-1 ( k-g )
Dividend rate
Percent rate
of return
Percent rate
of return
Growth
Dividend
per year
Where,
D = Dividend per year
k = Percent rate of return
g = Growth
