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Equities Chapter 6

Equities Chapter 6. Common Stock Valuation Schemes Dividends, Splits, Etc. Features of Common Stock. Represents ownership claims on earnings (dividends) Elect directors Approve changes in charter, mergers & acquisitions May have different classes of stock Voting Non-Voting Weak Voting.

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Equities Chapter 6

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  1. EquitiesChapter 6 Common Stock Valuation Schemes Dividends, Splits, Etc.

  2. Features of Common Stock • Represents ownership • claims on earnings (dividends) • Elect directors • Approve changes in charter, mergers & acquisitions • May have different classes of stock • Voting • Non-Voting • Weak Voting

  3. Valuation of Common Stock • Gordon Growth Model • Normal Growth • Supernormal Growth • Zero growth • P/E ratio • Intrinsic Value Analysis • Present value of future cash flows • Importance of fundamental Analysis

  4. Valuation Concerns • Holding Period • Any present value form sensitive to assumed period • Future price movements are nonlinear • Dividends may increase, decrease, or be withheld • Problem with Comment on Page 6.5 • “Why value isn’t based on earnings” • Numerous empirical studies suggest Price is strongly correlated with future (expected) earnings • Non-Dividend stocks – P/E ratio

  5. Gordon Growth Model • Assumes constant growth rate g of dividends and a known discount rate r, where r > g. V0 = d1 / (r – g) = d0 (1+g) / (r – g) • Implications of Growth Model • Decrease in r (discount rate), will cause value of stock to be higher • Increase in expected growth rate of dividends (g), will cause value of stock to be higher • Increase in next year’s expected dividend (d1) will cause value of stock to be higher

  6. Other Valuation Schemes • P/E Ratio • Price/Cash • Price/Sales • CAPM • ri = rf +  (rm – rf) • PEG Ratio (stock screens)

  7. Other Equity Instruments • ADR • Warrants • Attached to debentures as sweetener • Exercised or sold • Rights • Preemptive rights; maintain proportionate ownership share • Exercised or sold • Preferred Stock • Generally high dividend yields • Interest rate sensitive like bonds

  8. Dividends • Mechanics of Dividends • Declaration date (set by directors) • Ex-dividend date (set by market @2 business days prior to record date) • Record date (date of stock ownership) • Payment date

  9. Alternative Investments • Collectibles • Art • Gems • Coins • Memorabilia • Real Estate

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