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Common Stock

Common Stock

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Common Stock

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  1. Common Stock Chapter 15 Nov 19, 2012

  2. Learning Objectives • Characteristics of common stock. • Advantages and disadvantages of equity financing. • Process of issuing common stock. • Stock Options

  3. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote – Wall Street Journal Company Issuing the Stock Link to NASDAQ

  4. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Ticker Symbol

  5. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Annual Dividend per Share in dollars p = Initial Dividend

  6. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Dividend Yield Dividend Closing Price = Stock Quote

  7. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Price to Earnings (PE) Ratio Closing Price Earnings per Share = Stock Quote

  8. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Volume of Trading The number of shares changing hands.

  9. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Daily Trading Range 29 ¾ = $29.75

  10. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Closing Price

  11. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Price Change from Close on Previous Trading Day

  12. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Trading Range over the Past Year s = stock split = new 52 week high achieved on this day Stock Quote

  13. Characteristics of Common Stock • Ownership - shareholders • Dividends: • Vary over time • Not guaranteed • Unlimited growth • Residual Claim on income retained • Voting Rights • Lowest claim in case of liquidation

  14. Management of Publicly Traded Corporations • Shareholders elect a group of individuals called the Board of Directors who oversee the management of the corporation. • The Board of Directors selects and oversees the managers (i.e., CEO) who are responsible for day-to-day operations of the firm.

  15. Director Responsibility • Directors have fiduciary responsibility to act in the best interests of those who elected them. (Fiduciary means legal duty to act in the best interests of those who entrusted you.) • Directors can not have conflicts of interest that could be damaging to the company

  16. Ownership of Common Stock • Mostly owned (70%) by institutional investors • Institutional investors include: Pension plan funds (CALPERS) Insurance companies Mutual funds Hedge funds

  17. Pros and Cons of Equity Financing Disadvantages of Equity Financing • Dilution of ownership and power due to more shares of stock outstanding. • Lower earnings per share/stock price • A lot more work than Debt offering • Flotation costs (expensive) • Fees paid to investment bankers, lawyers, accountants, printers • Usually much higher than for debt issues.

  18. Pros and Cons of Equity Financing Advantages of Equity Financing • No interest or principal to pay (unlike debt) • No obligation to pay dividends. • Management doesn’t like debt (risk averse) • Reduces financial risk (total debt ratio) • This may be a more important advantage to firms that already are relatively risky due to the kind of business they do (e.g. high tech has high business risk)

  19. Issuing Common Stock • Sell to existing shareholders or to new shareholders? • How much $ do you need? • Timing – up or down market? • Initial Public Offering (IPO) (first time)

  20. Investment Bankers • Role of Investment Bankers • Underwriting – syndicate guarantees the sale, sets the price, buys the stock and resells it to the general public (expensive) • Best efforts – sell what they can • Investment bankers include: Goldman Sachs, Morgan Stanley, Merrill Lynch, J.P. Morgan, Credit Suisse First Boston, & others

  21. Pricing New Issues of Stock • If publicly traded, stock sells for existing market price • If IPO, a difficult task, much haggling with the investment banker, (and often wrong – Google, Face Book) • Methods include present value of future cash flows, comparisons to similar types of companies, market value of angel and secondary private offerings, etc.

  22. Stock Options • An option to buy shares of stock at a pre-determined price, usually set at the current market price of the stock or slightly below • Given to Directors, Officers and Employees as an incentive to stay with the company and make it grow • The recipient usually has a period of time, say ten years, in which to exercise the options before they expire

  23. Stock Options (Cont’d) • Certain restrictions may apply as to when an option may be exercised • Shares used for stock options exercised usually come from Treasury stock • Employee writes a check to the company for the exercise price of the option • Exercise and sell? (Tax consequences)