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Chapter 7 Valuation and Characteristics of Stock

Chapter 7 Valuation and Characteristics of Stock. 股份公司的制度安排. Aim. 1.     Identify the basic characteristics and features of ferret stock. 2.     Value preferred stock 3.     Identify the characteristics and features of common stock 4.      Value common stock

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Chapter 7 Valuation and Characteristics of Stock

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  1. Chapter 7Valuation and Characteristics of Stock 股份公司的制度安排

  2. Aim • 1.     Identify the basic characteristics and features of ferret stock. • 2.     Value preferred stock • 3.     Identify the characteristics and features of common stock • 4.      Value common stock • 5 Calculate a stock’s expected rate of return

  3. Preferred Stock Common Stock The Stock Holder’s Expected Rate of Return Call provision Convertible Preferred Stock Cumulative Feature Cumulative Voting Expected Rate of Return Internal Growth Limited Liability Majority Voting Multiple-holding Period Preemptive Right Protective Provisions Proxy Proxy Fight Sink-fund Provision Valuation Model Terms

  4. Preferred stock Hybrid security • No fixed maturity date. • Nonpayment of dividends leads no bankruptcy. • Taxable • Limited in amount.

  5. Multiple classes More than one series or class Each different characteristics. 13 Priority status regarding assets in bankruptcy.

  6. No residual earning Par: $25 Dividend rate: 7.56% Dividend $1.89

  7. Cumulative feature Past unpaid be paid before common stock dividends declared. No dividend enforcement.

  8. Claims on assets and incomes Priority over common stock. Bonds > preferred stock Preferred stock safer > common stock Common stock.

  9. Protective provisions Restrict the payment of common stock. Voting right in case of nonpayment. (six quarterly dividends in arreas. Sinking funds

  10. Convertibility At discretion(处置权）：predetermined shares. 1/3 convertibility feature. Reduced the cost of common stock.

  11. Retirement feature Take advantage of falling interest rates. Call provision: repurchase at stated price. Initial premium above the par 10%. Sinking fund provision: set a maturity date.

  12. OBJECTIVE 1 Preferred stock • Multiple classes of preferred stock • ·Preferred stock’s claim on assets and incomes • ·Cumulative dividends • ·Protective provisions • ·Convertibility • Multiple classes • Claim on assets and incomes

  13. 52 WEEK YLD VOL NET HI LO STOCK SYM DIV % PE 100s HI LO CLOSE CHG GenElec GE 2.08 2.0 24 28140 GenGrowProp GGP 1.72 5.5 14 1498 GenHost GH … dd 439 GenHouse GHW 0.32 3.1 dd 65 GenlnstrCp GIC … dd 7091 GenMills GIS 2.00 2.9 24 5591 GenMotor GM 2.00f 3.5 10 29880

  14. lCumulative feature • lProtective provisions • lConvertibility • lRetirement Features • lCallable Preferred • lSinking-Fund Provisions

  15. Axiom • Axiom 1: The Risk-Return Trade-off— We Won't Take on Additional Risk Unless We Expect to Be Compensated with additional Return. • Axiom 2: The Time Value of Money—A Dollar Received Today is Worth More Than A Dollar Received in the Future. • Axiom 3: Cash—Not Profits—is King.

  16. OBJECTIVE 3 COMMON STOCK • Common stock is certificate that indicates ownership in the corporation. • Features or Characteristic of Common Stock • Claim on income • Claim on Assets • Voting Rights • Preemptive Rights • Limited Liability

  17. OBJECTIVE 4 Valuing Common Stock • g= ROE * r • g = the growth rate of future earnings and the growth in the common stockholders investment in the firm • ROE = the return on equity (net income/common book value) • r = the company's percentage of profits retained, called the profit-retention rate6 • g=16%*0.25=4%

  18. Claim on income • Residual income: to shareholders nothing if after bondholders • Reinvestment : earning power (capital gains) • Limitless return • Nothing

  19. Voting Voting directors of board Voting for the charter changes Proxy fight when takeover Majority vote Cumulative vote: minority shareholders.

  20. Cumulative vote Outstanding: 1 000 Majority control:749 Minority control : 251 Election of board of directors?

  21. formula NE= O x D/TN + 1 NE: number of shares needed to elect a certain number of directors. O = total number of shares of common stock outstanding. D = number of directors desired. TN = total number of directors to be elected.

  22. D= 1,2 and 3 (1000 x 1)/(3 + 1）+ 1 = 251 (1000 x 2)/(3 + 1）+ 1 = 501 (1000 x 3)/(3 + 1）+ 1 = 751

  23. Preemptive right Preemptive right: entitles the common shareholder to maintain a proportionate share of ownership in the firm when issuing new stocks. Dilution of ownership

  24. Limited liability Liability limited in case of bankruptch to investment. Help raising the funds or debt.

  25. Common Stock Valuation­—Single Holding Period

  26. at the beginning of this year. • Dividend:$1.64, • market price:projected $22. • required rate of return:18% • Value ? • Vcs = $1.64/(1+0.18) +$22/(1+0.18) • =$1.39+$18.64 • =$20.03

  27. multiple-holding-period valuation model

  28. Dividend: $2 • growth rate: 10% • Required rate of return: 15% • D1=D0(1+g)=$2(1+0.10)=$2.20 Vcs=D1/(kcs-g) =$2.20/(0.15-0.10)=$44

  29. OBJECTICVE 5 The Stockholder’s Expected Rate of Return

  30. K1ps=D/Pps =$3.64/$50=7.28%

  31. The Common Stockholder's Expected Rate of Return

  32. kcs = $2.20 / $44 + 10% =15%

  33. Quiz • Why would a preferred stockholder want the stock to have a cumulative dividend feature and protective provisions?

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