9/23/2010
Stocks
Stock Exchanges

Capital market—
market—not money market

Secondary market
• Organized exchanges
• “Over the counter”
counter”
C. M. Korth
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Important Stock Exchanges

New York Stock Exchange (NYSE)

NASDAQ (also in NY)

London Stock Exchange

Euronext

Tokyo Stock Exchange
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9/23/2010
Specialists

Dealer: Buys & sells for own
Dealer:
account
• NASDAQ is a dealers market.

Broker: Brings buyer & seller
Broker:
together
• Receives commission from both
buyer and seller
C. M. Korth
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Varieties of Stock

Preferred stock

Common stock
C. M. Korth
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Preferred Stock

Preferences:
• Receipt of dividends
• Liquidation of the company

Disadvantages:
• No increased dividend in the future
• No voting rights
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Conditions Favoring Issue of Pfd

Price of common stock too low

Owners fear loss of control

Desire
i
to limit
li i amount off dividends
di id d

Company wants to issue debt but:
• Debt ratio is too high (or)
• Earnings are too volatile
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Common Stock




The ownership of a corporation
The board of directors represent
the common shareholders.
The riskiest provider of funds
However, the greatest beneficiary
of future increases in profits.
C. M. Korth
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Rights of Common Shareholders







Elect board of directors
Approve mergers & acquisitions
Approve change in # of shares
Amend cha
charter
te & b
by-laws
byla s
Inspect the books
Approve issuing “senior
“senior”
” securities:
preferred stock and bonds
Pre--emptive right
Pre
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9/23/2010
Conditions Favoring Issue of C/S

Stock price is high.

Debt ratio is too high.
g

Loss of control is not an issue.
C. M. Korth
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Gain for Shareholders

Dividends
• Dividend yield:
yield: D1 ÷ P0

C it l gains
Capital
i
• Capital gains yield:
yield: (P1 – P0) ÷ P0

=g
• Capital loss
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Maximization of shareholder
value:
(dividend yield)
yield) + (capital
(capital-gains yield)
yield)
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9/23/2010
Stock Price (1)

= PV (all future dividends)
• Preferred stock:
yieldpfd = Dpfd ÷ Ppfd
• 0-growth common: yieldz-g = Dz-g ÷ Pz-g
• [Perpetual bond:

yieldpbd = Ipbd ÷ Ppbd]
It’s the exact
exact--same formula!!!!
C. M. Korth
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Stock Price (2)

Constant--growth Common stock:
Constant
• Rcs = (D1 ÷ Pcs) + g

D ÷ P:
P Dividend
Di id d yield
i ld

g: Capital
Capital--gains yield

D1 = [D0 * (1 + g)]
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Bankruptcy
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Bankruptcy:: Chapter 11
Bankruptcy

Reorganization
• Stops creditors from foreclosing
• 120 days to file a reorganization
plan with the bankruptcy court
• Court appoints a trustee to
supervise the reorganization
• Management usually stays in
control.
C. M. Korth
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Bankruptcy:: Chapter 7
Bankruptcy

Liquidation:: priority of payment:
Liquidation
• Secured creditors (from sale of
secured assets)
• Bankruptcy trustee
• Wages (subject to limits)
• Taxes
• Unfunded pension
• Unsecured creditors
• Preferred shareholders
• Common shareholders
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