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CHAPTER THIRTEEN
CHARACTERISTICS
OF
COMMON STOCKS
1
THE CORPORATE FORM
• FEATURES OF THE CORPORATE FORM
– common stock with limited liability
– charter issued to begin
– stock certificates
• ownership claim
• transfer agent conducts title change
• registrar issues certificates
2
THE CORPORATE FORM
• FEATURES OF THE CORPORATE FORM
– voting
• cumulative voting system does not give majority
owner control
• majority voting system: straight voting and allows
majority owner control
3
THE CORPORATE FORM
• FEATURES OF THE CORPORATE FORM
– takeovers
• usually done with a tender offer by a bidder to a
target firm
• bidder usually offers to buy at a stated price some or
all of the shares held by current stockholders
• WHITE KNIGHT is a firm making a better offer
• GREENMAIL is an attempt to buy share held by
bidder at above-market price
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THE CORPORATE FORM
• FEATURES OF THE CORPORATE FORM
– ownership v. control
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know as principal-agent problem
stockholder motive is to maximize wealth
agent may make decisions for other reasons
a solution:
– give management stock options giving incentive to
maximize their own wealth as well as stockholders
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COMPONENTS OF
STOCKHOLDERS’ EQUITY
• Par Value
• the value authorized by the charter for initial capital
stock
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COMPONENTS OF
STOCKHOLDERS’ EQUITY
• Book Value Formula:
Cumulative retained earnings
+Capital Contributed in
excess of par
+Common stock
BOOK VALUE OF THE EQUITY
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COMPONENTS OF
STOCKHOLDERS’ EQUITY
• Reserved and Treasury Stock
• some corporations repurchase some of the stock
outstanding
• this becomes known as treasury stock
8
CASH DIVIDENDS
• DEFINITION: the portion of profits paid in
cash to the stockholders
– Process of Payment
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declaration date
date of record
ex-dividend date
payment date
9
STOCK DIVIDENDS AND
SPLITS
• STOCK DIVIDENDS AND SPLITS
– Stock Dividend
• issued in place of a cash payment
• a 5% stock dividend results in
example:
5% of 100 shares = 5 shares
10
STOCK DIVIDENDS AND
SPLITS
• Stock Split
• new shares issued after the split
example:
a 2 for 1 split (par=$1)
a 200 share holder receives 400 new shares
at $.50 par
• thus, there is no dilution of the shareholder’s equity
position
11
STOCK DIVIDENDS AND
SPLITS
• EX-DISTRIBUTION DATES
– similar to ex-dividend date
– 2 business days before the date of record
12
STOCK DIVIDENDS AND
SPLITS
• REASONS FOR STOCK DIVIDEND AND
SPLITS
– some believe splits signal the stock is
undervalued in the market
– splits will bring market price to a more
desirable (usually lower) range
– following a split, research shows investors
receive a positive abnormal return
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STOCK DIVIDENDS AND
SPLITS
• PREEMPTIVE RIGHTS
– a legal right interpreted differently depending
upon the country
– in the U.S. the stockholders have an inherent
legal right to maintain the proportion of
ownership they may control
– when new shares are issued
• current owners must be given first right of refusal
14
COMMON STOCK BETAS
• Role of Beta
• DEFINITION: it is a measure of a stock’s
sensitivity to future market movements
15
COMMON STOCK BETAS
• Calculation using linear regression the
model equation is specified
ri = a + b rI + e i
where
ri is the return of stock i
a is the average return of stock i
b is the stock i’s beta
rIis the return on the index
ei is the error term
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COMMON STOCK BETAS
• the standard error of beta indicates the
extent of standard deviation of the estimates
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COMMON STOCK BETAS
• correlation coefficient indicates how closely
the stock’s returns were explained by the
index returns
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COMMON STOCK BETAS
• coefficient of determination represents the
proportion of variance in the stock’s return
to variance in the index’s returns
19
COMMON STOCK BETAS
• 1-the coefficient of determination represents
the amount of the stock’s variance that
cannot be explained by variances in the
index returns
• i.e. nonsystematic risk
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