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 4 THE CORPORATE FORM • FEATURES OF THE CORPORATE FORM – ownership v. control • • • • 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 5 COMPONENTS OF STOCKHOLDERS’ EQUITY • Par Value • the value authorized by the charter for initial capital stock 6 COMPONENTS OF STOCKHOLDERS’ EQUITY • Book Value Formula: Cumulative retained earnings +Capital Contributed in excess of par +Common stock BOOK VALUE OF THE EQUITY 7 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 • • • • 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 13 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 16 COMMON STOCK BETAS • the standard error of beta indicates the extent of standard deviation of the estimates 17 COMMON STOCK BETAS • correlation coefficient indicates how closely the stock’s returns were explained by the index returns 18 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 20