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• 5 Calculate a stock’s expected rate of

return

Terms

• 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

Preferred stock

Hybrid security

1. No fixed maturity date.

2. Nonpayment of dividends leads no bankruptcy.

3. Taxable

4. Limited in amount.

Multiple classes

More than one series or class

Each different characteristics. 13

Priority status regarding assets in bankruptcy.

No residual earning

Par: $25

Dividend rate: 7.56%

Dividend $1.89

Cumulative feature

Past unpaid be paid before common stock dividends declared.

No dividend enforcement.

Claims on assets and incomes

Priority over common stock.

Bonds > preferred stock

Preferred stock safer > common stock

Common stock.

Protective provisions

Restrict the payment of common stock.

Voting right in case of nonpayment.

(six quarterly dividends in arreas.

Sinking funds

Convertibility

At discretion(处置权）： predetermined shares.

1/3 convertibility feature.

Reduced the cost of common stock.

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.

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

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

         Cumulative feature          Protective provisions         Convertibility         Retirement Features         Callable Preferred         Sinking-Fund Provisions

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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.

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

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%

Claim on income

1. Residual income: to shareholders

nothing if after bondholders

2. Reinvestment : earning power (capital gains)

3. Limitless return

4. Nothing

Voting

Voting directors of board

Voting for the charter changes

Proxy fight when takeover

Majority vote

Cumulative vote: minority shareholders.

Cumulative vote

Outstanding: 1 000

Majority control:749

Minority control : 251

Election of board of directors?

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.

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

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

Limited liability

Liability limited in case of bankruptch to investment.

Help raising the funds or debt.

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• Dividend: $2

• growth rate: 10%

• Required rate of return: 15%

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=$2.20/(0.15-0.10)=$44

OBJECTICVE 5 The Stockholder’s Expected Rate of Return

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Quiz

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