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Common Stock

Common Stock. Chapter 15. Nov 19, 2012. Learning Objectives. Characteristics of common stock. Advantages and disadvantages of equity financing. Process of issuing common stock. Stock Options. 52 Weeks Yld Vol Net

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Common Stock

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  1. Common Stock Chapter 15 Nov 19, 2012

  2. Learning Objectives • Characteristics of common stock. • Advantages and disadvantages of equity financing. • Process of issuing common stock. • Stock Options

  3. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote – Wall Street Journal Company Issuing the Stock Link to NASDAQ

  4. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Ticker Symbol

  5. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Annual Dividend per Share in dollars p = Initial Dividend

  6. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Dividend Yield Dividend Closing Price = Stock Quote

  7. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Price to Earnings (PE) Ratio Closing Price Earnings per Share = Stock Quote

  8. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Volume of Trading The number of shares changing hands.

  9. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Daily Trading Range 29 ¾ = $29.75

  10. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Closing Price

  11. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Stock Quote Price Change from Close on Previous Trading Day

  12. 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg s 42½ 29 QuakerOats OAT 1.14 3.3 24 5067 35 34¼ 34¼ -¾ s 36¼ 25 RJR Nabisco RN .08p ... 12 6263 29¾ 285/8 287/8 -¾ 237/8 20 RJR Nab pfB 2.31 9.7 ... 966 24 235/8 23¾ ... 7¼ 5½ RJR Nab pfC .60 9.4 ... 2248 6½ 6¼ 63/8 -1/8 Trading Range over the Past Year s = stock split = new 52 week high achieved on this day Stock Quote

  13. Characteristics of Common Stock • Ownership - shareholders • Dividends: • Vary over time • Not guaranteed • Unlimited growth • Residual Claim on income retained • Voting Rights • Lowest claim in case of liquidation

  14. Management of Publicly Traded Corporations • Shareholders elect a group of individuals called the Board of Directors who oversee the management of the corporation. • The Board of Directors selects and oversees the managers (i.e., CEO) who are responsible for day-to-day operations of the firm.

  15. Director Responsibility • Directors have fiduciary responsibility to act in the best interests of those who elected them. (Fiduciary means legal duty to act in the best interests of those who entrusted you.) • Directors can not have conflicts of interest that could be damaging to the company

  16. Ownership of Common Stock • Mostly owned (70%) by institutional investors • Institutional investors include: Pension plan funds (CALPERS) Insurance companies Mutual funds Hedge funds

  17. Pros and Cons of Equity Financing Disadvantages of Equity Financing • Dilution of ownership and power due to more shares of stock outstanding. • Lower earnings per share/stock price • A lot more work than Debt offering • Flotation costs (expensive) • Fees paid to investment bankers, lawyers, accountants, printers • Usually much higher than for debt issues.

  18. Pros and Cons of Equity Financing Advantages of Equity Financing • No interest or principal to pay (unlike debt) • No obligation to pay dividends. • Management doesn’t like debt (risk averse) • Reduces financial risk (total debt ratio) • This may be a more important advantage to firms that already are relatively risky due to the kind of business they do (e.g. high tech has high business risk)

  19. Issuing Common Stock • Sell to existing shareholders or to new shareholders? • How much $ do you need? • Timing – up or down market? • Initial Public Offering (IPO) (first time)

  20. Investment Bankers • Role of Investment Bankers • Underwriting – syndicate guarantees the sale, sets the price, buys the stock and resells it to the general public (expensive) • Best efforts – sell what they can • Investment bankers include: Goldman Sachs, Morgan Stanley, Merrill Lynch, J.P. Morgan, Credit Suisse First Boston, & others

  21. Pricing New Issues of Stock • If publicly traded, stock sells for existing market price • If IPO, a difficult task, much haggling with the investment banker, (and often wrong – Google, Face Book) • Methods include present value of future cash flows, comparisons to similar types of companies, market value of angel and secondary private offerings, etc.

  22. Stock Options • An option to buy shares of stock at a pre-determined price, usually set at the current market price of the stock or slightly below • Given to Directors, Officers and Employees as an incentive to stay with the company and make it grow • The recipient usually has a period of time, say ten years, in which to exercise the options before they expire

  23. Stock Options (Cont’d) • Certain restrictions may apply as to when an option may be exercised • Shares used for stock options exercised usually come from Treasury stock • Employee writes a check to the company for the exercise price of the option • Exercise and sell? (Tax consequences)

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