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CHAPTER SIXTEEN

CHAPTER SIXTEEN. COMMON STOCKS. 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. THE CORPORATE FORM.

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CHAPTER SIXTEEN

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  1. CHAPTER SIXTEEN COMMON STOCKS

  2. 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

  3. 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

  4. 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

  5. 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

  6. COMPONENTS OF STOCKHOLDERS’ EQUITY • Par Value • the value authorized by the charter for initial capital stock

  7. COMPONENTS OF STOCKHOLDERS’ EQUITY • Book Value • Formula: Cumulative retained earnings +Capital Contributed in excess of par +Common stock BOOK VALUE OF THE EQUITY

  8. COMPONENTS OF STOCKHOLDERS’ EQUITY • Reserved and Treasury Stock • some corporations repurchase some of the stock outstanding • this becomes known as treasury stock

  9. 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

  10. 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

  11. 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

  12. STOCK DIVIDENDS AND SPLITS • EX-DISTRIBUTION DATES • similar to ex-dividend date • 2 business days before the date of record

  13. 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

  14. 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

  15. COMMON STOCK BETAS • Role of Beta • DEFINITION: it is a measure of a stock’s sensitivity to future market movements

  16. COMMON STOCK BETAS • Calculation using linear regression the model equation is specified ri = a + b rI + ei 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

  17. COMMON STOCK BETAS • the standard error of beta indicates the extent of standard deviation of the estimates

  18. COMMON STOCK BETAS • correlation coefficient indicates how closely the stock’s returns were explained by the index returns

  19. COMMON STOCK BETAS • coefficient of determination represents the proportion of variance in the stock’s return to variance in the index’s returns

  20. 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

  21. END OF CHAPTER 16

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