Video 23 (Topic 5.1): Equity Characteristics

1. Video 23 (Topic 5.1):Equity Characteristics FIN 614: Financial Management Larry Schrenk, Instructor

2. Topics • Equity Basics • Equity Markets • Pros and Cons of Equity • Financing Comparison Note: Preferred Shares Later

3. Common Equity • Rights • Ownership • Entitled to Distributed Earnings (Dividends) • Entitled to Share of Assets • Residual Claimant Status • Interest Paid First • Absolute Priority Rule

4. Equity Markets • Public Exchanges (Physical or Electronic) • OTC Trading of Unlisted Stocks & Listed Stocks • Direct Trading

5. Short Selling • Price Decline Expected • $100 → $90 • Strategy • t = 0 Borrow $100 Share and Sell It Cash: $100; Liability: Replace Share • t = 1 Buy $90 Share and Replace Share Cash: $10; Liability: None

6. Owners, Directors, and Managers Stock Represents Ownership Ownership Implies Control Stockholders Elect Directors Directors Hire Management Managers Maximize Stock Price Recall Agency Problems

7. Ownership of Common Stock • 70% Owned by Institutional Investors • Institutional Investors Include: • Pension Plan Funds • Insurance Companies • Mutual Funds • Hedge Funds

8. Pros of Equity Financing • No Obligation to Pay Dividends • Risk Averse Management Doesn’t Like Debt • Reduces Financial Risk

9. Cons of Equity Financing • Dilution Ownership • Lower Earnings per Share • More Difficult than Debt Offering • Flotation costs More Expensive

10. Financing Comparison

11. Video 23 (Topic 5.1):Equity Characteristics FIN 614: Financial Management Larry Schrenk, Instructor