CHAPTER THIRTEEN

1. CHAPTER THIRTEEN CHARACTERISTICS OF 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 13