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 certificatesTHE 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 controlTHE 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 priceTHE 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
COMPONENTS OF
STOCKHOLDERS’ EQUITY
Par Value
the value authorized by the charter for initial capital stockCOMPONENTS OF
STOCKHOLDERS’ EQUITY
Book Value
Formula:Cumulative retained earnings +Capital Contributed in
excess of par +Common stock
BOOK VALUE OF THE EQUITY
COMPONENTS OF
STOCKHOLDERS’ EQUITY
Reserved and Treasury Stock
some corporations repurchase some of the stock outstanding
this becomes known as treasury stockCASH DIVIDENDS
DEFINITION: the portion of profits paid in cash to the stockholders
• Process of Payment
declaration date
date of record
ex-dividend date
payment dateSTOCK DIVIDENDS AND SPLITS
STOCK DIVIDENDS AND SPLITS
• Stock Dividend
issued in place of a cash payment
a 5% stock dividend results inexample: 5% of 100 shares = 5 shares
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 positionSTOCK DIVIDENDS AND SPLITS
EX-DISTRIBUTION DATES
• similar to ex-dividend date
• 2 business days before the date of record
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
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 refusalCOMMON STOCK BETAS
Role of Beta
DEFINITION: it is a measure of a stock’s sensitivity to future market movementsCOMMON STOCK BETAS
Calculation using linear regression the model equation is specified
r
i= r
I
iwhere
r
i is the return of stock i
is the average return of stock i
is the stock i’s betar
Iis the return on the index
i is the error termCOMMON STOCK BETAS
the standard error of beta indicates the extent of standard deviation of the
estimates
COMMON STOCK BETAS
correlation coefficient indicates how closely the stock’s returns were
explained by the index returns
COMMON STOCK BETAS
coefficient of determination represents
the proportion of variance in the stock’s
return to variance in the index’s returns
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
