Corporate Fin: Chpt. 9

Certificate represents ownership interest in the firm

No par value or coupon interest rate

No maturity date; exists as long as the firm does

• Dividends must be declared by Board of Directors
• No legal rights to receive dividends
• Not deductible for income tax purposes

Capital gains on the sale of stocks

Claim on assets comes after creditors, bondholders, and preferred stockholders

Voting rights for Board of Directors and corporate charter can be exercised in person or by proxy

Preemptive right entitles shareholders to maintain their proportionate share of ownership.

entitles shareholders to maintain their proportionate share of ownership.

Primary vs. Secondary

Organized security exchanges

License holders (formerly "Member")

Entitled to buy or sell on the exchange floor

Brokers vs. Dealers

Commission brokers

• Specialists
• Bid price, Ask price, Spread

NOT a physical exchange

Telecommunication, computer-based network

National Association of Security Dealers Automated Quotations (NASDAQ)

Electronic Communications Networks (ECNs)

present value

Dividends

Capital gains

Zero Growth

Constant Growth

Differential Growth

Dividends will remain at the same level forever

Div1 = Div2 = Div3 = ...

Since future cash flows are constant, the value of a zero growth stock is the present value of a perpetuity

P0 = Div1/(1+R)^1 + Div2/(1+R)^2 + Div3/(1+R)^3 + ...

or

P0 = Div/R

Assume that dividends wil grow at a constant rate, g, forever.

Div1 = Div0(1+g)

Div2 = Div1(1+g) = Div0(1+g)^2

Div3 = Div2(1+g) = Div0(1+g)^3

present value of a GROWING PERPETUITY:

P0 = Div1/R-g

Assume that dividends will grow at DIFFERENT foreseeable future and then will grow at a CONSTANT rate thereafter

growth rate; discount rate

Retained Earnings/Earnings

Earnings/Stockholders' Equity

g = Retention ratio * Return on Equity

The dividend yield.

The growth rate (in dividends)

= D/invest price

company that pays out all of its earnings as dividends

opportunities to invest in positive NPV projects

value of a firm that pays out 100% of its earnings as dividends plus.

net present value of the growth opportunities

P = EPS/R + NPVGO

REDUCE the DIVIDEND paid to shareholders

INCREASE the firm's GROWTH rate

offsetting; stock

If ROE > R, then increased retention INCREASES firm value since reinvested capital earns more than the cost of capital

P/E ratio = Price per share/EPS

The price-earnings ratio is calculated as the current stock price divided by annual EPS

4

NPV; risk