Finance 300 Chapter 8

Staggering

only a fraction of the directorships are up for election at a particular time. provides institutional memory - continuity on the board of the directors

bid price

price the dealer is willing to pay (when you sell back a book to the bookstore you receive the store's bid price)

Primary Market

shares of stock are first brought to the market and sold to investors

Classes of Stock

some class of stock has a lot more voting power. made so certain people can remain in control of the firm (usually founders).

if g>r forever then

stock price is infinitely large. (g>r for a period of time)

Preferred Stock

stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights

Dividends

the amount of the dividend and whether it is paid are decisions made by the board of directors. dividends are not deductible for corporate tax purposes. dividends received by individual shareholders are taxable

Price grows at the same rate as...

the dividends

ask price

the price at which the dealer will sell (when you buy a book at the bookstore you pay the store's ask price)

two stage growth

...

Other Rights of Shareholders

1. the right to share proportionally in dividends paid 2. the right to share proportionally in assets remaining after liabilities have been paid in a liquidation 3. the right to vote on stockholder matters of great importance, such as a merger 4. preemptive right - the right to share proportionally in any new stock sold

Broker

BRINGS TOGETHER buyers and sellers but does not maintain an inventory

Required return = (formula)

D0 x (1+g) / P0 + g first part is dividend yield, g is capital gains yield (capital gains yield will usually be bigger)

Price of stock = (formula)

D1/(1+R) + D2/(1+R)^2 + D3/(1+R)^3 ...

specialist

NYSE member acting as a dealer in a small number of securities on the exchange floor

commission brokers

NYSE members who execute customer orders to buy and sell stock transmuted to the exchange floor

floor brokers

NYSE members who execute orders for commission brokers on a fee basis

floor traders

NYSE members who trade for their own accounts, dying to anticipate temporary price fluctuations

NASDAQ

OTC market (only dealers). no physical location. has a multiple market maker system rather than a specialist system like NYSE

Price of stock (definition)

PV of all future dividends

Proxy

a grant of authority by a shareholder allowing another individual to vote his or her shares

Straight Voting

a shareholder may cast all votes for each member of the board of directors. directors are elected one at a time. 50 percent + 1 share will guarantee you a seat.

Cumulative Voting

a shareholder may cast all votes for one member of the board of directors. directors are elected all at once. increases the likelihood of minority shareholders getting a seat on the board. 1/(N+1) percent + 1 share will guarantee you a seat

Price = (benchmark PE)

benchmark PE ratio x EPSt

Price = (benchmark PS)

benchmark PS ratio x SPSt

Zero Growth Dividend (def and formula)

constant dividend. P = D/R

Supernormal Growth

dividend growth is not constant initially, but settles down to a constant growth eventually

Constant Growth Dividend (def and formula)

dividends grow at a steady rate (g). Dt = D0 x (1+g)^t/(R - g) Dt = Dt+1 / R-g

Secondary market

existing shares are traded among investors

proxy fight

if shareholders are not satisfied with management, an outside group of shareholders can try to obtain votes via proxy. they can vote by proxy in an attempt to replace management by electing enough directors

Dealer

maintains an inventory and stands ready to buy and sell at any time

Effects of Staggering

makes it more difficult for a minority to elect a director because there are fewer directors to be elected at one time. makes takeover attempts less likely to be successful because it makes it more difficult to vote in a majority of new directors