23. Common Stock

Common stock expected return formula

% return = dividend yield + appreciation = (dividend/price) + appreciation %

Approaches to estimating cost of capital for common stock (3)

1. capital asset pricing model (CAPM) 2. arbitrage pricing model (APM) 3. bond yield plus approach

Disadvantages of common stock (3)

1. generally a higher cost of capital than other sources 2. dividends paid are not tax deductible 3. additional shares issued dilute ownership and earnings

Attributes of common stock (4)

1. limited liability 2. residual claim to income and assets 3. right to vote 4. preemptive right (first right of refusal to acquire a proportionate share of any new common stock issued)

Advantages of common stock (3)

1. no legally required periodic payments - default cannot result from failure to pay dividends. 2. no maturity date 3. no security required

Retained earnings

Accumulated residual income.

Flotation costs

Costs of issuing new common stock that reduce the proceeds received by the issuer.

Crowdfunding

Raising of funds for an undertaking by obtaining many small amounts from a large number of sources, typically accomplished through internet solicitation.

Common stock

Represents an ownership interest in a corporation.