Finance Chapter 7

Number of shares

(number of direcotrs diesred * number of shares outstanding \ number of directors being elected + 1) + 1

Book value per share

(total common SE \ Number shares outstanding)

Issuance costs for sales of common equity are normally

significantly greater than those for corporate debt or preferred stock. There are significant economies of scale associated with security offerings.

A nonconstant growth dividend valuation model

uses the present value of yearly dividends plus the present value of the expected stock price at the end of the period of nonconstant growth.

A zero growth dividend valuation model can be used

when a firm's future dividend payments are expected to remain constant forever, as in a perpetuity.

Investment bankers provide a number of important services

within the operation of the capital markets.

One of the most commonly encountered simplified dividend valuation models is the constant growth dividend valuation model. In this model, the value of a common stock is

equal to next year's dividend divided by the difference between the required rate of return and the expected growth rate.

The valuation of small firm stock requires an

explicit consideration of the marketability of that stock, whether the stock represents minority or majority ownership, and whether the stock is voting or nonvoting.

Common stock permits a firm more flexibility in its financing plans than

fixed-income securities because, in principle, no fixed-dividend obligation exists.

The common stockholders are the true owners of the firm; thus, common stock is a permanent

form of financing. Common stockholders participate in the firm's earnings, potentially receiving larger dividends if earnings rise or smaller dividends if earnings drop.

Simpler common stock valuation models can be derived

from assumptions concerning the expected growth of future dividend payments.

The valuation of stock in small corporations poses special challenges because of it

limited marketability, lack of liquidity, and the difference between minority interest and controlling interest shares

Investment bankers assist firms in the security offering process by providing advice on a wide range

of corporate financial transactions, including the timing and structure of new security offerings.

New corporate securities are sold through

public cash offerings, private placements, and rights offerings.

Chapter 7 Notes

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Common stock dividends are normally expected to grow and not remain constant.

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Important Equations

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The cash flows can take two forms, cash dividend payments and price appreciation.

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The cash flows from common stocks are generally more uncertain than the cash flows from other types of securities.

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The valuation of common stock is considerablymore complicated than the valuation of either bonds or preferred stock for the following reasons:

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The characteristics of variable income (common stock) securities include

1) Accounting aspects 2)Stockholder rights 3)Features 4) Advantages and disadvantages

Methods of selling securities in the primary capital markets include

1) Public cash offering 2) Direct placement 3) Rights offering to shareholders

Stockholder rights include the following:

1) The right to dividends 2) The right to any assets remaining after senior claims are satisfied in a liquidation 3) Voting rights 4) The preemptive right, or the right to share proportionately in any new stock sold. This right is available in some firms but not in others.

In the constant growth dividend valuation model,

the value of a common stock is equal to the next period's dividend divided by the difference between the investor's required rate of return and the dividend growth rate.

In the general dividend valuation model,

the value of a common stock is equal to the present value of all the expected future dividends discounted at the investor's required rate of return.

In the general dividend valuation model, the value of a common stock is equal

to the present value of all future dividend payments discounted at the investor's required rate of return.