Financial Management Chapter 9

Proxy

document giving one person the authority to act for another, typically the power to vote shares of common stock. Who gets to win those votes from shareholders that do not actually goes to the meeting

Founder's Shares

stock owned by the firm's founders that enables them to maintain control over the company without having to own a majority of stock.

What does common stock represent and how is it valued?

Common stock represents the ownership position in a firm, and is valued as the present value of its expected future dividend stream.

Intrinsic Value and Stock Price

In equilibrium we assume that a stock's price equals its intrinsic value. - Outsiders estimate intrinsic value to help determine which stocks are attractive to buy and/or sell. - Stocks with a price below (above) its intrinsic value are undervalued (overvalued).

Are common stock dividends specified by contract?

No! Common stock dividends are not specified by contract—they depend on the firm's earnings.

Types of Common Stock

Proxy, Preemptive right, Classified Stock, Founder's Shares

Corporate valuation model

The corporate valuation model is an alternative model used to value a firm, especially one that does not pay dividends or is privately held. This model calculates the firm's free cash flows, and then finds their present values at the firm's weighted average cost of capital to determine a firm's value.

Discounted dividend model

The discounted dividend model values a common stock as the present value of its expected future cash flows at the firm's required rate of return on equity. Variations of this model are used to value constant growth stocks, zero growth stocks, and nonconstant growth stocks.

What are the differences between the discounted dividend and corporate valuation models? (There are 2)

The expected cash flow stream and the discount rate used in the models are different. The discounted dividend model calculates the firm's stock price as the present value of the expected future dividends at the firm's required rate of return on equity, while the corporate valuation model calculates the firm's stock price as the present value of the expected free cash flows at the firm's weighted average cost of equity.

What are the two models used to estimate intrinsic value?

Two models are used to estimate a stock's intrinsic value: the discounted dividend model and the corporate valuation model.

Classified Stock

common stock that is given a special designation such as Class A or Class B to meet the special needs of the company EX: Google has it and Berkshire Haltheway

Preemptive right

provision in a corporate charter that gives common stockholders the right to purchase on a pro rata basis new issues of common stock