Ch 8

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

one vote per share held

Preferred stock has preference over common stock in the

payment of dividends and distribution of corporate assets

The goal of many successful organizations is a ______ rate of growth in dividends.

steady

When the stock being valued does not currently pay dividends,

the dividend growth model can still be used based on the future dividends

capital gains yield

the dividend growth rate, or the rate at which the value of an investment grows

One requirement of the dividend growth model is...

That the growth rate is less than the discount rate (g<R)

Benchmark PE ratio x EPS =

The price at which a stock (for which the company does not pay dividends) would trade

Why is a share of common stock more difficult to value than a bond?

Three reasons: 1. With common stock, not even the promised cash flows are known in advance 2. The life of the investment is essentially forever because common stock has no maturity 3. There is no way to easily observe the rate of return that the market requires

Rights of common shareholders

Voting rights and the right to a proportional share of dividends paid

Proxy

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

Dividend Growth Model

a model that determines the current price of a stock as its dividend next period divided by the discount rate less the dividend growth rate

cumulative voting

a procedure in which a shareholder may cast all votes for one member of the board of directors

straight voting (noncumulative voting)

a system in which each shareholder may cast all votes for each member of the board of directors/votes the number of shares he or she owns on candidates for each of the positions open

The constant growth model infers that...

dividends change at a constant rate

Dividend Yield

dividends per share/market price per share

common stock

equity without priority for dividends or in bankruptcy

The price of a share of common stock is equal to the present value of all ___ future dividends.

expected

A PE Ratio that is based on estimated future earnings is known as a __________ PE ratio.

forward

One common reason for having two classes of common stock with different voting rights is:

it is easier for insiders such as founding families to maintain control of the company

current price of stock (P 0) =

(D1+P1)/(1+R)

A benchmark PE ratio can be determined using:

-a company's own historical PEs -the PEs of similar companies

In which ways is preferred stock like a bond?

-preferred shareholders receive a stated value of the firm liquidates, like bondholders -some preferred stock has credit ratings, like bonds -preferred shareholders receive a stated dividend, similar to interest on a bond -preferred stock sometimes has a sinking fund, giving it a set maturity like bonds

Features of Common Stock

-voting rights -proxy voting -classes of stock -share proportionally in declared dividends -share proportionally in remaining assets during liquidation -preemptive right- first shot at new stock issue to maintain proportional ownership if desired

Effects of staggered elections for directors:

1. Makes it more difficult for a minority to elect a director bc there are fewer directors to be elected at one time 2. Makes takeover attempts less likely to be successful bc it makes it more difficult to vote in a majority of new directors

Which entity declares a dividend?

Board of directors

In the dividend discount model, the expected return for investors comes from

Dividend yield and growth rate

Expected cash flows to investors in stocks include:

Dividends and capital gains

True or false: For investors in the stock market, dividends from stocks are fixed and guaranteed, while capital gains are variable and not guaranteed

False

An asset's value is determined by the present value of its

Future cash flows

The value of a firm is based on its ___ rate and its ___ rate

Growth, discount

Is a company required to pay preferred dividends?

No; the company may defer dividends on preferred stock; however they can not pay dividends to common shareholders until preferred dividends are paid.

The constant growth formula calculates the stock price

One year prior (year t) to the first dividend payment (d t+1)