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