1. CHARACTERISTICS OF COMMON STOCKS
CHAPTER THIRTEEN
CHARACTERISTICS OF
COMMON STOCKS

2. THE CORPORATE FORM FEATURES OF THE CORPORATE FORM
common stock with limited liability
charter issued to begin
stock certificates
ownership claim
transfer agent conducts title change
registrar issues certificates

3. THE CORPORATE FORM FEATURES OF THE CORPORATE FORM voting
cumulative voting system does not give majority owner control
majority voting system: straight voting and allows majority owner control

4. THE CORPORATE FORM FEATURES OF THE CORPORATE FORM takeovers
usually done with a tender offer by a bidder to a target firm
bidder usually offers to buy at a stated price some or all of the shares held by current stockholders
WHITE KNIGHT is a firm making a better offer
GREENMAIL is an attempt to buy share held by bidder at above-market price

5. THE CORPORATE FORM FEATURES OF THE CORPORATE FORM ownership v. control
know as principal-agent problem
stockholder motive is to maximize wealth
agent may make decisions for other reasons
a solution:
give management stock options giving incentive to maximize their own wealth as well as stockholders

6. COMPONENTS OF STOCKHOLDERS’ EQUITY
Par Value
the value authorized by the charter for initial capital stock

7. COMPONENTS OF STOCKHOLDERS’ EQUITY
Book Value Formula:
Cumulative retained earnings
+Capital Contributed in
excess of par
+Common stock
BOOK VALUE OF THE EQUITY

8. COMPONENTS OF STOCKHOLDERS’ EQUITY
Reserved and Treasury Stock
some corporations repurchase some of the stock outstanding
this becomes known as treasury stock

9. CASH DIVIDENDS
DEFINITION: the portion of profits paid in cash to the stockholders
Process of Payment
declaration date
date of record
ex-dividend date
payment date

10. STOCK DIVIDENDS AND SPLITS
issued in place of a cash payment
a 5% stock dividend results in
example: 5% of 100 shares = 5 shares

11. STOCK DIVIDENDS AND SPLITS
Stock Split
new shares issued after the split
example: a 2 for 1 split (par=$1)
a 200 share holder receives 400 new shares
at $.50 par
thus, there is no dilution of the shareholder’s equity position

12. STOCK DIVIDENDS AND SPLITS
EX-DISTRIBUTION DATES
similar to ex-dividend date
2 business days before the date of record

13. STOCK DIVIDENDS AND SPLITS
REASONS FOR STOCK DIVIDEND AND SPLITS
some believe splits signal the stock is undervalued in the market
splits will bring market price to a more desirable (usually lower) range
following a split, research shows investors receive a positive abnormal return

14. STOCK DIVIDENDS AND SPLITS
PREEMPTIVE RIGHTS
a legal right interpreted differently depending upon the country
in the U.S. the stockholders have an inherent legal right to maintain the proportion of ownership they may control
when new shares are issued
current owners must be given first right of refusal

15. COMMON STOCK BETAS Role of Beta
DEFINITION: it is a measure of a stock’s sensitivity to future market movements

16. COMMON STOCK BETAS ei is the error term
Calculation using linear regression the model equation is specified
ri = a + b rI + ei
where ri is the return of stock i
a is the average return of stock i
b is the stock i’s beta
rIis the return on the index
ei is the error term

17. COMMON STOCK BETAS
the standard error of beta indicates the extent of standard deviation of the estimates

18. COMMON STOCK BETAS
correlation coefficient indicates how closely the stock’s returns were explained by the index returns

19. COMMON STOCK BETAS
coefficient of determination represents the proportion of variance in the stock’s return to variance in the index’s returns

20. COMMON STOCK BETAS
1-the coefficient of determination represents the amount of the stock’s variance that cannot be explained by variances in the index returns
i.e. nonsystematic risk