1. Common Stock: Characteristics, Valuation, and Issuance7
Common Stock: Characteristics, Valuation, and Issuance

2. Introduction
This chapter describes the characteristics of common stock.
It discusses the process for selling securities and the role of the investment banker.
It develops the valuation models for common stock.

3. Common Stock
Common stock (C/S) is the permanent long-term financing of a firm.
Represents the true residual ownership of a firm
Stockholders elect the board of directors.

4. Balance Sheet Accounts Associated With C/S
Par value of C/S
Contributed capital in excess of par
Additional paid in capital
Capital surplus
Retained earnings (R/E)
Book value per share
equity # shares outstanding =

5. Rights of Common Stockholders
Dividend rights
Asset rights
Preemptive rights
Voting rights

6. Voting for the Board of Directors
Majority voting requires more than 50 percent of the votes to elect a director.
Cumulative voting
Shareholders may concentrate votes on a few candidates.
Proxy
signing over your voting rights to someone else

7. Features of C/S C/S classes Stock dividends Stock repurchases
Voting and nonvoting
Specific ownership
Stock dividends
Transfer from R/E account to the C/S and additional paid-in capital accounts
Stock repurchases
Disposition of excess cash
Financial restructuring
Future corporate needs
Reduction of takeover risk
Stock splits
Reverse stock splits

8. C/S Advantages and Disadvantages
Flexible
Reduced financial leverage
Lower cost of capital
Disadvantages
Diluted EPS
Expensive

9. Investment Banking Long-range financial planning
Timing of security issues
Purchase of securities
Marketing of securities
Arrangement of private loans and leases
Negotiation of mergers

10. How Are Securities Sold?
Public cash offering
Selling securities through investment bankers to the public
IPO’s Web site:
Private or direct placement
Placing a security issue with one or more large investors
Rights offering
Selling C/S to existing stockholders
Standby underwriting
Investment banker purchases shares not sold to rights holder.

11. Other Issuance Costs Management time Underpricing new equity
Stock price declines
Incentives
“Green shoe” option

12. Registration Requirements
SEC act of 1933 & SEC exchange act of 1934
Any interstate security issue over $1.5 million and having a maturity greater than 270 days is required to register issue with the SEC.
Provide all buyers of the new security with a final copy of the prospectus
Shelf registration
Check NYSE regulations

13. Global Equity Markets
Multinational firms can take advantage of institutional differences from one country to another.
Stock markets in United States, Japan, London, and Paris
Nearly 24-hour per day trading of C/S
Provide investors with opportunities to buy and sell shares any time they wish
Global name and product recognition

14. Valuation of C/S
Capitalized value of the stock’s expected stream of cash flow during holding period
Uncertain
Dividends
Not constant
Expected to grow over time
Capital gain or loss

15. Dividend Valuation Models
Zero growth
g = 0
Constant growth dividend
ke > g
Dt = D0 (1 + g)t
Above-normal growth
Multiple growth rates

16. Zero Growth

17. Constant Growth

18. Above-Normal Growth
1. Find the PV of the dividends during the above-normal growth period (if two or more above-normal growth periods continue with the PV of the second)
2a. Find the value of the C/S at the end of the above-normal growth period
2b. Discount the answer in 2a to the present time
3. Sum steps 1 and 2b to find p0

19. Sources of Analyst Growth Rate Forecasts
Value Line Investment Survey
Institutional Brokers Estimate System
Zacks Earnings Estimates

20. Valuing Small Firms Nature of business History of business
Economic outlook
Dividend paying capacity
Industry
Earnings capacity
Book value
Financial condition
Majority or minority interest
Voting or nonvoting
Valuation Web site: