1. CHAPTER FIVE COMMON STOCK © 2001 South-Western College Publishing

2. 2 Outline  Corporations, Shares, and Shareholder Rights  Corporations  Shares  Shareholder Rights  The Mystique of Dividends  Types of Dividends  Special Distributions  The Dividend Payment Procedure  Why Dividends Do Not Matter

3. 3 Outline  Stock Splits  Forward and Reverse Splits  Why Stock Splits Do Not Matter  Why Firms Split Their Stock  Stock Splits vs. Stock Dividends  The Financial Page Listing  The Basic Information  Footnotes and Symbols

4. 4 Outline  Categories of Stock  Blue Chip Stocks  Income Stocks  Cyclical Stocks  Defensive Stocks  Growth Stocks  Speculative Stocks  Penny Stocks  Category Overlap  A Note on Stock Symbols

5. 5 Corporations, Shares, and Shareholder Rights  People who own stock have an equity interest in the organization.  If a business has shares of stock, it is organized as a corporation rather than a proprietorship or a partnership.  The shares of some corporations are closely held, while others are publicly held.  The two types of stock are common stock and preferred stock.

6. 6 Corporations, Shares, and Shareholder Rights  the right to receive declared dividends on a pro rata basis  the right to vote - Some companies have more than one class of stock.  the right to maintain ownership percentage - The mechanics of the preemptive right are accomplished by a rights offering. Shareholder Rights

7. 7 The Mystique of Dividends: Types of Dividends  cash dividends - paid in cash Some firms have an optional dividend reinvestment plan.  stock dividends - paid in additional shares of stock  property dividends - the pro rata distribution of a physical asset

8. 8 The Mystique of Dividends: Special Distributions  spin-offs - a parent firm divests itself of a subsidiary, and all the shares in the subsidiary are distributed proportionally to the shareholders in the parent  split-offs - a parent firm divests itself of a subsidiary, and the shareholders must make a choice between keeping shares in the parent, or exchanging them for shares in the separated subsidiary

9. 9 The Mystique of Dividends  An increasingly common type of recapitalization is the issuance of shares called tracking stock.  These shares track the performance of a subsidiary, and in many respects, are just a new class of shares.

10. The Mystique of Dividends: The Dividend Payment Procedure 10 The Chronology of Events 1. date of declaration Ex-dividend date (2 business days prior to the date of record) 2. date of record 3. date of payment

11. 11 The Mystique of Dividends: The Dividend Payment Procedure  A dividend paid in accordance with a previously announced corporate policy is a regular dividend.  Companies usually pay dividends quarterly.  A firm that wishes to make an extra distribution of cash to the shareholders does so through a special dividend, also called an extra or extraordinary dividend.

12. 12 The Mystique of Dividends: Why Dividends Do Not Matter  Paying dividends reduces the amount in a firm’s checking account, and hence the shares are worth less.  On the ex-dividend date, share prices tend to fall by about the amount of the dividend.

13. 13 Stock Splits: Forward and Reverse Splits  A stock split is an accounting decision to change the number of shares outstanding without selling any more to the public.  With a forward split, also called a regular way or direct split, shareholders end up with a greater number of shares than before the split.  With a reverse split, the number of existing shares is reduced.

14. 14 Stock Splits: Why Stock Splits Do Not Matter The value of a firm cannot be increased by splitting, or combining, its shares.

15. 15 Stock Splits  The primary motivation for a stock split is usually a desire to reduce the share price.  Large reverse splits often reduce the number of shareholders.  The difference between a stock split and a stock dividend is purely an accounting phenomenon. With a stock split, the par value of the stock changes by the split factor. With a stock dividend, the par value is not affected.

16. 16 The Financial Page Listing Footnotes and Symbols boldface type, underlined, , , , s, n, dd, g, x,... Basic Information 52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg 25 20 AtlanEngy ATE 1.54 7.2 12 371 21 20 21 +

17. 17 Categories of Stock  Income stocks are those that historically have a higher-than-average payout ratio (the proportion of net income after taxes paid as a dividend).  A cyclical stock is one whose fortune is directly tied to the state of the overall national economy.  A blue chip stock usually has a long history of uninterrupted dividends.

18. 18 Categories of Stock  A defensive stock is largely immune to changes in the economy.  Growth stocks reinvest most of their earnings rather than paying them out as dividends and may be good candidates for above-average returns.  A speculative stock has a high probability of a loss and a small probability of a large profit.  Penny stocks refer to unusually risky, especially inexpensive shares.

19. 19 Categories of Stock  Category overlap: The stock categories are not mutually exclusive.  A note on stock (ticker) symbols: - are usually between one and four letters - the letter after a decimal indicates the class of stock - under the NASDAQ system, the last letter of a five-letter symbol indicates what type the security is

20. 20 Review  Corporations, Shares, and Shareholder Rights  Corporations  Shares  Shareholder Rights  The Mystique of Dividends  Types of Dividends  Special Distributions  The Dividend Payment Procedure  Why Dividends Do Not Matter

21. 21 Review  Stock Splits  Forward and Reverse Splits  Why Stock Splits Do Not Matter  Why Firms Split Their Stock  Stock Splits vs. Stock Dividends  The Financial Page Listing  The Basic Information  Footnotes and Symbols

22. 22  Categories of Stock  Blue Chip Stocks  Income Stocks  Cyclical Stocks  Defensive Stocks  Growth Stocks  Speculative Stocks  Penny Stocks  Category Overlap  A Note on Stock Symbols Review