Finance Ch 8

Dividends

% of par value at a fixed rate.

Classes

Series of preferred stock with different characteristics; example being priority status when a company goes bankrupt.

Cumulative Preferred Stock

Requires all past unpaid preferred stock dividends to be paid before any common stock dividends are declared.

Convertible

Preferred stock that can be converted into a predetermined amount of shares of common stock. About 1/3 of all preferred stock has this feature. (2000)

Adjustable Rate Preferred Stock

Designed to move with interest rates; quarterly dividends move with interest rate at a premium or discount, typically based on US government securities.

Auction Rate Preferred Stock

Dividend rate is set every 49 days by an auction process. Yield is the lowest possible “bid.”

Participation Feature

Allows stock dividend to grow or shrink with formulas with a set formula. Rare, and is at cost to the firm.

PIK Preferred

Dividend pays in preferred stock. DRIP (Dividend Reinvestment Plan) The firm offers dividend rates typically from 12 to 18% to incentivize investors.

Voting Rights

Common stockholders have voting rights; though typically shareholders designate by proxy- giving the power of attorney to another person for large groups. They have the right to elect a Board of Directors and must approve any change in corporate charter.

Proxy Fights

When financial distress or management takeovers, two groups fight each other for proxy votes.

Cumulative Voting

Each share of a stock allows the shareholder that number of votes equal to the number of directors being elected.

Preemptive Rights

Entitles a common shareholder the right to a proportionate share of ownership in the firm. A common stockholder can refuse more stocks being sold.

Common Stock Dividend

1. The profitability of the firm
2. Management’s decision to pay dividends or retain the profits

Preferred PV

Dividend/Rate of Return

Preferred Required Rate of Return

Annual Dividend/Intrinsic Value

Preferred Expected Rate of Return

Annual Dividend/Market Price

Common-Constant Growth Model

Next Dividend/Required Rate-Growth

Common-Expected Return

(Dividend yr 1/Market Price) + Growth Rate

Common-Return on Equity

Net Income /(Par Value+ Paid in Capital + Retained in Earnings)

Growth Rate

Return on Equity \* Profits Retained

Common Stock Single Period

(Next Dividend+ Anticipated Stock)/(1+ Required Rate of Return)

Dividend Yield

Annual Dividends per Share / Share Prices