SIE 2

Authorized Stock

When a corporation is formed, its corporate charter authprizes that a fixed number of common shares may be issued

Market capitalization

The number of shares outstanding times the current market price is used to find

Treasury Stock/Shares

Buy back some of these previously issed shares

Settlement

When the securities and the purchase price have changed. The buyer becomes the owner of record

Cash Dividends

• Enable a company to share a part of the corporation’s profits with shareholders

• Declared by BOD and paid quarterly

Stock Dividends

• Giving additional shares to exitsing stockholders

• The total number of shares outstanding increases, but the value decreases

• No immediate economic value/tax cost basis

• Less than 25% of the outstanding shares

Stock Split

Larger distribution of shares

Forward Stock Split

• 2:1, A shareholder with 100 shares would now have 200 shares

• Be twice as many shares outstanding, the price per share would be reduced by 50% outstanding

• The price per share is more affordable for small shareholders

Reverse Stock Split

• 1:10, Fewer shares outstanding, but a higher price per share

• For a company whose share price has fallen below the minimum price required by an exchange (NYSE)

Preemptive Rights

• Distributed to shareholders prior to the issuance of new shares to the public

• Short-term securities that give the owner the option to buy a certain number of shares at a reduced price

• 30-60 days

3 options for rights

1. Exercise their right and buy new shares at a price below the current marklet price

2. Sell the right to another investor

3. Do nothing and the let the right expire worthless

Balance Sheet

“Snapshot” of all the company’s assets and liabilities

TA -TL = Net Worth

TA = Neth Worth + TL

Income Statement

Details all aources of revenue and expenses

Earnings per Common Share

Earnings Available for common / Common Shares Outstanding

Dividend or Current Yield

Annual Income / Market Price

Price / Earnings Ratio

Market Price of Security / Earnings per Share

Shareholders rights

• Right to inspect books and records

• Right to transfer ownership

• Preemptive right

• Right to corporate distributions

• Right to corporate assets upon dissolution

• Right to vote

Require a Shareholder Vote

• Declare a stock split

• Declare a reverse stock split

• Issue convertible bonds or preferred stock

• Issue stock options to officers on preferential basis

Do not require a Shareholder Vote

• Declare a cash dividend

• Declare a stock dividend

• Declare a preemptive rights distribution

Statutory Voting

Votes must be evenly cast (more common)

Cumulative Voting

• May divide their total votes in whatever manner they choose

• Advantage for “small investor”

Cumulative Preferred

• If the issuer does not pay, the missed payments and must be paid before the issuer can resume making any other dividend payments

• Does not allow an investor to share an issuing company’s profits

Callable Preferred

• The issuer has the right to redeem the shares after a set date

• Redeemed by the issuer if interest rates fall

Convertible Preferred

• Shareholders can exchange their preferred shares for common stock based on a predetermined price

• Typically driven by the price of the issuer’s common shares (least dependent on interest rates)

• Offers an opportunity for growth and benefits if the common stock rises

Participating Preferred

Shareholders may also be given additional dividends and must be declared by the BOD

Preferred Stock’s Market Price Fluctuates

Changes in interest rates and creditworthiness of the issuer

Non-convertible preferred stock

Will have a higher yield than similar convertible shares of the same issuer

Warrant

• Long-term option to buy stock at a fixed price

• Only valuable if the stock price rises/above (Sweeteners)

• The exercise price of a warrant is set at a premium to the stock’s current market price, and the warrants are exercised when the exercise price is below the market price

American Depositary Receipts (ADRs)

Trading of foreign securities in the USA

Exchange Rate Risk/Currency Risk

Priced in U.S. dollars, the market price will depend in part on changes in foreign currency markets

Outstanding Shares

Issued shares - Treasury Shares

Reverse Stock Split Math

Multiply amount of shares to the stock split and divide the price per share with the stock split

Term Bond Issue

Every bond has the same interest rate and maturity (Corporate and U.S. government)

Zero-Coupon Bonds

• No interest payments are made

• No reinvestment risk/phantom interest

• Purchased at a discount and redeemed at par

Balloon Maturity

A serial bond issuance where the largest amount of the total of all bonds issued will mature on the latest date

Serial Bond

Issue with differing maturity dates (Municipal bonds)

Series Bonds

• An issue of bonds with the same maturity but different dates of issuance

• Used to finance long-term construction where all money is not needed at once

Sell a bond

At ask

Buy a bond

At bid

10 basis points

.10%

Basis Points

Bond qoutes include a measure of yield to maturity

20 basis points

0.002

Discount

Coupon Rate/Nominal < Current Yield < YTM < YTC

Premium

Coupon Rate/Nominal > Current Yield > YTM > YTC

Bond’s Nominal Yield is

The percentage of par value recevied by the bondholder annually

Equation for Current Yield

Annual coupon payment/current market price of bond

A bond is selling at a discount when its

YTM is higher than its coupon rate