chapter 8 - common + preferred shares Flashcards
what are common shares
ownership of the company
value of each share changes with changes in total value of the company’s equity and it’s total shares outstanding
- potential for significant gains + losses
define preferred shares
-provides a cash payment/dividend
-these cash payments/dividends are fixed; hence preferred shares are often viewed as fixed income and not equity
- most attractive to an investor wanting a steady income and more security that their investment will not be volatile
which is more volatile? preferred shares or common?
common is more volatile
define stock splits
a company splits its shares thereby doubling its shares outstanding
- a stock split doesn’t increase a company’s market capitalization
what’s market capitalization
total equity value = total share * share price
why would a company split its share if it has no effect on its overall equity value/market capitalization
to encourage more people to buy their stocks at a lower price - increase liquidity
for common shares do company’s have to pay dividends?
no - they can choose to or not
why do some companies pay dividends and other retains all of their net income
retain net income to invest into other projects for the company
or appease their shareholders by paying dividends
timing of dividends
dividend declaration date
ex-dividend date - 1 business day before the record date
record date - date the shareholders are recorded to receive the dividends
payment date - date the dividends are paid
what happens to the share price on the ex-dividend date
share price declines based on the dividend amount
define stock diviends
you receive an additional company shares
define dividend reinvestment plans (DRIPs)
the investor decides to receive a stock rather than a cash dividend
voting privileges in common shares
you might get them, restricting voting shares, restricts the rights/votes of shareholders
do dividends have to be paid for preferred shares
yes - legal obligation
what’s the tax treatment of dividends?
dividends aren’t tax deductive but but the investors receive a dividend tax credit - pay less tax rate
how to value a preferred dividend
value = PV of future cash flows
there’s no maturity date like a bond - dividends are in perpetuity
what’s the perpetuity formula for pricing of preferred dividends
pv = preferred dividend receive/rate of return return required on the preferred (for investor) or the cost of funding the preferred (for the issuer)
what’s the market or dividend yield
rate of return
why is yield important than the nominal value of the dividend?
dividend yield allows us to compare dividends on an apples-to-apples basis
what’s the use of a stock index
gauge overall market movements and conduct a performance comparison
what’s a stock that’s value weighted?
each stock in the index is weighted according to its equity value/market capitalization
how to calculate average of a stock
- average are calculated by adding each stock price and dividing by the number of stocks
why do we use stock indices with value weighting and not the average
averages don’t accurately gauge market movements
why do people still use average for the stock index - DJIA
old habits are difficult to break - used over 100 yrs
Dow jones previously owned WSJ - which would emphasize DJIA movements
the 30 stock in DJIA are bellweather stocks
what are the major stock indices? - which one isn’t value-weighted?
US - S_500
Canada - S&P/TSX composite
Japan - Nikkei Stock Average
UK - FTSE 100
Germany - DAX
France - CAC 40
- all are value-weighted except nikkei
