chapter 9 - key concepts (stocks and their valuation) Flashcards
legal rights and facts about common stock
- Remember, a firm’s common stockholders have the right to elect its directors, who in turn elect the - CEO/officers to run the firm.
- Corporations have to periodically hold elections for the board of directors
- Ownership implies control
- Stockholders elect directors
- Directors elect management
who owns stock, who elects directors, who
elects management, goal of firm
who owns stock: stockholders
who elects directors: stockholders
who elects management: directors
goal of firm: maximize the stock price
what is a proxy? a proxy fight?
proxy: a document giving one person the authority to act for another, typically the power to vote shares of common stock
proxy fight: an attempt by a person or group to gain control of a firm or win a corporate vote
what do activists investors typically want?
They buy stocks they view as undervalued and pressure management to do things they believe will raise the value
raise stock price
are activist campaigns increasing or
decreasing?
idk tbh maybe declining
what is the most important difference between
class a and class b sold?
Some firms have multiple than one type of common stock. May have classified stock to meet special needs. A common example is class A and class B.
Class A – typically sold to the public
Class B stock is retained by company’s insiders.
Typically used by the company’s founders to maintain control over the company without having to own a majority of the shares. These are called founders’ shares.
CLASS B shares are worth more than class a shares
how management counters takeovers/loss of control in company
Try to own 50% of the total voting power.
Only allow 1/3 of directors to be elected each year – so it takes multiple years to win control of the board
Require 75% of stockholders instead of 50% to approve a merger
Vote in a poison pill provision – allows stockholders of a firm taken over by another firm to buy shares at a reduced price. (dilutes shareholders and reduces the value of the firm).
If a stock has a large number of class b shares, does the company have poor or good corporate governance?
CLASS B shares are founder shares so they are worth more than class A shares
it is good corporate governance
what are dual class shares?
Companies with multiple types of shares are called dual-class share structure and are criticized for corporate governance. For this reason, companies with class-class shares can’t be added to the S&P 500.
what does the concept of a stock’s intrinsic
value mean?
intrinsic value: the theoretical correct value of the firm, fully rational what should the price be? (long-run value)
long-run concept
what is the relationship between intrinsic
value and current stock price?
In equilibrium, a stock’s price equals its “true” price or intrinsic value
in a rational market, will a stock’s price equal
its intrinsic value?
To the extent that investor perceptions are incorrect/irrational, a stock’s price in the short run may deviate from its intrinsic value
in a rational market, the stock price = intrinsic value
if a stock is undervalued, what is the
relationship between its stock price and
intrinsic value?
Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run
not sure if this is right :(
what is preferred stock?
Hybrid security
Like bonds, preferred stockholders receive a fixed dividend that must be paid before dividends are paid to common shareholders
why do preferred stock have features similar to stocks and bonds
like bonds, preferred stockholders receive a fixed dividend that must be paid before dividends are paid to common shareholders
