Stock Valuation

Question 1

If you buy a stock you can receive cash in 2 ways

Answer 1

– The company pays dividends
– You sell your shares, either to another investor in the market or back to the company

Question 2

What is the expected value of bonds

Answer 2

The price of the stock

Question 3

Shareholders rights - stocks

Answer 3

• Dividends are paid at the discretion of the directors
• Right to elect the directors
• Right to be elected as a director and right to vote (generally 1 share = 1 vote), right to write proxy, etc.

Question 4

Other rights - stocks

Answer 4

• Share proportionally in declared dividends.
• Share proportionally in remaining assets during liquidation.
• Preemptive right (right to purchase additional shares): First shot at new stock issue to maintain
Other Rights
proportional ownership if desired.

Question 5

Classes of stock

Answer 5

• Unequal voting rights,
• Control of firm, and
• Coattail provision (provision allows the holders of the non-voting or restricted voting shares the
right to convert their shares into voting shares).

Question 6

Cumulative voting

Answer 6

– Designed for minority shareholders
– Directors are elected all at once
– A shareholder may cast all votes for one member of the board of directors

Question 7

Straight voting

Answer 7

– Directors are elected one at a time
– Majority shareholders can control the board

Question 8

Proxy voting

Answer 8

Shareholder grants someone else authority to vote on their behalf

Question 9

Dividend characteristics

Answer 9

• Dividends are not a liability of the firm until a dividend has been declared by the Board.
• Firm cannot go bankrupt for not declaring dividends.

Question 10

Dividends and taxes

Answer 10

• Dividend payments are not considered a business expense and are not tax deductible.
• Dividends received by individual shareholders are partially sheltered by the dividend tax credit.
• Dividends received by corporate shareholders are not taxed.
• This prevents double taxation of dividends.

Question 11

Preferred stock features

Answer 11

• Preferences given
• Form of equity
• Generally, have no voting privileges
• Voting can be granted in some circumstances
• Cash dividend is described in dollars per share
• Dividends are not a liability unless dividends declared
• Most preferred dividends are cumulative: Any missed preferred dividends have to be paid before common dividends can be paid
• Undeclared dividends are carried forward

Question 12

Are dividends a livability; why or why not

Answer 12

No unless the dividend is declared

Question 13

What happens to undeclared dividends

Answer 13

They are carries foreards

Question 14

Constant dividend

Answer 14

The firm will pay a constant dividend forever.
This is like preferred stock.
The price is computed using the perpetuity formula (P0 = D1 ÷ r)

Question 15

Constant dividend growth

Answer 15

The firm will increase the dividend by a constant percent every period.

Question 16

Supernormal growth

Answer 16

Dividend growth is not consistent initially but settles down to constant growth
eventually.

Question 17

What happens is dividend are expected at regular intervals forever

Answer 17

Then it is like a preferred stock and is valued as a perpetuity

Question 18

Stock market reporting

Answer 18

• Financial Newspapers
• As an outsider to the market, we need to generally assume that the listed market value of a share of stock is right.
• The benchmark for comparison in most valuations remains the market price.
• If your numbers do not match with the market, take a second look at your numbers.
• Stock market quotations are published in the newspapers and are also available on-line (usually with 15-minute delays during trading hours)
• In Canada, large cap stocks trade on the TSX
• Quotes and corporate information on stocks that trade on the TSX can be found at the exchange’s website