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Mr. Al Mannaei
Abstract
Equity
Capital
Debt
Abstract
Bonds (Debt) vs. Stock (equity)?!
Pay higher ?
Bear higher risk ?
Considered fixed income ?
Liquidation!
who will receive his money first bondholder or
shareholder ?!
Introduction
What is equity ?
A stock (common/ preferred)
represent an ownership.
Public equity vs. Private equity ?
Public : listed companies in the stock market.
Private : Unlisted companies.
How can investors buy public or private equity ?!
Common Stock
What happen when you buy a common stock
(equity) ?
Own part from the corporation.
Right to vote (one vote per share).
A residual claim on income and assets in liquidation.
Limited Liability.
liability for the debts of the corporation is limited to
their investment in the common stock.
Common Stock
Example : VIVA need to collect 100 million as a
capital, the company sell 100 million shares,
Sara bought 10 million shares. What does this
mean ?!
-Sara own 10% from the company.
-Sara voting weight 10%.
-Sara is liable for 10% from company's debt.
Common Stock
Common shareholders may vote with their
shares to elect the members of the board of
directors.
Board of
Directors
Common
Shareholders
Executive
Management
Return
How does stock holder make profit ?!
Return
Reem bought 10,000 shares from Caribou. for
6$. A year later the company pay 0.5$
dividends per share, at that time the price of
the stock is 8$. Calculate total return ?!
Preferred Stock
A class of ownership in a corporation that has a
higher claim on the assets and earnings than
common stock.
-Owner of preferred Stock :
- Receive FIX dividends periodically.
- Dont have voting right.
- In case of liquidation, owner will receive their
money before shareholders of common stock .
Preferred Stock
Cumulative provision - arrearage plus
current dividends must be paid before any
payment made to common shareholders.
Non-participating preferred receive a fixed
level of dividends, thus not participating in
possible high earnings level of the corporation.
Adjustable-rate preferred, indexed to market
rates, varying with the index.
Preferred Stock
Case1: BISB make $20 million profit, the bank
decided to distribute 10 files per share, BISB
is paying for preferred stock 5 files annually.
Answer : Preferred stock holder will receive 5 files per share.
Summary
Common
Stock
Risk
Return
Liquidation
Payment
guaranteed/FI
X
Voting
Ownership
Preferred
Stock
Bond
Summary
Financial
security
Preferred
Stock
Bond
Highest Risk
Return
1Highest Return
Liquidation
Payment
guaranteed/FIX
Voting
Yes
NO
NO
Ownership
Yes
Yes
NO
Risk
Common
Stock
Investors
Investors
MCQs
A stock purchased at $40 at the beginning of
the year paid $10 in dividends and was sold
for a net price of $42 at the end of the year.
The total annual return is :
a.25 %
b.100 %
c. 30 %
d. 28.6 %
MCQs
A shareholder in a troubled corporation is
not likely to lose his/her
a. money invested in the stock.
b. house.
c. dividends declared.
d. par value.
Common Stock
Equity Valuation
Preferred Stock
P0
r
A fixed-rate preferred stock approximates a
perpetuity (continues, infinity) and the value
can be found by dividing the annual dividends
by the discount rate.
D1
P0
(r g )
(r-g) is the discounting rate, r : required rate, g: growth rate.
D0 (1 g )
D1
P0
(r g )
(r g )
D0 (1 g )
D1
P0
(r g )
(r g )
Exercise
ABC Company pays a 25 cent dividend every
month and the required rate of return is 6% per
year, calculate the value of the stock ?
Wait ! Is it common stock or preferred stock ?!
Thank You
Kingsoft Office
published by www.Kingsoftstore.com
@Kingsoft_Office
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