The Valuation of Common stock by rt3463df

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```									The Valuation of Common Stock

Definitions
Exemplifications
Sample practice problems
Common stock

   Ownership claim

   Residual claim on firm’s cash flow
Common stock = ownership claim

   Vote to approve auditors
   Vote to approve financial statements
   Vote to elect board members
   Vote changes in articles of incorporation
   Vote by-laws
   Vote on mergers and acquisitions
Voting

   Cumulative voting

   Straight voting
Voting: Exemplification

   There are 5 seats on the board of directors and 8
candidates:
   John
   Jane
   Jasmine
   Jennifer
   James
   Janice
   Jason
   Jasper
Cumulative voting: divide the votes among
the candidates you wish to elect

   To elect John you need at least 1/(5+1) = 16.67% of

   To elect John, Jasmine, and Jane you need at least
3/(5+1) = 50% of votes +1
Straight voting: cast the votes for each
candidate separately

   To elect any of the eight candidates you need at least
Exemplification: Bombardier

Number of voting rights           Issued

Class A shares 1                      10 votes per share           347,426,582

Class B shares                         1 vote per share           1,018,169,323

Preferred shares, Series 2                   None                  12,000,000

1) As at April 18, 2000, the Bombardier family controlled indirectly through
holding companies 80.30% of the outstanding Class A shares of the
Corporation or 62.20% of all the voting rights attached to all the shares of the
Corporation.
Exemplification: Bombardier

Number of voting rights           Issued

Class A shares 1                      10 votes per share           347,426,582

Class B shares                         1 vote per share           1,018,169,323

Preferred shares, Series 2                   None                  12,000,000

1) As at April 18, 2000, the Bombardier family controlled indirectly through
holding companies 80.30% of the outstanding Class A shares of the
Corporation or 62.20% of all the voting rights attached to all the shares of the
Corporation.
Exemplification: Bombardier

Number of voting rights           Issued

Class A shares 1                      10 votes per share           347,426,582

Class B shares                         1 vote per share           1,018,169,323

Preferred shares, Series 2                   None                  12,000,000

1) As at April 18, 2000, the Bombardier family controlled indirectly through
holding companies 80.30% of the outstanding Class A shares of the
Corporation or 62.20% of all the voting rights attached to all the shares of the
Corporation.
Exemplification: Bombardier

Number of voting rights           Issued

Class A shares 1                      10 votes per share          347,426,582

Class B shares                         1 vote per share           1,018,169,323

Preferred shares, Series 2                   None                  12,000,000

1) In the early 2000s, the Bombardier family controlled indirectly through
holding companies 80.30% of the outstanding Class A shares of the
Corporation or 62.20% of all the voting rights attached to all the shares of the
Corporation.
What happens when your voting power
amounts to less than 0.001%?

   you are likely to lose interest in voting, hence

   you will probably vote by proxy
What happens when there are several rival
stakeholders with comparable voting
power?

A PROXY FIGHT !!!

   MONTREAL, Dec. 22 /CNW/ - Messrs. Gordon Usher-Jones and Mark Diamond of
Montreal (the ``Dissidents''), shareholders who hold in excess of 1,000,000 shares of
Armistice Resources Ltd. (``Armistice''), announce that they are soliciting ``Dissident
Proxies'' for the election of a new board of directors at Armistice's annual general
meeting scheduled for January 13. As detailed in the proxy materials, the Dissidents
are unsatisfied and frustrated with the performance of Armistice's share price, the
poor mining decisions taken by management over the past several years as well as
the inappropriateness of loans made to certain directors and associated companies.
The Dissidents have proposed replacing the current board of directors with its own
slate which will include Gordon Usher-Jones, Mark Diamond, Richard Hamm, Guy
Hinse and Charles R. Spector. The new board of directors will draw upon the
expertise of its members in order to fully utilize Armistice's resources in order to
begin deep drilling to fully delimit the extent of Armistice's overall mineral
potential. The Dissidents are calling upon all shareholders of Armistice who are
dissatisfied with the current performance of Armistice to please obtain a copy of the
Dissident Proxy Circular and support the Dissidents' board nominees by completing
and returning the blue proxy.
Common stock = Claim on residual cash
flow

Residual cash flow = ?
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
Net income = Residual cash flow

Revenue
(Cost of goods and services)
(Depreciation)
EBIT
(Interest)
EBT
(Tax)
Net income
The valuation of common stock
Common stock = Equity
Attention ! They are different!

Book value of equity

Market value of equity
Book value of equity

Equity = Assets - Liabilities
Market value of equity

Market value = PV of payments to shareholders
Current stock value= PV of future dividends

P0 = D1/(1+r) + D2/(1+r)2 +.......+Dt/(1+r)t +....
But dividends are an infinite stream of payments !

We need to find a closed end formula!
Assume constant dividend

P0=D/r
Assume a growing dividend…at a constant rate g

P0 = D0(1+g)/(1+r) + D0(1+g)2/(1+r)2 +…...

P0 = D1/(r-g)
The meaning of the stock discount rate (r)

A fair rate of return required by the shareholder

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