COMM 308 Chapter Notes - Chapter 7: Dividend Policy, Issued Shares, Stock Certificate
15 Oct 2016
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Equity security - ownership interest in underlying entity, usually a corporation. Pay dividends from after-tax earnings, so unlike interest payments, they don"t provide issuer with tax-deductible expense. Common share - certificate of ownership in a corporation. Preferred share - gives owner a claim to a fixed amount of equity that is established when shares are first issued. Valuation of equity securities k = rf + risk k = required return on equity security. For long-lived investments like common shares, the use of a short-term interest rate often introduces problems, since it is directly affected by the bank of canada"s monetary policy. To offset this, many analysts use long-term canada bond yields as the rf rate. Risk premium will be based on an estimate of the risk associated with the security. The higher the risk, the higher the risk premium, because investors will require a higher return as compensation.
