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Chapter 9

FIN3403 Chapter Notes - Chapter 9: Dividend Yield, Retained Earnings

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Financial Management Chapter 9 Stocks and Their Valuation
Legal Rights and Privileges of Common Stock Holders
o Control of the Firm
Firm’s common stockholders have the right to elect its directors, who elect the
officers who manage the business
Major stockholders are typically the president and board (For small businesses)
Managers typically own stock (For large businesses)
Managers can be removed by stockholders if not effective
Corporations must hold elections of directors periodically usually once a year
Stockholders can appear in an annual meeting and vote in person or
transfer their right to votes to another person (Proxy)
Proxy Fight An attempt by a person or group to gain control of a firm
by getting its stockholders to grant that person or group the authority to
vote its shares to replace the current management
o An action whereby a person or group succeeds in a firm’s
management and taking control of the company.
o The preemptive Right
Preemptive right a provision in the corporate charter or bylaws that gives
common stockholders the right to purchase ona pro rata basis new issues of
common stock
Prevents management of a corporation from issuing a large number of
additional shares and purchasing those shares itself
Protect stockholders from a dilution of value
Types of Common Stock
o Classified stocks used to meet special needs
Enables the company’s founders to maintain control over the company without
having to own a majority of the common stock
Founders’ shares stock owned by the firms founders that enables them to
maintain control over the company without having to own a majority of stock
Stock Price Versus Intrinsic Value
o Stock prices is simply the current price and is easily observed for publicly traded
o Intrinsic value of the company’s stock, cannot be directly observed and must instead be
o Why Do Investors and Companies Care about Intrinsic Value?
Investors want to buy stocks that are undervalued, the price below the stock’s
intrinsic value
Managers need to know how alternative actions likely affect stock prices
Need to consider whether their stock is significantly undervalued or
overvalued before making certain decision
o Two basic models used to estimate intrinsic values
Discounted dividend model
Focuses on dividends
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