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pricing of financial assets (DDM (limitations of DDM (value drivers (DDM…
pricing of financial assets
what are shares
shareholder rights
pro rata of assets upon liquidation once all debt is paid
dividends if any
shareholder meetings
annual meeting
proxy content
when two or more groups are competing to collect more proxies to prevail in matters up to a shareholders' vote
proxy
a written authorisation for someone else to vote your shares
voting
straight voting
shareholders vote for each director separately, with each shareholder having as many votes as shares held
cumulative voting
each shareholder is allocated votes equal to number of open spots multiplied by their number of shares
different classes of shares: common sharees and preffered shares and founders shares: different aspects of voting dividnends and claim on net assets
represent a piece of ownership in a corporation
basics of stocks
preferred vs common shares
preferred stock is stock with preference over common shares in payment of dividends and in liquidation
cumulative vs non cumulative preferred stock
non cumulative= preferred stick where the missed dividends do not accumulate, only the current dividend is owned before common dividends need to be paid
cumulative= where all missed dividends must be paid before any common dividends can be paid
preferred stock equity vs debt
generally no voting rights
priority over common stick holder upon liquidation but behind bondholders and creditors in liquidation
dividends are paid after tax
mechanics of stock trade
Limit order= order at specific price
Round lot= 100 shares
Market order= order at market
Most exchange today are fully electronic, NYSE is one of the few that still has floor trading
specialists hold trading licenses and make markets in some securities
floor brokers represent customer orders on the floor
DDM
capital gain
amount by sleeing the selling price exceeds the purchase price
rate: % of initial price of the stick
total return
stock's dividend plus cap gains rate
dividend yield
expected annual dividend of a stock divided by its current price= % return an investor espects to earn
if expected dividend yield+expected cap gain return is greater than the expected return (hurdle rate) of investor, then the investor should buy that stick
limitations of DDM
value drivers
DDM includes an implicit forecast of the firm's profitablility which is discounted back at the firm's equity cost of capital
uncertain dividend forecast
DDM values a stock based on a forecast of future dividends, but usually future dividends carry a tremendous amount of uncertainty
need to question the assumptions; practitioners will typically run a sensitivity analysis