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Class notes FIN 300 (FIN300)
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Lecture notes of 10 pages for the course FIN 300 at Ru (week 8 notes)
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Week 8 - Stock ValueStock Basics
• Stock Market Reporting: Stock Quotes
- Common Stock: A share of ownership in the corporation, which confers rights to any common
dividends as well as rights to vote on election of directors, mergers, or other major events. Most
risky, but most return.
- Ticker Symbol: A unique abbreviation assigned to each publicly traded company.
• Common Stock
-Shareholder Voting
● Straight Voting
● Cumulative Voting (multiply shares you own by how many directors there are)
● Classes of Stock (voting shares, non-voting shares, founding family shares - 50% + 1 share)
-Shareholder Rights
● Annual Meeting (carved into charter of company - meeting used to change directors, remove
board members)
● Proxy - Proxy Contest (a shareholder signs off voting power to a specific person to vote on their
behalf)
• Preferred Stock (hybrid - half bond, half stock)
– Cumulative versus Non-Cumulative Preferred Stock
– Preferred Stock: Equity (assumption: companies and equity live forever) or Debt\
– Preferred stock also is assumed to live forever.
Key Terms and Definitions
• Straight voting: Voting for directors during which shareholders must vote for each director
separately, with each shareholder having as many votes as shares held.
• Cumulative voting: Voting for directors during which each shareholder is allocated votes equal to
the number of open spots multiplied by his or her number of shares.
• Annual meeting: Meeting held once per year at which shareholders vote on directors and other
proposals, as well as ask managers questions.
• Proxy: A written authorization for someone else to vote your shares.
• Proxy contest: A contest between two or more groups competing to collect proxies to prevail in
the matter up for shareholder vote (such as election of directors).
• Preferred stock: Stock with preference over common shares in payment of dividends and in
Liquidation.
• Cumulative preferred stock: Preferred stock for which all missed preferred dividends must be paid
before any common dividends may be paid.
• Non-cumulative preferred stock: Preferred stock for which missed preferred dividends do not
accumulate. Only the current dividend is owed before common dividends may be paid.
The Dividend-Discount Model
A One-Year Investor
– Two potential sources of cash flows from owning a stock:
Dividends, Selling Shares
, - Since the cash flows are not riskless, they must be discounted at the equity cost of capital
Dividend Yields, Capital Gains, and Total Returns
– Dividend Yield: The expected annual dividend of a stock divided by its current price; the percentage
return an investor expects to earn from the dividend paid by the stock.
– Capital Gain: The amount by which the selling price of an asset exceeds its initial purchase price.
● Capital Gains Rate: An expression of capital gain as a percentage of the initial price of the asset.
–Total Return: The sum of a stock’s dividend yield and its capital gain rate
Company A = 2 + 8 = 10% (this stock is riskier than stock B = more return)
Company B = 7 + 3 = 10%
Issue with this example? Both cannot equal 10% return as one stock is riskier that the other. Stock A will
have more return.
Example: Suppose you expect Loblaw Companies Ltd. to pay an annual dividend of $0.56 per share in the
coming year and to trade $45.50 per share at the end of the year.
• If investments with equivalent risk to Loblaw’s stock have an expected return of 6.80%, what is the most
you would pay today for Loblaw’s stock?
• What dividend yield and capital gain rate would you expect at this price?
• To solve for the beginning price we would pay now (P0) given our expectations about dividends
(Div1 = $0.56) and future price (P1 = $45.50) and the return we need to expect to earn to be willing
to invest (rE = 6.8%).
• We can then calculate the dividend yield and capital gain rate
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