Companies issue common and preferred stock to raise ownership capital. common stock certificate are legal documents that evidence ownership of the holders in a company. common stock is permanent source of financing. common stock holders, being real owners of the company ,have residual claim on income and assets.therefore ,common stock holders are the ultimate risk and return bearer of the company.although the common stockholder are the actual owner of the company and have residual claim on incomes and assets,their liabilities in case of liquidation is limited the amount of their investment.
The concept of value includes book value,liquidation value, intrinsic value of equity includes common stock ,share premium and retained earnings. liquidation value is the amount that a company could realize if it sell its assets after having terminated its business and paying to all claimant. intrinsic value is the present value of the cash flow stream providing to the investor, discounted at an appropriate required rate of return.on the other hand ,market value of a security is the actual price at which the stock is being traded in the market.
In the chapter ,the concept of intrinsic value has been used ,the intrinsic value of a share is present value of all future dividends excepted over an infinite time horizon.if dividend are expected to grow at a constant rate ,the intrinsic value of share of common stock can be computed by dividing expected dividend per share by (Ks-g).in case of zero growth common stock ,value of stock is computed by dividing dividend per share ,D1,by investors' required rate of return (Ks).if actual market price of the stock is less than intrinsic value,the stock is called underpriced or undervalued.an underpriced stock should be purchased.if the stock is selling at above the intrinsic value,the stock is called overpriced or overvalued. an overpriced stock should not be purchased. the yield on common stock comes from two sources.the first source is the expected dividend yield and the second source is the expected capital gain yield or price appreciation yield.
preferred stock is a hybrid security with some combined features of both debt and common stock and promises to pay fixed dividends and climes on assets.value of preferred stock is computed by dividend preferred stock dividend by investers' required rate of return.
The concept of value includes book value,liquidation value, intrinsic value of equity includes common stock ,share premium and retained earnings. liquidation value is the amount that a company could realize if it sell its assets after having terminated its business and paying to all claimant. intrinsic value is the present value of the cash flow stream providing to the investor, discounted at an appropriate required rate of return.on the other hand ,market value of a security is the actual price at which the stock is being traded in the market.
In the chapter ,the concept of intrinsic value has been used ,the intrinsic value of a share is present value of all future dividends excepted over an infinite time horizon.if dividend are expected to grow at a constant rate ,the intrinsic value of share of common stock can be computed by dividing expected dividend per share by (Ks-g).in case of zero growth common stock ,value of stock is computed by dividing dividend per share ,D1,by investors' required rate of return (Ks).if actual market price of the stock is less than intrinsic value,the stock is called underpriced or undervalued.an underpriced stock should be purchased.if the stock is selling at above the intrinsic value,the stock is called overpriced or overvalued. an overpriced stock should not be purchased. the yield on common stock comes from two sources.the first source is the expected dividend yield and the second source is the expected capital gain yield or price appreciation yield.
preferred stock is a hybrid security with some combined features of both debt and common stock and promises to pay fixed dividends and climes on assets.value of preferred stock is computed by dividend preferred stock dividend by investers' required rate of return.
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