CHAPTER FIVE

COMMON STOCK

© 2001 South-Western College Publishing

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Outline

Corporations, Shares, and Shareholder Rights Corporations Shares Shareholder Rights

The Mystique of Dividends Types of Dividends Special Distributions The Dividend Payment Procedure Why Dividends Do Not Matter

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Outline

Stock Splits Forward and Reverse Splits Why Stock Splits Do Not Matter Why Firms Split Their Stock Stock Splits vs. Stock Dividends

The Financial Page Listing The Basic Information Footnotes and Symbols

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Outline

Categories of Stock Blue Chip Stocks Income Stocks Cyclical Stocks Defensive Stocks Growth Stocks Speculative Stocks Penny Stocks Category Overlap A Note on Stock Symbols

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Corporations, Shares, and Shareholder Rights

People who own stock have an equity interest in the organization.

If a business has shares of stock, it is organized as a corporation rather than a proprietorship or a partnership.

The shares of some corporations are closelyheld, while others are publicly held.

The two types of stock are common stock and preferred stock.

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Corporations, Shares, and Shareholder Rights

the right to receive declared dividends ona pro rata basis

the right to vote- Some companies have more than one class of stock.

the right to maintain ownership percentage- The mechanics of the preemptive right are accomplished by a rights offering.

Shareholder Rights

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The Mystique of Dividends: Types of Dividends

cash dividends - paid in cashSome firms have an optional dividend reinvestment plan.

stock dividends - paid in additional shares of stock

property dividends - the pro rata distribution of a

physical asset

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The Mystique of Dividends: Special Distributions

spin-offs - a parent firm divests itself of a subsidiary, and all the shares in the subsidiary are distributed proportionally to the shareholders in the parent

split-offs - a parent firm divests itself of a subsidiary, and the shareholders must make a choice between keeping shares in the parent, or exchanging them for shares in the separated subsidiary

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The Mystique of Dividends

An increasingly common type ofrecapitalization is the issuance of shares called tracking stock.

These shares track the performance of a subsidiary, and in many respects, are just a new class of shares.

The Mystique of Dividends:The Dividend Payment Procedure

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The Chronology of Events

1. date of declaration

Ex-dividend date (2 business days prior to the date of record)

2. date of record

3. date of payment

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The Mystique of Dividends:The Dividend Payment Procedure

A dividend paid in accordance with apreviously announced corporate policy is a regular dividend.

Companies usually pay dividends quarterly.

A firm that wishes to make an extradistribution of cash to the shareholders doesso through a special dividend, also called an extra or extraordinary dividend.

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The Mystique of Dividends:Why Dividends Do Not Matter

Paying dividends reduces the amount in a firm’s checking account, and hence the shares are worth less.

On the ex-dividend date, share prices tend to fall by about the amount of the dividend.

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Stock Splits: Forward and Reverse Splits

A stock split is an accounting decision tochange the number of shares outstanding without selling any more to the public.

With a forward split, also called a regular wayor direct split, shareholders end up with a greater number of shares than before the split.

With a reverse split, the number of existingshares is reduced.

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Stock Splits: Why Stock Splits Do Not Matter

The value of a firm cannot be increased by splitting, or combining, its shares.

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Stock Splits

The primary motivation for a stock split isusually a desire to reduce the share price.

Large reverse splits often reduce the numberof shareholders.

The difference between a stock split and astock dividend is purely an accounting phenomenon. With a stock split, the par value of the stock changes by the split factor. With a stock dividend, the par value is not affected.

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The Financial Page Listing

Footnotes and Symbols

boldface type, underlined, , , , s, n, dd, g, x, ...

Basic Information

52 Weeks Yld Vol Net Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg25 20 AtlanEngy ATE 1.54 7.2 12 371 21 20 21 +8

383

41

87

41

81

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Categories of Stock

Income stocks are those that historicallyhave a higher-than-average payout ratio (the proportion of net income after taxes paid as a dividend).

A cyclical stock is one whose fortune is directly tied to the state of the overall national economy.

A blue chip stock usually has along history of uninterrupted dividends.

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Categories of Stock

A defensive stock is largely immune tochanges in the economy.

Growth stocks reinvest most of their earnings rather than paying them out as dividends and may be good candidates for above-average returns.

A speculative stock has a high probability of a loss and a small probability of a large profit.

Penny stocks refer to unusually risky, especially inexpensive shares.

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Categories of Stock

Category overlap: The stock categories are not mutually exclusive.

A note on stock (ticker) symbols: - are usually between one and four letters- the letter after a decimal indicates the class of stock- under the NASDAQ system, the last letter of a five-letter symbol indicates what type the security is

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Review

Corporations, Shares, and Shareholder Rights Corporations Shares Shareholder Rights

The Mystique of Dividends Types of Dividends Special Distributions The Dividend Payment Procedure Why Dividends Do Not Matter

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Review

Stock Splits Forward and Reverse Splits Why Stock Splits Do Not Matter Why Firms Split Their Stock Stock Splits vs. Stock Dividends

The Financial Page Listing The Basic Information Footnotes and Symbols

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Categories of Stock Blue Chip Stocks Income Stocks Cyclical Stocks Defensive Stocks Growth Stocks Speculative Stocks Penny Stocks Category Overlap A Note on Stock Symbols

Review