Productivity at your daily life

Corporate decisions should be analyzed in terms of how alternative courses of action are likely to affect a firm’s value. However, it is necessary to know how stock prices are established before attempting to measure how a given decision will affect a specific firm’s value. This chapter showed how stock values are determined, and also how investors go about estimating the rates of return they expect to earn. The key concepts covered are listed below.

A proxy is a document that gives one person the power to act for another, typically the power to vote    shares of common stock. A proxy fight occurs when an outside group solicits stockholders’ proxies in an effort to vote a new management team into office.
A takeover occurs when a person or group succeeds in ousting a firm’s management and takes control of the company.

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  oStockckholders often have the right to purchase any additional shares sold by thefirm. This right, called the preemptive right, protects the control of the presentstockholders and prevents dilution of their value.
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  Although most firms have only one type of common stock, in some instances classifiedstock is used to meet the special needs of the company. One type isfounders’ shares. This is stock owned by the firm’s founders that carries sole voting nights but restricted dividends for a specified number of years.
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  A closely held corporation is one that is owned by a few individuals who are typically associated with the firm’s management.
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  A publicly owned corporation is one that is owned by a relatively large numberof individuals who are not actively involved in its management.
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  Whenever stock in a closely held corporation is offered to the public for the firsttime, the company is said to be going public. The market for stock that is just beingoffered to the public is called the initial public offering (IPO) market.
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  The value of a share of stock is calculated as the present value of the stream ofdividends the stock is expected to provide in the future.
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  The equation used to find the value of a constant growth stock is:
  The expected total rate of return from a stock consists of an expected dividendyield plus an expected capital gains yield. For a constant growtfirm, both the expecteddividend yield and the expected capital gains yield are constant.
  The equation for ˆrs, the expected rate of return on a constant growth stock,can be expressed as follows:
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  A zero growth stock is one whose future dividends are not expected to grow atall, while a supernormal growth stock is one whose earnings and dividends areexpected to grow much faster than the economy as a whole over some specifiedtime period and then to grow at the “normal” rate.
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  To find the present value of a supernormal growth stock, (1) find the dividendsxpected during the supernormal growth period, (2) find the price of the stock atthe end of the supernormal growth period, (3) discount the dividends and the projectedprice back to the present, and (4) sum these PVs to find the current value ofthe stock, ˆP0.

Taken From : Five-Minute MBA – Corporate Finance

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