Corporate Governance and Equity Concepts

Study Notes

Corporate Governance

Corporate governance refers to the control issues involved in running a company.
It encompasses a wide range of topics related to how a company is managed and controlled.

Equity

Equity represents ownership in a firm, often referred to as stock.
A broader term encompassing equity in general is variable-return securities.
Stockholders hold a residual claim, meaning they receive what's left after all other claims have been paid.
Common stock comprises over 90% of variable-return securities.

Preferred Stock

Preferred stock combines features of both equity and debt, making it a hybrid security.
It is typically non-voting and non-participating, with the exception of venture capitalists.
Preferred stock pays a fixed annual dividend, unless the company decides to skip it, no explanation is required.
Skipping dividend payments risks angering shareholders and potentially causing them to sell their stock.
The feature of preferred stock allowing dividends to be held in arrears ensures that missed dividends are paid before common stock dividends.
Preferred stock is cumulative, meaning unpaid dividends must be paid before any common stock dividends can be distributed.
Companies issue preferred stock to increase company value by reducing the denominator of discounted cash flows, thereby raising the valuation.

Fixed Annual Dividend

The fixed annual dividend is calculated by multiplying the par value by the dividend rate, also known as the quoted percentage.

Calculating the Value of Preferred Stock

The value of preferred stock (Vps) is determined by dividing the annual fixed dividend (D) by the discount rate or required rate of return (Kps).
Vps = D / Kps.
For example, if a share of Xerox preferred stock pays an annual dividend of $4.125 and the required rate of return is 9.50%, the value of the stock would be $43.42.

Single Holding Period Model

This model assumes an investor purchases a stock today, holds it for one year, and then sells it in the market.

Description

This quiz explores key concepts in corporate governance, equity, and preferred stock. Understand the dynamics of ownership, control issues, and the characteristics of different types of securities. Test your knowledge on how these components interact within a company.