Stock Valuation Chapter 1 PDF

**[Stock Valuation]** 1. Differences between Debt and Equity Debt -- bonds Equity -- stock ----------------------------- --------------------------------------------------------------------...

**[Stock Valuation]** 1. Differences between Debt and Equity Debt -- bonds Equity -- stock ----------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- Voice in management Are not the owners and have no voice in management Have a voice in management Voting rights Debtholders have no voting rights and rely on contractual obligations Have voting rights on special issues Maturity Has a maturity date. A start and an end date Has no maturity as equity is a permanent form of financing. Equity is perpetual Claims on assets and income Have a legal right to be repaid Investors have only an expectation to be repaid Priority for payments Prioritised to be paid first. Senior to equity Paid after creditors are paid. Subordinate to debt Source of funding Includes all borrowing incurred by a firm and is repaid according to a fixed schedule Funds provided by firm's owners, repayments subject to firms performance Who provides funding Obtained from Creditors Obtained from Investors Tax treatment Interest deduction on tax No deduction on tax Risk carried Holds firm to their contractual agreements They expect greater returns to compensate for the additional risk they bear 2. Common stock *Types of common stock ownership* 1 Privately owned stock The common stock of a firm is owned by private investors, this stock is not publicly traded --- ----------------------- --------------------------------------------------------------------------------------------------------------------------------------------------------- 2 Publicly owned stock The common stock of a firm is owned by public investors, this stock is publicly traded e.g. on the stock exchanges 3 Widely owned stock the common stock of a firm is owned by many unrelated individuals and institutional investors 4 Closely owned stock The common stock of a firm is owned by an individual or a small group of investors (such as family members), they are usually privately owned companies *Types of shares for common stock* Issued shares = outstanding shares + treasury stock 1 Authorised shares Are the shares of common stock that a firms corporate charter allows to issue. Are the stipulated number you want to sell to the public using a memorandum of understanding --- -------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2 Outstanding shares Are issued shares of common stock held by investors, this includes private and public investors. Number of shares actually owned by the public/private investors 3 Issued shares Are shares of common stock that have been put into circulation 4 Treasury stock Are issued shares of common stock held by the firm, often these shares have been repurchased the firm. The company buys stock back from the public and don't go back to authorised shares *Common stock: Voting rights* - Each share of common stock is entitles is holder to one vote in the election of directors - Votes are generally assignable and may be cast at the annual stockholders meeting - A proxy statement allows the transfer of votes of a stockholder to another party. This can be done with a signing of a proxy statement transferring their vote - Existing management generally receives the stockholders proxies because it is able to solicit them at company expense - A proxy battle is an attempt by nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes - Supervoting shares is stock that carries with it multiple votes per share rather than the single vote per share typically given on regular shares of common stock - Nonvoting common stock is a common stock that carries no voting rights. It is issued when the firm wishes to raise capital through the sale of common stock but doesn't want to give up its voting control *Common stock: Dividends* - The payment of dividends to the firms shareholders is at the discretion of the company's board of directors - Dividends may be paid in cash, stock (increase ownership) or merchandise (stock or property in various ways) - Common stockholders are not promised a dividend but they come to expect certain payments on the basis of the historical dividend patten of the firm - Before dividends are paid to common stockholders any past due dividends owed to preferred stockholders must be paid - Initial financing for most firms typically comes from a firm's original founders in the form of a common stock investment - Early-stage debt or equity investors are unlikely to make an investment in a firm unless the founders also have a personal stake in the business - Initial non-founder financing usually comes from private equity investors - After establishing itself, a firm will often 'go public' by issuing shares of stock to a much broader group in order to acquire more funding to expand e.g. JSE listing 3. Preferred stock *Preferred stock characteristics* - Preferred stock gives its holders certain privileges that make them senior to common stockholders - preferred stockholders are promised a fixed periodic dividend, which is state either as a percentage or as a dollar amount - Par-value preferred stock is preferred stock with a stated face value that is used with the specified dividend percentage to determine the annual dollar dividend - No-par preferred stock is preferred stock with no stated face value but with a stated annual dollar dividend *Basic rights of preferred stockholders* - Preferred stock is often considered quasi-debt (mix of debt and common stock), much like interest on debt it specifies a fixed periodic payment (dividend). Receive money before common stockholders - Preferred stock is unlike debt in that it has no maturity date - Because they have a fixed claim on the firm's income that takes precedence over the claim of common stockholders, preferred stockholders are exposed to less risk - Preferred stockholders are not normally given a voting right, although preferred stockholders are sometimes allowed to elect one member of the board of directors - Preferred shares have a higher priority claim on the firm's current income than do common stockholders - Preferred stockholders are given preference over common stockholders in the liquidation of assets in a legally bankrupt firm, although they must "stand in line" behind creditors +-----------------------+-----------------------+-----------------------+ | 1 | Cumulative preferred | - Is preferred | | | stock | stock for which | | | | all passed | | | | (unpaid) | | | | dividends in | | | | arrears, along | | | | with current | | | | dividend, must be | | | | paid before | | | | dividends can be | | | | paid to common | | | | stockholders. | | | | | | | | - Accumulate what | | | | is due of unpaid | | | | and current due | | | | in the period | | | | before common | | | | stock is paid | +=======================+=======================+=======================+ | 2 | Noncumulative | - Is preferred | | | preferred stock | stock for which | | | | passed (unpaid) | | | | dividends do not | | | | accumulate | +-----------------------+-----------------------+-----------------------+ | 3 | Restrictive covenants | - Includes | | | | provisions about | | | | passing | | | | dividends, the | | | | sale of senior | | | | securities, | | | | mergers, sales of | | | | assets, minimum | | | | liquidity | | | | requirements and | | | | repurchases of | | | | common stock. | | | | | | | | - Measures set | | | | limitations for | | | | preferred | | | | stockholder on | | | | the below in | | | | terms of | | | | influence | +-----------------------+-----------------------+-----------------------+ | 4 | Callable feature | - Is a feature of | | | | callable | | | | preferred stock | | | | that allows the | | | | issuer (owner of | | | | stock) to retire | | | | the shares within | | | | a certain period | | | | time and at a | | | | specified price | | | | | | | | - Whoever holds | | | | stock cannot sell | | | | shares until a | | | | specified time | | | | e.g. 2 years. But | | | | give the | | | | stockholder an | | | | opportunity to | | | | sell shares | | | | withing a period | | | | e.g. 2 years even | | | | if there is a | | | | clause | +-----------------------+-----------------------+-----------------------+ | 5 | Conversion feature | - Is a feature of | | | | convertible | | | | preferred stock | | | | that allows | | | | holders to change | | | | each share into | | | | stated number of | | | | shares of common | | | | stock | | | | | | | | - Converting from | | | | preferred to | | | | common stock is | | | | determined by | | | | price | +-----------------------+-----------------------+-----------------------+ | 6 | Certificate of | - Agreement similar | | | designation | to a bond | | | | indenture that | | | | specifies a | | | | variety of | | | | features of a | | | | preferred stock | +-----------------------+-----------------------+-----------------------+ 4. Going public - When a firm wishes to sell its stock in the primary market, it has three alternatives. Here we focus on the initial public offering (IPO), which is the first public sale of a firms stock i. A public offering, in which it offers its shares for sale to the general public ii. A rights offering, in which new shares are sold to existing shareholders iii. A private placement, in which the firm sells new securities directly to an investor or group of investors - IPOs are typically made by small, fast-growing companies that either: a. Require additional capital to continue expanding b. Have met a milestone for going public that was established in a contract to obtain VC funding - The firm must obtain approval of current shareholders and hire an investment bank to underwrite the offering - The investment banker is responsible for promoting the stock and facilitating the sale of the company's IPO - The company must file a registration statement with the SEC (security stock exchange) - The prospectus (document) is a portion of a security registration statement that describes the key aspects of the issue, the issuer and its management and financial position - The prospectus is a document that lists everything about the firm and it is checked by SEC and investment baker that it complies with the market - A red herring (document) is a preliminary prospectus made available to prospective investors during the waiting period between the registration statements filing with the SEC and its approval - Investment bankers and company officials promote the company through a road show, a series of presentations to potential investors around the country and sometimes overseas - This helps investment bankers gauge the demand for the offering which helps them to set the initial offer price - After the underwriter (investment banker) sets the terms, the SEC must approve the offering - The role of the investment banker when going public is the following: c. An investment banker is a financial intermediary that specializes in selling new security issues and advising firms with regard to major financial transactions. d. The investment banker knows about the markets and commodities e. Underwriting is the role of the investment banker in bearing the risk of reselling, at a profit, the securities purchased from an issuing corporation at an agreed-on price f. The company starts by going public, meaning all shares might not be bought. Example a company has 500 000 shares and they are not all bought. The public buys 300 000 shares, the underwriter takes them and gives security on the remaining 200 000 shares, this gives security to the IPO company g. This process involves purchasing the security issue (commodity/shares) from the issuing corporation at an agreed-on price and bearing the risk of reselling it to the public at a profit h. The underwriter and the company will agree on a price of what they will buy the shares for in order to make a profit i. The investment banker also provides the issuer with advice about pricing and other important aspects of the issue j. An underwriting syndicate is a group of other bankers formed by an investment banker to share the financial risk associated with underwriting new securities k. The syndicate shares the financial risk associated with buying the entire issue from the issuer and reselling the new securities to the public. They do diversity of risk l. The selling group is a large number of brokerage firms that join the originating investment banker(s). Each accepts responsibility for selling a certain portion of a new security issue on a commission basis +-----------------------------------------------------------------------+ | Example: Compensation for underwriting and selling services typically | | comes in the form of a discount on the sale price of the securities. | | | | An investment banker may pay the issuing firm R200 per share for | | stock that will be sold for R250 per share (market price) | | | | The investment banker may then sell the shares to members of the | | selling group for R230 per share. In this case, the original | | investment banker earns R30 per share (R230 sale price -- R200 | | purchase price) | | | | The members of the selling group earn R20 for each share they sell | | (R250 sale price -- R230 purchase price) | +-----------------------------------------------------------------------+ 5. Common stock valuation - Common stockholders expect to be rewarded through periodic cash dividends and an increasing share value. Return on stock price, example Woolworths share price is R50 -- R100 per capital gain - Some of these investors decide which stocks to buy and sell based on a plan to maintain a broadly diversified portfolio. Assets in different sectors to balance portfolios to compensate any losses lowers the risks - Other investors have a more speculative motive for trading: - They try to spot companies whose shares are undervalued -- meaning that the true value of the shares is greater than the current market price - Example of the above book value (R35) \> stock market price (R20) it means the company doesn\'t evaluate the price market is not priced correctly and there is potential growth - Undervalued the book value (R25) and market price is R20 - These investors buy shares that they believe to be undervalued and sell shares they think are overvalued, i.e. the market price is greater than the true value - Example the book value is (R20) \< than the market value (R25) - This tells investors the stock will drop as true value is low and that the stock has reached a ceiling and might go down and lose money. The investor will then sell - Economically rational buyers and sellers use their assessment of an asset's risk and return to determine its value - In competitive markets with many active participants, the interactions of many buyers and sellers result in an equilibrium price (demand and supply) -- the market value -- for each security - Because the flow of new information is almost constant, stock prices fluctuate, continuously moving toward a new equilibrium that reflects the most recent information available. This general concept is known as market efficiency - Example R20 stock cannot be sold for more or less than R20 stock. It is determined by market forces and no new information can change the market price - The efficient-market hypothesis (EMH) is a theory describing the behaviour of an assumed 'perfect' market in which: - Securities are in equilibrium - Security prices fully reflect all available information and react swiftly to new information - Because stocks are fully and fairly priced, investors need not waste time looking for mispriced securities +-----------------------+-----------------------+-----------------------+ | 1 | Weak-form EMH | - Can't profit by | | | | looking at past | | | | trends. A recent | | | | decline is no | | | | reason to think | | | | stocks will go up | | | | (or down) in the | | | | future. Evidence | | | | supports | | | | weak-form EMH, | | | | but "technical | | | | analysis" is | | | | still used | | | | | | | | - Past stock price | | | | data are publicly | | | | available and | | | | virtually | | | | costless to | | | | obtain- This | | | | means that | | | | information about | | | | how a company\'s | | | | stock price has | | | | changed over time | | | | is easily | | | | accessible to | | | | anyone and | | | | doesn\'t require | | | | much money to | | | | get. | | | | | | | | - You can find this | | | | information on | | | | various financial | | | | websites or in | | | | newspapers, and | | | | it doesn\'t cost | | | | much, if anything | | | | at all, to access | | | | it. | +=======================+=======================+=======================+ | 2 | Semi strong-form EMH | - The semi | | | | strong-form | | | | hypothesis states | | | | that all publicly | | | | available | | | | information | | | | regarding the | | | | prospects of a | | | | firm must already | | | | be reflected in | | | | the current stock | | | | price | | | | | | | | - Such information | | | | includes, in | | | | addition to past | | | | prices, | | | | fundamental data | | | | on the firm's | | | | product line, | | | | quality of | | | | management, | | | | balance sheet | | | | composition, | | | | patents held, | | | | earning | | | | forecasts, and | | | | accounting | | | | practices. | +-----------------------+-----------------------+-----------------------+ | 3 | Strong-form EMH | - The strong-form | | | | version of the | | | | efficient market | | | | hypothesis states | | | | that stock prices | | | | reflect all | | | | information | | | | relevant to the | | | | firm, including | | | | information | | | | available only to | | | | company insiders | | | | | | | | - This suggests | | | | that even insider | | | | information would | | | | not give an | | | | investor an | | | | advantage because | | | | it is already | | | | reflected in | | | | security prices. | +-----------------------+-----------------------+-----------------------+ - Although considerable evidence supports the concept of market efficiency, a growing body of academic evidence has begun to cast doubt on the validity of this notion - Behavioural finance is a growing body of research that focuses on investor behaviour and its impact on investment decisions and stock prices. Advocates are commonly referred to as 'behaviourists' - Understanding human behaviour helps us understand investor behaviour: 6. Types of Common stock valuation equations +-----------------------------------+-----------------------------------+ | Basic common stock valuation | Zero-Growth dividend model | | equation | | +===================================+===================================+ | - The value of a share of | - Assumes that the stock will | | common stock equals the | pay the same dividend each | | present value of its expected | year, year after year | | cash flows | | | | - An approach to dividend | | - Common stock dividend | valuation that assumes a | | valuation model: | constant, nongrowing dividend | | | stream | | Where: | | | | D1 = D2 =... = D∞ | | 1. *P*~0~ = Value today of | | | common stock | - The equation shows that the | | | zero growth, the value of a | | 2. *D~t~* = Dividend *expected* | share stock would equal the | | at the end of year *t* | present value of a perpetuity | | | of D~1~ dollars discounted at | | 3. *r* = Required return on | a rate *r~s~* | | common stock | | | | NB! In test look for -- remains | | 4. *D~0~* = Future expected with | constant | | growth | | | | | | 5. *D~1~* = Current dividend | | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | Constant-Growth model | Gordon Growth dividend model | +===================================+===================================+ | - The constant-growth model is | - A common name for the | | a widely cited dividend | constant-growth dividend | | valuation approach that | model that is widely cited in | | assumes that dividends will | dividend valuation | | grow at a constant rate, but | | | a rate that is less than the | | | required return | | | | - The equation shows that the | | - The zero- and constant-growth | zero growth, the value of a | | common stock models do not | share stock would equal the | | allow any shift in expected | present value of a perpetuity | | growth rates | of D~1~ dollars discounted at | | | a rate *r~s~* | | - | | | |  | +-----------------------------------+-----------------------------------+ +-----------------------------------------------------------------------+ | Variable-Growth model | +=======================================================================+ | - A dividend valuation approach that allows for a change in the | | dividend growth rate | | | | - It is a way to figure out how much a company's stock is worth by | | looking at the dividends it pays | | | | - Unlike the simpler models where the dividend grows at a constant | | rate, this model allows for the growth rate to change | | | | - For example, a company might grow its dividends quickly for a few | | years and then slow down the growth rate | | | | - To determine the value of stock in the case of variable growth, | | we use a 4-step procedure | | | | 6. Find the value of the cash dividends at the end of each year, | | D~t~, during the initial growth period, years one through *n* | | | | 7. Find the present value of the dividends expected during the | | initial growth period | | | | 8. Find the value of the stock at the end of the initial growth | | period, by applying the constant-growth model (Equation 7.4) | | to the dividends expected from year *n* + 1 to infinity | | | | 9. Add the present value components found in Steps 2 and 3 to | | find the value of the stock, P~0~, given in Equation 7.5: | | | | NB! In test look for -- | +-----------------------------------------------------------------------+ +-----------------------------------------------------------------------+ | Free Cash Flow model | +=======================================================================+ | - A free cash flow valuation model determines the value of an | | entire company as the present value of its expected free cash | | flows discounted at the firm's weighted average cost of capital, | | which is its expected average future cost of funds over the long | | run | | | | - Free cash flow is the money left over for investors (both lenders | | and owners) after the company has paid all its bills and expenses | | | | - Free cash flow is the cash flow available to investors -- the | | providers of debt (creditors) and equity (owners) -- after the | | firm meets all of its other obligations | | | | - Particularly useful when valuing firms that have no dividend | | history or are startups, or when valuing an operating unit or | | division of a larger public company | | | | Where | | | | - V*~C~* = Value of the entire company | | | | - FCF*~t~* = Free cash flow expected at the end of year t | | | | - r*~WACC~* = The firm's weighted average cost of capital | | | | | | | | - Because the value of the entire company, V~c~, is the market | | value of the entire enterprise (i.e., of all assets). To find | | common stock value, Vs, we must subtract the market value of all | | the firm's debt, V~D~, and the market value of preferred stock, | | V~P~, from V~c~: | | | | - Company's Total Value (V~C~) -- this is the total value of | | everything the company owns (all its assets) | | | | - Common Stock Value (V~S~) -- this is the value of just the | | company's common stock (the ownership shares) | | | | - Debt (V~D~) -- the amount of money the company owes (like loans | | or bonds) | | | | - Preferred Stock (V~P~) -- the value of preferred share (a type of | | stock that has priority over common stock but usually doesn't | | have voting rights) | | | | - To find out how much the common stock is worth, you need to: | | | | 1. Start with the total value of the company (V~C~) | | | | 2. Subtract the value of the company's debt (V~D~) | | | | 3. Also subtract the value of the preferred stock (V~P~) | | | | - So, the formula is: | | | | NB! In test look for -- | +-----------------------------------------------------------------------+ 7. Other approaches to common stock valuation +-----------------------------------+-----------------------------------+ | Book Value | Liquidation Value | +===================================+===================================+ | - Book value is the amount per | - Liquidation value is the | | common share remaining if all | amount per common share | | of the firm's assets were | remaining if all the firm's | | sold for their exact book | assets were sold for their | | (accounting) value and if its | market value and liabilities | | liabilities (including | (including preferred stock) | | preferred stock) were paid at | were paid in full | | book value | | +-----------------------------------+-----------------------------------+ | Price / Earnings (P/E) Multiple | | | Approach | | +-----------------------------------+-----------------------------------+ | - It is a popular technique | | | used to estimate the firm's | | | share value | | | | | | - It is calculated by | | | multiplying the firms | | | earnings per share (EPS) by | | | the average price/earnings | | | (P/E) ratio for the industry | | | | | | - There are tow main versions: | | | | | | 10. Forward P/E ratio divides | | | the current stock price | | | by a forecast of earnings | | | over the next year | | | | | | 11. Trailing P/E ratio uses | | | earnings over the | | | previous year (trailing | | | 12 months or TTM in the | | | denominator | | | | | | - The use of P/E multiples is | | | especially helpful in valuing | | | firms that are not publicly | | | traded, but analysts use this | | | approach for public companies | | | too | | | | | | - The P/E multiple approach is | | | forward looking because stock | | | prices are and usually | | | produces higher valuations | | | than the book value or | | | liquidation value approaches | | | | | | - Problems with the P/E | | | valuation are: | | | | | | - The P/E ratios vary | | | widely over time | | | | | | - In 1980, the average | | | stock had a P/E ratio | | | below 9, but by year | | | 2000, the ratio had risen | | | almost to 30 | | | | | | - Therefore, analysts using | | | the P/E approach in the | | | 1980s would have come up | | | with much lower estimates | | | of value than analysts | | | using the model 20 years | | | later | | | | | | - By 2020, the average | | | stock has a P/E ratio of | | | about 24, which is well | | | above the long-run | | | average | | | | | | - When using this approach | | | to estimate stock values, | | | the estimate will depend | | | more on whether stock | | | market valuations | | | generally are high or low | | | rather than on whether | | | the particular company is | | | doing well or not | | +-----------------------------------+-----------------------------------+ 8. Decision making and common stock value +-----------------------------------+-----------------------------------+ | Changes in Expected dividends | - Any management action would | | | cause stcokholders to raise | | | their dividend expectations | | | should increase the firm's | | | value (as long as | | | stockholders perceive no | | | increase in the risk of the | | | future dividend stream) | +===================================+===================================+ | Changes in Risk | - Any action taken by the | | | financial manager that | | | increases the risk | | | shareholders must bear will | | | also raise the risk premium | | | required by shareholders and | | | hence the required return | | | | | | - Any action by the financial | | | manager that increases risk | | | contributes to a reduction in | | | value, and any action that | | | decreases risk contributes to | | | an increase in value | +-----------------------------------+-----------------------------------+ | Combined Effect | - A financial decision rarely | | | affects dividends and risk | | | independently, most decisions | | | affect both factors often in | | | the same direction | | | | | | - As firms take on more risk, | | | their shareholders expect to | | | see higher dividends | | | | | | - The net effect on value | | | depends on the relative size | | | of the changes in these two | | | variables | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | **Debt (Bonds):** | **Equity (Stock):** | +===================================+===================================+ | - No voice in management. | - Voice in management and | | | voting rights. | | - No voting rights. | | | | - No maturity date (perpetual). | | - Has a maturity date. | | | | - Claims are subordinate to | | - Legal right to repayment; | debt. | | prioritized payments. | | | | - Dividends are not | | - Interest payments are | tax-deductible. | | tax-deductible. | | | | - Higher risk, but potential | | - Lower risk, contractual | for higher returns. | | agreements hold the firm | | | accountable | | +-----------------------------------+-----------------------------------+ - **Methods:** - **Public Offering:** Shares sold to the general public. - **Rights Offering:** New shares sold to existing shareholders. - **Private Placement:** Sold directly to investors. - **Process:** - Approval by shareholders and hiring an investment bank. - Filing with the SEC, promoting through a roadshow. - Underwriting by investment bankers who bear the resale risk. - **Investor Returns:** - **Dividends:** Periodic cash payments. - **Capital Gains:** Increase in share value. - **Valuation Models:** - **Zero-Growth:** Assumes constant dividends. - **Constant-Growth (Gordon Growth):** Assumes dividends grow at a constant rate. - **Variable-Growth:** Allows for changing dividend growth rates. - **Free Cash Flow:** Values the entire company based on expected cash flows. - **Book Value:** Value per share based on book (accounting) value. - **Liquidation Value:** Value per share if assets are sold at market value. - **P/E Multiple:** Valuation based on earnings per share (EPS) and industry average P/E ratio. Forward and trailing P/E ratios used for forecasting and past earnings. +-----------------------------------+-----------------------------------+ | **2. Common Stock** | **3. Preferred Stock** | +===================================+===================================+ | - **Ownership Types:** | - **Characteristics:** | | | | | - **Privately Owned:** Not | - Senior to common stock | | publicly traded. | with fixed dividends. | | | | | - **Publicly Owned:** | - **Par-Value:** Fixed face | | Traded on stock | value for dividend | | exchanges. | calculation. | | | | | - **Widely Owned:** Owned | - **No-Par:** No face value | | by many investors. | but fixed dividend. | | | | | - **Closely Owned:** Owned | - **Rights:** | | by a small group, often | | | family. | - Fixed claim on income, | | | less risky than common | | - **Types of Shares:** | stock. | | | | | - **Authorized Shares:** | - No voting rights, but | | Permitted to issue by | sometimes elect a | | corporate charter. | director. | | | | | - **Outstanding Shares:** | - Higher claim priority in | | Currently held by | liquidation. | | investors. | | | | - **Features:** | | - **Issued Shares:** | | | Circulated shares. | - **Cumulative:** Past | | | unpaid dividends | | - **Treasury Stock:** | accumulate. | | Repurchased by the firm. | | | | - **Noncumulative:** Past | | - **Voting Rights:** | dividends do not | | | accumulate. | | - One vote per share in | | | director elections. | - **Restrictive | | | Covenants:** Limits | | - Proxy statements allow | influence on certain | | vote transfer. | actions. | | | | | - Proxy battles may shift | - **Callable:** Can be | | control. | retired by the issuer | | | within a period. | | - **Supervoting Shares:** | | | Multiple votes per share. | - **Convertible:** Can be | | | converted to common | | - **Nonvoting Stock:** No | stock. | | voting rights but raises | | | capital. | - **Certificate of | | | Designation:** Specifies | | - **Dividends:** | features. | | | | | - At the discretion of the | | | board of directors. | | | | | | - Paid in cash, stock, or | | | merchandise. | | | | | | - Must pay preferred | | | stockholders before | | | common stockholders. | | +-----------------------------------+-----------------------------------+ This summary covers the essential concepts and methodologies related to stock valuation, highlighting the differences between debt and equity, types of stock, dividend policies, the IPO process, and various valuation models.