RSM230 Final Exam Notes Essay

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RSM230 NOTES – FINAL EXAM

LECTURE #1 – EQUITIES
Stock Markets are Volatile
 Another work for equities is stocks – traded on the stock market
 Volatile – means that it moves around a lot
 Huge drop between 2011-2012 → markets were ignoring problems in the euro market and as the year progressed, there was more and more talk about Greece needing a bailout → important because they are "first in line"/indicators
Investment Performance
 Historically stocks have the highest historic return and the greatest risk
 Excess return = equities (stocks) – treasury (bonds)
 Volatility – standard deviation in returns (measure of riskiness) → stocks more volatile than bonds
What's the outlook for the stock market?
 Stock prices rise when corporate earnings are expected to increase
 Earnings expectations rise when the economy is getting stronger so investors watch all new economic data
 US stocks are rising now because investors believe that the US economy is strengthening
 European market uncertainty (Greece, Spain, and euro zone generally have introduced a lot of volatility in the market)
What are stocks (shares)?
 Stocks – claim on the residual income produced by a company after all expenses and taxes are paid
 Represent part ownership of the firm and are (generally) accompanied by voting rights which afford the owner some measure of control over the organization
 Companies will sell claims on their future income (stocks) in order to raise capital for large investments; Initial and
Seasoned Equity offerings (IPOs & SEOs)
 "equity" means ownership o Net income – have two choices: either to (a) retain all of it to reinvest in the firm; or (b) pay dividends to shareholders Features of Common Equity
 Limited liability o Most traded companies are corporations: Inc, Ltd, PLC o Shareholder is only at risk for the initial shareholder's capital (i.e. stops at corporate level)
 Separate legal existence o Can sue and be sued (signing authority; officers of the company) o Corporation taxes
 Companies can be: o Public – ease of exchanging ownership (private: limited transfer rights) o Listed – on an exchange to make exchange of ownership (trading) easier o Accessing public markets brings in securities legislation whether the stock is listed or not
Shareholder Rights
 Canadian Business Corporations Act 24-3 defines the rights of shareholders when there is one class of shares as: o A) the right to vote at any meeting of the shareholders of the corporation
 The right to vote confers the right to choose the board of directors which in turn chooses management and determines control of the company o B) to receive any dividend declared by the corporation
 Dividends have to be declared by the Board of Directors and shareholders cannot force payment
 When a company pays a dividend, this is a negative signal to investors because it indicates that the company no longer needs to reinvest in their own firms (i.e. stagnant or decreasing growth) o C) to receive the remaining property of the corporation on dissolution (bankruptcy)
 When bankrupt, creditors (bondholders) and banks get paid first; common shareholders are last to get paid (residual right)

Multiple Classes of Shares
 These thee rights can be assigned to different classes of shares: o Preference (preferred) shares – limited voting rights when dividends are not paid
 Preferential right to a dividend (rank above common shareholders)
 Cumulative or non-cumulative
 Limited voting rights when dividends are in arrears
 Have par value of $25
 Only created by banks and utilities
 EXAMPLE: preferred shares (class C)
 No voting rights unless dividends in arrears for two years, after which each share gets one vote
 A dividend of $0.30/share every quarter when declared by the board of directors
 Payment of $25 par value before any payments to class A and B shares on wind up of company o Non-voting or limited voting common shares
 EXAMPLE: non-voting shares (class A)
 No voting rights…