TOPIC 4 & 5 : STOCK VALUATION

Differences between debts and equity :

Debt Equity
Payment nature Fixed schedule payment Subject to firm performance
Indicate Obligations (higher debt, higher Ownership
obligations )
Voting rights No Yes
Claims Primary Secondary
Tax advantage Yes ( high interest => low profit No
=> low tax )

- Equity : in equity have share capital, net profit (coming from income statement), balance
sheet, retain earning ( profit remain last time not yet use ), drawings ( owner of company
withdraw and record for personal purpose), …

Common share
Equity
Preference share

● Preference share: Shares in which shareholders receive fixed schedule payment

- Types of characteristics: having 4 types

1) Cumulative preference shares: company pay dividend altogether at the end of year
(Company prepare quarterly but not let customer wait over a year)
+ Cumulative means total or together.
Ex: first year receive $1000, second year receive $2000.
2) Non-cumulative preference shares: shareholder received dividend every quarterly
3) Callable preference shares: (= buy back) : those shares that company buy it back from
investor for a given period of time ( buy shares back from shareholder with market price )
4) Convertible preference share : PS turn to CS after a period of time , and same as
convertible bonds (convertible bonds will convert into a share) => means you can involve in
controlling

- Rights:
+ Voting rights: means you have right to select CEO or director. No matter how many
shares, you just have right to vote only 1 time
Ex: Preference shareholder has 100 shares => 1 vote; Common Shareholder has 100
shares => 100 votes
+ Primary claims: receive dividend first
+ Quasi-debt: means haft debt and half of quasi
Preference shareholders be treated as half debt and haft equity (like as debt but no more
debt because they receive dividend)
+ Having debt because primary claim and fixed schedule
+ Not having debt because voting right and dividend

● Common share: on which dividend payment is subject to firm performance

- Rights (for existing shareholders)

+ Voting rights: multiple voting right
 + Proxy rights: another person will vote on your behalf (by your transferring voting rights
and cannot be transferred anyone else except Common Shareholder)
+ Primitive rights: provide protections (protection from 2 team):
1. Delusion of control: if new common shareholders joint into company => company
easy to lose control, this rights will protect existing common shareholders
2. Delusion of earning: if 10 CS earn 5000 profits => each SH receive 500, if more CS
join, profit will reduce but this rights make the participation of newcomers is
unaffected.
+ Special rights: Rights to buy common shares at lower price. existing common
shareholders will have rights to buy new common share with discounts.

# Form of dividend for common shareholder: receive dividend in 3 forms

- Cash dividend (most common): means CS receive dividend in formal cash (pay dividend
in cash only.)
Ex : Cheque cash, transfer money to bank account.
- Stock dividend : pay dividend by stock, give bonus shares.
Ex : market price at $5, 100 shares, $2 per shares’ dividend => receive 40 shares
- Inventory dividend (not common, the worst form of paying) : pay dividend by services or
goods.
Ex : A funeral company tend to give u free service when you or your family die.
Question: If a company making profit, can I say company have cash. Answer: No

# Find the difference between Common Share and Preference Share

Common Share Preference Share
Secondary claims Primary claims
Dividend subject on perform Fixed dividend
Multi voting right Single vote right
Private placement Public offering
Cannot convert PS can convert into CS (not yet prove )
Controller Not having much control
Proxy right Np proxy right

# Similarities between Preference Share and Debts (different from Common Share)
- Quasi-debt from Preference Shares: half debt - half equity
- Fixed schedule payment
- Primary claims (both better than Common Shares )
- Both are not controller
- Company capital (y nay acceptable but not recommend )
- Callable Preference Share: fixed schedule

* Note:
- Mortgage: debts ( maybe ) , PS ( no )
- Tax advantage: debts ( yes ) , PS ( no )