Hayley Moore. Chapter 8 Stock Markets. A)Common Stocks

Another option is the issuing of preferred stock, the company’s common stock is already overvalued in the market; therefore, sourcing additional capital through common stock might result to lower proceeds.

As for the combination of cash and new shares, shareholders can take part of their money

* b.  Further allocation of amounts allocated to repurchased shares to various components of stockholder equity upon formal or constructive retirement.

while after tax cost of capital is r (1-t). If the interest rate or yield to maturity is 6.5% and the rate

Item 5.|  |MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES|  | |20|  |

fraction of pretax earnings that the shareholders keep. One minus that ratio is the average tax rate so the

The case is set in the context of RJR’s 1985 financing of its $4.9 billion acquisition of Nabisco Brands Inc. To finance the acquisition, RJR was proposing the issue of $1.2 billion of 12 year notes and the same amount in preferred stock. It had already funded $1.5 billion of the acquisition leaving $1 billion more to finance.

their right to receive cash at precisely the time that Arley's stock is low, which is also when the firm

firm’s financing, for example, issuing or repurchasing stock and borrowing or repaying loans. It also

This strategy is equivalent like borrowing a risk-free loan and buying a forward sale of gold in which the company lock in the selling price of the 5.1 million ounce of gold produced in next 3 years by repaying them to the bank.  Forward Sale

There are two types of markets as well. The primary market is where new issues of securities, such as stocks and bonds, are sold to the initial buyers. Secondary markets are where existing securities are re-sold. The secondary market is also the more common market for the average person. An example would be the New York Stock Exchange.

• a firm must earn on its investment projects to increase the market value of its common shares

Though stocks have statistically delivered higher returns in the long term compared to bonds, bond prices are less volatile. The dividends paid out on stocks are uncertain and depend on the distributable profits of the company, the company’s investment plans and cash needs for the same, and other such factors. On the other hand, bonds generally make a pre-specified interest payout to all bondholders periodically, thereby ensuring an assured, known cash-inflow in the hands of a bond-holder. Further, on maturity of the bond, a pre-determined principal amount is paid out by the issuer to the bondholder, to purchase back the bond. Hence, a bondholder who holds the bond to maturity, knows exactly how much he /she will receive both by way of interest as well as principal on maturity. This is completely untrue for stocks, where neither the dividend flow nor the capital appreciation is predictable with certainty.

The share trading system can be part into two principle areas the essential market and the optional market. The essential market is the place new issues are first sold through beginning open offerings. Institutional financial specialists normally

A financial intermediary, by definition, is responsible for the process of transferring money from economic agents with a surplus of funds to economic agents with a deficit of funds, and is known as financial intermediation. This is achieved by means of a financial security, such as stocks and bonds. The mechanism that allows the trade of such financial securities is known as a financial market. Financial markets aim to facilitate the raising of capital, as well as the transfer of risk between economic agents and also international trade. Typically, the borrower will issue a receipt, or financial security, to the lender that promises to pay back the capital gained. Securities such as these can be freely bought or sold within financial