Group 1 Bonife, Angela receives them.

However, if the performance

Estella, Ma. Kirsten of that person is poor and stockholders are
Kintanar, Aesha Cassandra dissatisfied, this is when an outside group
Pobadora, Ma. Jhezarie may solicit the proxies in an effort to
Alenton, Elizabeth overthrow management and take control of
Common stock the business.

It is a form of corporate equity ownership, Proxy Fight

which is also a type of security. It offers an A proxy fight or also known as a proxy
opportunity for higher long-term returns contest or a proxy battle, refers to a
compared with bonds but comes with situation in which a group of common
greater risk. That is why common stock shareholders in a company join forces in an
valuation is an essential factor in attempt to oppose or vote out the current
determining a stock's price. management or board of directors.

Unlike with preferred stock dividends and Proxy fights are typically difficult to win to
bonds, which are set by contract, and they companies who have various governance
are valued in much the same way, common tactics in place and also include restrictive
stock dividends are not contractual, as they requirements in its bylaws. Therefore, most
depend on the firm’s earnings. proxy fights by shareholders are
unsuccessful.
I. Control of the Firms
Common stockholders control the firm Takeover
through their right to elect the company's Takeover is an action whereby a person or
board of directors, which appoints group succeeds in ousting a firm’s
management. management and taking control of the
company. Some managers’ in a company
State and federal laws stipulate how who move to make takeovers more difficult
stockholder control is to be exercised. have been countered by stockholders,
especially large institutional stockholders,
II. Voting Rights who do not like barriers erected to protect
The common stockholders also have the incompetent managers.
right to vote.
They can appear at annual meetings and III. PREEMPTIVE RIGHT
vote in person or it can also be through a A preemptive right is a provision in the
proxy. corporate charter or bylaws that gives
common stockholders the right to purchase
Proxy on a pro rata basis new issues of common
A proxy is a person who represents a stock or convertible securities.
member in the shareholders' meeting of a
company, with a legal document that could The common stockholders often have the
prove their authority, typically the power to right, that is called the preemptive right to
vote shares of common stock. purchase on a pro rata basis any additional
shares sold by the firm.
For a person to act as a proxy for an
individual, formal documentation may be Purpose of Preemptive Right
required that outlines the extent to which the • To prevent the management of a
proxy can speak on the individual's behalf. corporation from issuing a large
number of additional shares and
Usually, a management company always purchases those shares itself.
solicits stockholders’ proxies and usually
 • To protect stockholders from a Golden Shares
dilution of value.
Golden shares provide special power in the
IV. Dividends right form of veto power to the holder of the
Dividends are a form of income that shares.
shareholders of corporations receive for
each share of stock that they hold.
Stock Price
Dividends are important in a company
because it can be an indicator of financial Stock price is simply the current market
liability. price, and it is easily observed for publicly
traded companies.
The common stockholder may also be
entitled to receive dividends, which are Intrinsic value
payments made by the corporation to its
shareholders out of the profits. Intrinsic value, which represents the “true”
value of the company’s stock, cannot be
The Board of directors determines the directly observed and must instead be
amount and frequency of the dividends, and estimated.
common stockholders are typically entitled
to receive dividends on a pro rata basis. Intrinsic Value Formula

V. Inspection Rights Intrinsic Value = (Stock Price - Option Strike

The inspection rights or the opportunity to Price) x (Number of Options)
inspect corporate books and records.
Common stockholders have the right to Two basic models are used to estimate
inspect the corporation’s books and records intrinsic values
to ensure that the corporation is being
managed properly. They have the right to • Discounted dividend model
know not only the financial condition of the
corporation but also how the corporate • Corporate valuation model
affairs are being managed, so that if they
find the condition unsatisfactory, they may DISCOUNTED DIVIDEND MODEL
be able to take the necessary measures to
protect their investments. The analysis as performed by the marginal
investor, whose actions actually determine
TYPES OF COMMON STOCK the equilibrium stock price, is critical, but
every investor, marginal or not, implicitly
Classified Stock goes through the same type of analysis.

Common stock that is given a special Formula for Discounted Dividend Model
designation such as Class A or Class B to
meet special needs of the company Stock Value = D1
r-g
Founders’ Shares
D1 = expected dividend of the period
Stock owned by the firm’s founders that r = Rate of return of dividends
enables them to maintain control over the g = Growth rate of dividends
company without having to own a majority
of stock. REQUIRED INPUTS:
REQUIRED RATE OF RETURN
Required Rate of Return, rs the stock’s intrinsic value is determined by
The minimum rate of return on a common dividing the annual dividend amount by the
stock that a stockholder considers required rate of return:
acceptable or worthwhile to own a stock.
also referred to as the “cost of equity” Formula: Stock Value= Annual Dividends/
Required Rate of Return
Determining Required Rate of Return
(Dividend Payment / Stock Price) + Example:
Dividend Growth Rate What is the intrinsic value of a stock that
pays $2.00 in dividends every year if the
Practice Problem: required rate of return on similar
In July 2018, Coke was trading at nearly investments in the market is 6%?
$45 per share. Its annual dividend per share
was projected to be $1.56. Coke has Solution:
increased its dividends by roughly 5% per We can apply the zero growth DDM formula
year, on average.The rate of return for Coke to get
is: Stock Value= $2.00/0.6 =$33.33

Rate of return= (Dividend Payment / Stock While this model is relatively easy to
Price) + Dividend Growth Rate understand and to calculate, it has one
significant flaw: it is highly unlikely that a
Rate of Return= ($1.56/45) + .05 = .0846, or firm’s stock would pay the exact same dollar
8.46% amount in dividends forever, or even for an
extended period of time. As companies
In other words, an investor can expect an change and grow, dividend policies will
8.46% annual return based on its current change, and it naturally follows that the
share price. payout of dividends will also change.

GROWTH RATE • Constant Growth Dividend

Growth Rate, g Discount Model
The expected rate of growth in dividends As indicated by its name, the constant
per share. growth DDM assumes that a stock’s
dividend payments will grow at a fixed
TYPES OF DIVIDEND DISCOUNT MODEL annual percentage that will remain the same
• The Gordon Growth Model throughout the period of time they are held
The most common DDM is the Gordon by an investor. While the constant growth
growth model, which uses the dividend for DDM may be more realistic than the zero
the next year (D1), the required return (r), growth DDM in allowing for dividend growth,
and the estimated future dividend growth it assumes that dividends grow by the same
rate (g) to arrive at a final price or value of specific percentage each year.
the stock. The formula for the Gordon
growth model is as follows: The constant growth DDM formula is:
Stock Value= D1 / r-g Stock Value= D0 (1 + g) / r − g

• Zero Growth Dividend Discount

Model
The zero growth DDM assumes that all Practice Problem for DDM: Using Gordon
future dividends of a stock will be fixed at Growth Model
essentially the same dollar value forever, or
at least for as long as an individual investor Using the same problem, In July 2018,
holds the shares of stock. In such a case, Coke was trading at nearly $45 per share.
Its annual dividend per share was projected
to be $1.56. Coke has increased its
dividends by roughly 5% per year, on
average.

Let’s say you want to see a 10% return.

What would the appropriate price be based
on the current dividend rate and growth
rate?

Stock value = Dividend per share /

(Required Rate of Return – Dividend
Growth Rate)

Stock value = $1.56 / (0.10 – 0.05) = $31.20