A spin-off is when a company gets rid of subsidiaries.
Time Warner did this when it spun off its Time Inc. subsidiary.
The company doesn't just sell the subsidiary to another firm.
Rather, it creates a new stand-alone company and then distributes its stock to its stockholders.
For every 8 shares of Time Warner stock that a person held, he or she received 1 share of Time Inc.
There have been hundreds of stock spin-offs.
Land's End, News Corporation, and TripAdvisor are some of the recent spin-offs.
If the subsidiary is no longer a good fit for the company, or if they feel they've become too diversified and want to focus on their core products, they usually execute stock spin-offs.
Spin-offs can work well for investors too.
In declaring a split, a firm merely announces that it will increase the number of shares outstanding by exchanging a specified number of new shares for each outstanding share of stock.
Two new shares of stock are exchanged for each old share in a two-for-one stock split.
Three new shares are exchanged for two old shares in a three-for-two split.
A stockholder who owned 200 shares of stock before a two-for-one split becomes the owner of 400 shares if there had been a three-for-two split.
A stock split is used by a company to increase its stock's trading appeal.
Normally, the price of the stock falls in proportion to the terms of the split, unless there is a big increase in the level of dividends.
The company is issuing 12,000,000 shares of stock at a price of $14 per share.
This cloud-based file-sharing and document-management company has a new issue of fresh capital.
After a two-for-one split, a $100 stock can be traded at or close to $50 a share.
The original price per share is divided by the ratio of new shares to old.
After a three-for-two split, the same $100 stock would trade at about $65.
Starbucks split its shares on April 9, 2015.
Starbucks shares closed at $95.23 on the day before the split.
The opening price of a Starbucks share fell to $47.65 after the split.
Corporations can sometimes reduce the number of shares by buying back their own stock.
Firms can buy back their own stock if they think it's worth more in the marketplace.
The company's own stock becomes an attractive investment candidate when that happens.
Firms buy back shares as an alternative to paying dividends.
Paying dividends may force some shareholders to pay taxes on their income, while repurchasing shares may have different tax consequences.
Firms usually purchase their stock in the open market.
Technically, treasury stocks are simply shares of stock that have been issued and subsequently purchased by the issuing firm.
The treasury stocks are kept by the corporation and can be used later.
They could be used to pay for mergers and acquisitions, to meet employee stock option plans, or as a means of paying stock dividends.
The shares can be held in the treasury for a long time.
The long-term impact is less settled, with some research suggesting that share repurchases are followed by periods of above-average stock returns.
Sometimes a company will issue classes of common stock that entitle holders to different privileges and benefits.
Hundreds of publicly traded firms, including well-known tech companies, have created stock classes.
Each class of common stock has its own characteristics.
Firms that issue multiple classes of stock give different voting rights to different groups of investors.
Class A and Class B shares were issued when Facebook conducted its IPO.
The Class A shares were available for purchase by the public.
Class B shares, held by Facebook CEO and founder Mark Zuckerberg, were entitled to 10 votes per share.
Even if Facebook issued many more Class A shares, it would not affect the voting control of the company.
Sometimes firms use classified stock to give different rights to different investors.
If there is more than one class of common stock outstanding, you should take the time to determine the privileges, benefits, and limita tions of each class.
Basic knowledge of how to read stock-price quotes is required to be an informed stock trader.
The transaction costs associated with buying and selling stock need to be understood.
Keeping track of current prices is an essential part of buy and sell decisions.
You can use prices to monitor the performance of your security holdings.
Investment returns are impacted by transaction costs.
The costs of stock transactions can sometimes consume most of the profits from an investment.
These costs should not be taken lightly.
The stock market has come to rely on a highly effi cient information system that quickly disseminates market prices to the public.
The stock quotes that appear daily in the financial press and online are a vital part of the information system.
The quotes give a great deal of additional information, including the most recent price of each stock.
A basic quote for a stock is shown in Figure 6.4.
After trading hours on Friday, May 15, 2015, the quote was taken.
On that day, the price of Abercrombie common stock closed at $21.42 per share, up $0.17 from the previous day's close.
The stock opened on Friday at $21.27 and went on to hit a high of $21.55 and a low of $21.17 (see "Day's Range").
There are a few noteworthy items in Figure 6.4.
The average stock in the market has a systematic risk of less than that of the stock in Abercrombie's, as the very wide trading range over the past year would indicate.
The figure shows a stock quote from May 15, 2015.
The number of shares outstanding is 888-738-5526.
In its most recent reporting period, the company earned $0.71 per share, and given the closing price of $21.42, the price-to-earnings ratio of the stock was just over 30.
Common stock can be bought and sold in round or odd lots.
The sale of 400 shares of stock would be an odd lot transaction, while the sale of 75 shares would be a round lot transaction.
There are two round lots and an odd lot for trading 250 shares of stock.
There are transaction costs that an investor incurs when buying or selling stock.
Roughly one-third of all trades involve odd lots.
Remember that the ask price is what you would pay to buy the stock and the bid price is what you get if you sell the stock, so the difference between them is a kind of transaction cost.
The current bid-ask spread gives you a rough idea of the transaction cost that you pay to the market maker or dealer who makes a living buying and selling shares every day.
A share of common stock can be described in many different ways.
The accounting, investment, and monetary attributes of a stock are designated by each.
It has nothing to do with the stock's price, but is a minimum value below which the corporate charter does not allow a company to sell shares.
The floor for the value of a stock is established by the par value.
The par value of Facebook's shares was set at $0.000006.
Par value is inconsequential except for accounting purposes.
The basis for assessing the extent of a stockholder's legal liability used to be par value.
Many stocks today are issued without a par value because the term has little or no significance for investors.
Stockholders' equity is just the difference between the firm's assets and its liabilities on the balance sheet.
The book value is the amount of capital that shareholders contributed to the firm when it initially sold shares as well as any profits that have been reinvested over time.
Assets worth $100 million are on the balance sheet of Social Networks Incorporated.
The company has 10 million common shares.
The stockholders' equity is $4 per common share.
$30 million was raised in the company's initial public offering of common stock and the other $10 million was reinvested in the business since the IPO.
A stock's book value is a backward-looking estimate of its value because it focuses on things that happened in the past, like the original sale of stock and profits earned and reinvested in earlier periods.
A stock's market value is indicative of investors' expectations about how the company will perform in the future.
It's independent of the book value and reflects what investors are willing to pay to acquire the company.
Sometimes stocks trade at market prices that exceed their book values.
The total market value of claims held by shareholders can be calculated by taking the market price of the stock and dividing it by the number of shares outstanding.
The market capi talization of a firm is similar to the stockholders' equity figure on the balance sheet, except that the market capi talization represents what the firm's equity is actually worth in today's market.
According to investors, Social Networks Incorporated will rapidly increase its revenues and earnings over the next several years.
The company's book value per share is less than the company's stock price.
With 10 million common shares outstanding, the market value of the company is $200 million, compared to the book value of stockholders' equity of just $40 million.
When a stock's market value drops below its book value, it's usually because the firm is dealing with financial distress and doesn't have good prospects for growth.
Some investors like to look for stocks that are trading below book value in the hope that they will earn high returns in the future.
It also entails significant risks and may offer high returns.
The worth investors place on the stock indicates what they think the stock should be trading for.
A complex process is based on expectations of the return and risk of a stock.
There are two possible sources of return for any stock.
When establishing investment value, investors try to figure out how much money they will make from the two sources.
They use those estimates to figure out the return potential of the stock.
They try to assess the amount of risk to which they will be exposed by holding the stock.
Risk and return help them place an investment value on the stock.
An investor should be willing to pay the maximum price for the issue.
Explain how a stock spin-off works.
Define and distinguish between the terms.
Treasury stock versus classified stock.
U.S. corporations paid out billions of dollars in dividends.
The companies included in the S&P 500 stock index yielded more than $375 billion in dividends.
Despite the numbers, dividends don't get much attention.
Many investors put little value on dividends.
The attitudes toward dividends are changing.
Capital gains can turn into substantial capital losses if you don't pay attention.
When the market stumbles, York's dividend dends provide a nice cushion.
Current tax laws place dividends on the same plane as capital dividends without missing a single year since 1816, the year that gains.
Both are taxed at the same rate.
Single taxpayers with modified adjusted gross two centuries of continuous income of $200,000 and married couples over $250,000 are subject to dividends.
Companies share some of their profits with stockholders by paying out dividends.
The firm's board of directors decides how much to pay in dividends.
The directors look at the firm's operating results and financial results to see if dividends should be paid.
They consider whether the firm should distribute some of its cash to investors in the form of dividends or stock purchases.
Several important payment dates are established if the directors decide to pay dividends.
In this section, we'll look at the factors that affect the dividends.
We will look at some of the key payment dates.
A variety of factors are taken into account when the board of directors considers paying dividends.
The board looks at the firm's earnings.
Even though a company doesn't have to show a profit to pay dividends, profits are still considered a vital link in the decision.
Earnings per share translate into profits per share.
It gives a measure of earnings available to stockholders.
The following formula can be used to find earnings per share.
If a firm reports a net profit of $1.25 million, pays $250,000 in dividends to preferred stockholders, and has 500,000 shares of common stock outstanding, it has an earnings per share of $2.
The preferred dividends are subtracted from profits because they have to be paid before funds can be made available to common stockholders.
The board looks at the firm's growth prospects while assessing profits.
Some of the firm's earnings may be used to help finance future growth.
The board will take a close look at the firm's cash position to make sure that dividends don't lead to a cash shortfall.
The firm may be subject to a loan agreement that limits the amount of dividends it can pay.
The board will consider market effects after looking at internal matters.
If a company wants to retain earnings rather than pay them out in dividends, it should use the funds to achieve faster growth and higher profits, according to most investors.
If the company can't distribute earnings through dividends, investors will clamor for the firm to do so.
To the extent that different types of investors tend to be attracted to dif ferent types of firms, the board must make every effort to meet the dividends of its shareholders.
Income-oriented investors are attracted to firms that pay high dividends.
Failure to meet those expectations could cause some investors to sell their shares, putting downward pressure on the stock price.
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