Question

Define these business finance terms in your own words and then give a real world example of each: Classes of stock, Comparable Valuations, Dividend Growth model, Preemptive RIght, an Preferred stock.

Answer 1

Classes of Stock :Two important classes of stock are common stock and preferred stock. In general, preferred stock has “rights, preferences, and privileges” that common stock does not have. Typically, investors get preferred stock, and founders and employees get common stock (or stock options).Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; hence, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), the company of Warren Buffett (one of the greatest investors of all time), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".

A Comparable Valuations or Comparable company analysis (CCA) is a process used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry. Comparable company analysis operates under the assumption that similar companies will have similar valuation multiples, such as EV/EBITDA. The most common valuation measures used in comparable company analysis are enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S). If the company's valuation ratio is higher than the peer average, the company is overvalued.

Dividend growth model also known as Gordons Growth model is a valuation model, that calculates the fair value of stock, assuming that the dividends grow either at a stable rate in perpetuity or at a different rate during the period at hand.The Model is especially useful for companies that have a great cash inflow and the company has stability with dependable leverage patterns.The valuation can be easily performed since the inputs of data for Gordon’s Growth model are readily available for computation.The Gordon Growth model has been proven to be favorable to real estate agents and several real estate ventures too.

Preemptive rights are a clause in an option, security or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the security.For example, a shareholder has 1,000 shares in a company, which currently has 5,000 shares outstanding. At this point, the shareholder owns 20% of the business. The company wants to sell another 5,000 shares in order to raise funds. If the shareholder wants to maintain the same proportional ownership of the business, it must buy 1,000 of these additional shares.

Preferred stock (also called preferred shares, preference shares or simply preferreds) is a form of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument.Companies offering preferred stock include Bank of America, Georgia Power Company and MetLife. Preferred stock derives its name from the fact that it carries a higher privilege by almost every measure in relation to a company's common stock.