Question

1. What is common stock? What are the differences between common stock and bond?
2. What is preferred stock? What are the features of preferred stock?
3. What is classified stock? When and why would a firm use classified stock?
4. What is a track stock?
5. What models can one use to value stocks? What models have we learned before?

Answer 1

Common stock is the voting share of the corporation. It is usually the largest portion of the equity of the firm. The common stock may be paid dividend or not. It differs from bond in was that the cash flows of the bond are guranteed while it is not. The common stock can vote but the bond cannot. The bond are usually the first to receive funds from liquidation while the common stock is usually the last.

Preferred stock are the non-voting equity instruments that are paid dividends before common stocks. The features are:

• They are the first to be paid dividends and come with clawback provision
• The dividend is perpetual
• The do not have voting rights
• They may be convertible