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Modern Furniture Evaluation - Essay Example

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Modern Furniture Evaluation

Preferred stock is a class of ownership in a corporation that has a higher claim on the assets and earnings than the common stock. Preferred stock generally has a dividend that must be paid out before the dividends to common stockholders and the shares usually do not have voting rights. Each company can work out the details pertaining to the issue of preferred stocks. However preferred stock can be considered as a financial instrument that possesses the characteristics of both debt (with fixed dividend) and equity (potential appreciation). (Investopedia)
A convertible debt or security is a bond or a share of preferred stock that can be converted at the option of the holder into common stock of the same corporation. The investor is provided with a fixed return from a bond or with a specified dividend from the preferred stock. In addition the investor has an option to covert it to common stock. As a result the company is able to sell a convertible security at a lower yield than it would have to pay on a straight bond or preferred stock issue. This is an advantage for issuing convertible securities. (James C.Van Horne)
A Warrant is an option to purchase a specified number of shares of common stock at a stated price. When the holder of a warrant exercises his option he surrenders the warrants. Warrants are often employed as 'sweeteners' to a public issue of bonds or debt that is privately placed. As a result the company should be able to obtain a lower rate of interest than it would otherwise. For companies that are marginal credit risks the use of warrants may make the difference between being able and not being able to raise funds through a debt issue. Occasionally warrants are directly sold to investors directly against cash. On other occasions they are used in founding of the company issued as compensation to underwriters and venture capitalists. Mostly warrants are issued in connection with a debt issue often a private placement. (James C.Van Horne)

A primary financial instrument evidences a direct claim against some other party. These instruments often are traded in the spot market with prices set by the usual forces of demand and supply. In contrast a derivative security derives its value from an underlying primary security. One of the examples for the underlying security for derivatives is the stock option. Movements in the price of the underlying asset, the stock in this case drive the value of the derivative instrument, the option. Derivatives may take the form of simple put and call options on stocks. These options were traded in relatively illiquid over the counter markets. However with the tremendous financial innovations occurred in the last two decades the role of derivative securities in the financial markets have increased manifold touching new heights. (James C. Van Horne)

Modern Furniture Company

Total Number of shares outstanding: 3,000,000
Cash Dividend Proposed: $ 1.60 per share
Total Earnings of the firm $ 12,000,000
Earnings per share $ 4.00
Market Value of the Share $ 88.00



P/E Ratio

P/E Ratio is given
Market Value per Share
Earnings per Share

88.00
4.00

= 22

Dividend Yield and Dividend Payout Ratio

Dividend Yield is given by

Annual Dividends per ...Show more

Summary

Common stock is the security that represents ownership in a corporation. The holders of common stock conduct the affairs of a corporation by electing a board of directors and voting on corporate policy. The common stock is also known as 'ordinary shares'. The common stockholders receive the return for their investments in the form of dividends from the companies…
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Modern Furniture Evaluation essay example
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