1 00:00:00,000 --> 00:00:08,000 Alan Kring Productions in association with the Emergent Light Studio presents 2 00:00:08,000 --> 00:00:16,000 the Illinois State Collegiate Compendium, Academic Lecture in Business and Economics. 3 00:00:16,000 --> 00:00:24,000 This is Business Finance, FIL 240 for autumn semester 2023. 4 00:00:24,000 --> 00:00:42,000 Today, corporate valuation alternatives. Now I'll go on rambling for a while and then at 5 00:00:42,000 --> 00:00:50,480 2.45 I open the quiz and everyone just gets to live the dream taking a quiz 6 00:00:50,480 --> 00:00:55,560 five and when you're done you go. I'll make sure I remember to give you the 7 00:00:55,560 --> 00:01:01,800 password so that you have that. Try to think if there's anything else before we 8 00:01:01,800 --> 00:01:07,000 go in. We're going to look at the numbers. The numbers are not pretty at all today. 9 00:01:07,000 --> 00:01:16,420 It is kind of a wide sweep. The markets are in a bad mood right now for one 10 00:01:16,420 --> 00:01:22,640 reason or another and it's just a sour day on the street. As you can see the 11 00:01:22,640 --> 00:01:32,400 Dow is down a third of a percent and then the S&P is down a rather surprising 12 00:01:32,400 --> 00:01:42,920 1.44 percent and then the NASDAQ is in the toilet at two almost two and a half 13 00:01:42,920 --> 00:01:48,680 percent down. It's just a really rough day out there today and there are a lot of 14 00:01:48,680 --> 00:01:55,240 reasons for that but I mean some of the reasons just seem like they're 15 00:01:55,240 --> 00:02:00,480 speculative. We still have good signs on the economy that it's doing well. 16 00:02:00,480 --> 00:02:09,000 The Fed isn't threatening to raise interest rates. So what is honking off 17 00:02:09,000 --> 00:02:16,160 the markets this much? Now as you can see crude oil is just basically in the 18 00:02:16,160 --> 00:02:21,920 middle of its trading range. It's up a little bit up 2% but it's 19 00:02:21,920 --> 00:02:27,320 nothing to get excited about at all. It's bouncing between 82 and 88 20 00:02:27,320 --> 00:02:35,720 nicely right now as I told you it probably would. Gold is getting rather 21 00:02:35,720 --> 00:02:41,320 close to that resistance at $2,000 an ounce. You see it right there? Not 22 00:02:41,320 --> 00:02:46,800 pleasant at all. An unpleasant little look that the gold has because we're 23 00:02:46,800 --> 00:02:51,560 almost near that line. Something is wrong with this. I'm gonna have to refresh this 24 00:02:51,560 --> 00:03:01,120 screen but there we go. Oh yeah it's it's a rough day out there. So anyway moving 25 00:03:01,120 --> 00:03:07,760 on from where we were with gold. Now crude was down and then it 26 00:03:07,760 --> 00:03:12,280 was up but it's just bouncing around gold up some so that's a little concern. 27 00:03:12,280 --> 00:03:18,760 Notice silver which is not as speculative isn't doing anything 28 00:03:18,760 --> 00:03:26,400 particularly at all and so the gold going up is most likely based on 29 00:03:26,400 --> 00:03:32,400 speculation of bad economic times. However we'll just have to see about 30 00:03:32,400 --> 00:03:39,680 that. The euro is depreciating against the dollar and so is the British pound. 31 00:03:39,680 --> 00:03:46,720 So those economies must be in less have less positive prospects than ours for 32 00:03:46,720 --> 00:03:52,000 what for one reason or another and the yen is depreciating against the dollar 33 00:03:52,000 --> 00:03:58,240 as well. So the US dollar is strengthening for what that's worth. 34 00:03:58,240 --> 00:04:04,200 Notice that the Nikkei rose early in trading. This was in the middle of the 35 00:04:04,200 --> 00:04:09,400 night last night and at night last night and then it just sort of bounced around 36 00:04:09,400 --> 00:04:15,360 and then it did a sell-off close to the end and then it rallied a little tiny bit 37 00:04:15,360 --> 00:04:21,400 at the end. Now the London they did sort of a similar thing. They started out down 38 00:04:21,400 --> 00:04:26,240 and then they rose and then went down and then they came climbing back up 39 00:04:26,240 --> 00:04:29,960 again. So there's a lot of volatility out there. It looks like a lot of 40 00:04:29,960 --> 00:04:35,120 uncertainty but it's not a pleasant day on the street right now at all. Let me 41 00:04:35,120 --> 00:04:41,640 show you a couple of things real quick here. If you are a bear well there are a 42 00:04:41,640 --> 00:04:45,360 couple of things you can do. I'm going to teach you how to make money having 43 00:04:45,360 --> 00:04:49,720 stock prices go down. Most people think the only way you make money is if 44 00:04:49,720 --> 00:04:54,600 stock prices go up. No, they can go down and you can make money off that. It's 45 00:04:54,600 --> 00:05:00,520 called short selling. There is another way that you can profit make money off 46 00:05:00,520 --> 00:05:07,600 stocks falling. You would just take bearish funds ETFs that are on the sour 47 00:05:07,600 --> 00:05:12,800 side. I'll show you a couple. I may have shown you these before. Here's one SQQQ. 48 00:05:12,800 --> 00:05:20,720 That is a bear fund. It's an ETF that's bearish. Well is that an ETF even? 49 00:05:20,720 --> 00:05:28,240 But look at that. On a day when the market is bearish, really bearish, that 50 00:05:28,240 --> 00:05:35,920 son of a dog is up more than seven and a half percent in one day. There's 51 00:05:35,920 --> 00:05:42,160 a way. Well I'm a bear. It's a bear market. How do I make money? Go for these 52 00:05:42,160 --> 00:05:50,000 funds that are contrarian. They go up when the stock market goes down. Let me 53 00:05:50,000 --> 00:05:57,400 try another one here. This is one. This is mostly NASDAQ stuff. Betting on the 54 00:05:57,400 --> 00:06:02,040 NASDAQ going down in the NASDAQ as you can see went down a lot. Here's one 55 00:06:02,040 --> 00:06:11,440 that's contrary on the Dow. Well that one kind of sucks. And then we've got SPXU 56 00:06:11,440 --> 00:06:21,840 SPXU I think. Let's look at that one first. Yep. Bearish. It's a bear fund. 57 00:06:21,840 --> 00:06:30,560 Short. See that short there? Short is bear. Okay so here we go. It's up more than 58 00:06:30,560 --> 00:06:37,180 half of more than four and a half percent. There you go. So you don't have to 59 00:06:37,180 --> 00:06:42,640 wait for a bull market to be a successful investor. This is the message 60 00:06:42,640 --> 00:06:45,920 that we're getting from this kind of thing right here. I want to look at 61 00:06:45,920 --> 00:06:54,000 something real quick here. Look at this. See the beta? This is the SPXU. Look at 62 00:06:54,000 --> 00:06:59,880 the beta. It's negative. That's the contrarian. It's moving against the world 63 00:06:59,880 --> 00:07:05,620 portfolio. That's what a negative beta would tell you. And in a case like this 64 00:07:05,620 --> 00:07:11,880 that's what you want. You want it to move contrary. The opposite. And this one is 65 00:07:11,880 --> 00:07:19,780 almost three, a magnification of three on the world portfolio. Taking that to be 66 00:07:19,780 --> 00:07:33,580 what beta means. Another one. Is that SPX? I think SPXL? No that's a bull. SPXL is a 67 00:07:33,580 --> 00:07:38,800 bull. That one should beat you up. That one's taking a butt back. But these funds 68 00:07:38,800 --> 00:07:43,320 you can go bull or bear on these funds and they're not that expensive to jump 69 00:07:43,320 --> 00:07:51,480 into. This one 70 about 72 bucks a share for it. The one I just gave you the 70 00:07:51,480 --> 00:08:00,080 ultra pro short 12.86 a share. So it's not a costly buy-in to the game and 71 00:08:00,080 --> 00:08:04,640 that's a bear fund. So if you want to be a bear and you want to be a cheap bear 72 00:08:04,640 --> 00:08:09,920 then you would probably reach for something like the S&P 500. I didn't have 73 00:08:09,920 --> 00:08:17,880 things of remember look at the SQQQ. How much is that one? 21 bucks 21.83 a 74 00:08:17,880 --> 00:08:23,800 share. That's for a bear position. Now on the other hand if you want to do bull 75 00:08:23,800 --> 00:08:33,840 stuff you would go TQQQ and it's taking a butt bath today. But notice that that 76 00:08:33,840 --> 00:08:41,400 one is taking a dive because it is a bull position. It's a long position and of 77 00:08:41,400 --> 00:08:48,240 course look at its beta. That is very risky. It's going to magnify the hell out 78 00:08:48,240 --> 00:08:55,240 of the market when it plays its hand. So there you go. One way or 79 00:08:55,240 --> 00:09:00,760 the other these are the funds that you can look at if you want to take bear 80 00:09:00,760 --> 00:09:05,760 positions especially. Now with bull positions they're easy find ETFs that are 81 00:09:05,760 --> 00:09:12,600 normal ETFs or just regular stocks and jump into those. With bear positions you 82 00:09:12,600 --> 00:09:16,560 can do short sales but those are kind of complicated. I'll show you how to do them 83 00:09:16,560 --> 00:09:22,680 but they require margin accounts. This you just buy in and you're on the bear 84 00:09:22,680 --> 00:09:27,640 side of the market and you hope that the bears win. You stop being chipper and 85 00:09:27,640 --> 00:09:33,680 optimistic and you start being pessimistic. These are a way that you can 86 00:09:33,680 --> 00:09:39,000 make money in the bear markets. So the idea that stocks go up that's the only 87 00:09:39,000 --> 00:09:44,000 way people can make money and everyone loses when the stock market goes down. 88 00:09:44,000 --> 00:09:48,360 No horse crap. You just have to know a little bit about the markets and you don't 89 00:09:48,360 --> 00:09:54,200 have to do fancy stuff. Just go for some of these bear funds. These short as we 90 00:09:54,200 --> 00:10:04,040 call them short funds. Okay enough of the boy. Look at that beta on that one. 91 00:10:04,040 --> 00:10:10,960 That's TQQQ but yeah these are some of the things that you can do in 92 00:10:10,960 --> 00:10:19,320 the market. Now the last thing that on stocks and just a few overview words and 93 00:10:19,320 --> 00:10:24,520 I had talked about this earlier but I just want to refresh your mind for a 94 00:10:24,520 --> 00:10:29,320 future quiz. Not for this one and for of course the final. Just the basics of 95 00:10:29,320 --> 00:10:35,280 stocks and a couple of different ways that are alternatives for valuing a 96 00:10:35,280 --> 00:10:41,600 firm and valuing its equity. Now the first thing is just as a refresher from 97 00:10:41,600 --> 00:10:50,160 something for something I did earlier. When I use word stock usually when I use 98 00:10:50,160 --> 00:10:59,360 that word what I'm actually referring to is common stock. However there is another 99 00:10:59,360 --> 00:11:07,520 kind of stock which is called preferred stock. Now understand that these are both 100 00:11:07,520 --> 00:11:16,760 equity and if it's equity it has the residual claim. The bills have to pay be 101 00:11:16,760 --> 00:11:23,560 paid in a timely manner before any stockholder can get a 102 00:11:23,560 --> 00:11:30,880 dividend. Get anything or reinvestment in the company. So that's the first thing 103 00:11:30,880 --> 00:11:41,560 to appreciate is it neither of these has any prior claim over the debt, the 104 00:11:41,560 --> 00:11:48,800 liabilities. However within equity the preferred has the prior claim to 105 00:11:48,800 --> 00:11:54,920 dividends. The preferred has the prior claim. The preferred has to be paid a 106 00:11:54,920 --> 00:12:00,360 dividend if there is preferred in the company issued by the company and only 107 00:12:00,360 --> 00:12:08,720 if the preferred is satisfied per the contract itself then the common stock 108 00:12:08,720 --> 00:12:15,920 can get a dividend or get reinvestment in the company. Now there's a problem 109 00:12:15,920 --> 00:12:23,800 here one last thing. When we refer to common stock when I say stock I probably 110 00:12:23,800 --> 00:12:33,920 mean common stock and within that you have to look at if there is 111 00:12:36,560 --> 00:12:45,800 the classification. There could be more than one kind of common stock. The kind 112 00:12:45,800 --> 00:12:53,200 of common stock, there's the normal kind. You get one vote at a shareholders 113 00:12:53,200 --> 00:12:57,640 meeting for each directors position that's open and that's it. You get 114 00:12:57,640 --> 00:13:03,040 dividends if there's a dividend declared and all of that. There could be another 115 00:13:03,040 --> 00:13:13,280 kind of stock. There could be this ancient founder stock. That would be 116 00:13:13,280 --> 00:13:22,360 stock that was for insiders. It has probably has super majority voting to 117 00:13:22,360 --> 00:13:27,560 allow the insiders to maintain control of the board of directors. It may also 118 00:13:27,560 --> 00:13:36,240 have and I am honestly I'm not sure about this but I think I've seen examples 119 00:13:36,240 --> 00:13:44,120 where the of classifieds where the founder stock had a different dividend 120 00:13:44,120 --> 00:13:50,560 from that of the normal stockholders. Not sure about that but I saw I've seen a 121 00:13:50,560 --> 00:13:59,560 couple of references to it. Now the founder stock is generally generally 122 00:13:59,560 --> 00:14:17,240 subject to rule 144. Rule 144 of the Securities Exchange Act of 1934 123 00:14:17,240 --> 00:14:27,000 restricts the sale of the founder stock because they probably have inside 124 00:14:27,000 --> 00:14:32,960 information. So their certificates at least back when they were printed 125 00:14:32,960 --> 00:14:39,200 certificates were printed would have a big red stamp on them restricted and 126 00:14:39,200 --> 00:14:48,640 that there were rules under which that stock could be leaked. L-E-A-K-E-D. In other 127 00:14:48,640 --> 00:14:54,780 words a founder doesn't have to keep all of his or her stock but he can't just 128 00:14:54,780 --> 00:15:00,720 sell it to a broker. Hi I've got 50 million shares of founder stock. Sell them 129 00:15:00,720 --> 00:15:09,560 all. You can't do that. There are windows that are allowed but you have to have an 130 00:15:09,560 --> 00:15:17,800 opinion of legal counsel that says this is acceptable to do this sale is 131 00:15:17,800 --> 00:15:24,560 acceptable under rule 144 and for this amount. There has to be a notification to 132 00:15:24,560 --> 00:15:30,500 the SEC all that good stuff. So in other words you're a founder. You got 50 133 00:15:30,500 --> 00:15:35,320 million shares. Well you know I'd kind of like to dump a half million of those 134 00:15:35,320 --> 00:15:43,040 shares. Well if the legal counsel says yes under rule 144 you can do that for 135 00:15:43,040 --> 00:15:49,020 this period of time then it would be a go. You would file the proper forms to 136 00:15:49,020 --> 00:15:53,960 be able to do it and all that. You can even find websites where they list 137 00:15:53,960 --> 00:16:00,920 insider trades on stock. You'll see it and sometimes people can't keep an eye 138 00:16:00,920 --> 00:16:07,280 on that. Well what if what if you see the insiders of some corporation all getting 139 00:16:07,280 --> 00:16:12,980 rid of stock at the same time. Well that would be some people's idea of a good 140 00:16:12,980 --> 00:16:17,800 let's get out of this before the founders must know something so let's 141 00:16:17,800 --> 00:16:22,040 get out. So it's one of those things you keep an eye on at the certain websites 142 00:16:22,040 --> 00:16:27,240 will show you that information and it's good to know that oh these insiders are 143 00:16:27,240 --> 00:16:33,560 getting rid of stock. That doesn't necessarily mean that this that these 144 00:16:33,560 --> 00:16:37,920 guys thinks the stock is going to the company's going to hell. You might be if 145 00:16:37,920 --> 00:16:44,600 I've been in companies I have consulted for companies where the founders they 146 00:16:44,600 --> 00:16:49,400 weren't paying themselves hardly anything in salary. They just plowed 147 00:16:49,400 --> 00:16:55,880 forward year after year keeping the company going. So when a window opened 148 00:16:55,880 --> 00:17:02,880 under rule 144 yeah they kind of some of them sold a lot of stock that they could 149 00:17:02,880 --> 00:17:08,120 sell just so they could make up for all the years that they had gone without 150 00:17:08,120 --> 00:17:14,280 much in stock. That's it's not it's not a sign that the company is going to hell 151 00:17:14,280 --> 00:17:20,160 always. It might just be okay we just we just want some money because we haven't 152 00:17:20,160 --> 00:17:25,360 been paid very well and others it's just greed. Yeah I want to buy myself a new 153 00:17:25,360 --> 00:17:30,960 boat yacht or something but it's not always a bad sign. But if you see a bunch 154 00:17:30,960 --> 00:17:37,560 of insiders using 144 at the same time that might be a little bit more 155 00:17:37,560 --> 00:17:43,480 worrisome. What do they know kind of thing. One but one way or the other you 156 00:17:43,480 --> 00:17:51,720 will not be up you don't go out and buy founder stock. Once a founder sells it 157 00:17:51,720 --> 00:18:00,720 it's just regular stock okay. It's just normal stock but and then it's so you're 158 00:18:00,720 --> 00:18:05,320 not you still suddenly become a founder with it. Although that inside those 159 00:18:05,320 --> 00:18:11,160 inside chairs if they have super majority voting rights they're probably 160 00:18:11,160 --> 00:18:16,240 not going to be out there in the market to be sold. However you saw one example 161 00:18:16,240 --> 00:18:24,360 Berkshire Hathaway. You can buy the heavies the big Berks. Now if you just 162 00:18:24,360 --> 00:18:32,720 want to be a Berkshire Hathaway shareholder you buy the baby Berks. Those 163 00:18:32,720 --> 00:18:39,640 are cost you $337 each and what's even suckier about them is that they don't 164 00:18:39,640 --> 00:18:47,920 really pay much of a dividend. It's a decent stock though but I mean it's not 165 00:18:47,920 --> 00:18:52,280 the kind of stock that I would be too interested in buying. Beta is low and all 166 00:18:52,280 --> 00:19:00,520 that but if you want to be one of the big Berks be our K and participate in 167 00:19:00,520 --> 00:19:07,000 the have those super majority voting rights and all that well let's try that 168 00:19:07,000 --> 00:19:19,040 again. BRK. Yeah those cost $513 and whoa did you see that price jump by a couple 169 00:19:19,040 --> 00:19:24,200 hundred dollars there now down a couple well yeah but that's actually very small 170 00:19:24,200 --> 00:19:30,040 percentages but if you want to be in the big league with some heavy duty the 171 00:19:30,040 --> 00:19:35,080 inside stock it's right there for you. Now if you're going to do that let me 172 00:19:35,080 --> 00:19:40,720 know and I'll help you give you some investment advice for a commission fee 173 00:19:40,720 --> 00:19:45,960 which you can I'm sure afford if you could buy a half a million dollars a 174 00:19:45,960 --> 00:19:52,200 share. Some of you will actually have enough money you could do that someday 175 00:19:52,200 --> 00:19:58,080 but you probably wouldn't even if you had a lot of money because you'd have to 176 00:19:58,080 --> 00:20:04,880 have a lot of money to throw a half a million dollars and just plain old 177 00:20:04,880 --> 00:20:10,240 stock which is really what this is. There's nothing extraordinary about it at all 178 00:20:10,240 --> 00:20:18,320 except for the price but anyway that's the inside. Now the preferred stockholders 179 00:20:18,880 --> 00:20:26,240 let me mention those a little about the valuation. I'm going to write 180 00:20:26,240 --> 00:20:46,680 VLT 1.75% cumulative preferred and I've done this before but I'm just doing it 181 00:20:46,680 --> 00:21:11,800 again. Cumulative preferred par value $80 per share. Now what this means is first 182 00:21:11,800 --> 00:21:18,400 of all this word right here cumulative would not necessarily be on a 183 00:21:18,400 --> 00:21:24,800 preferred stock certificate. If it is it's quite a thing but what this says is 184 00:21:24,800 --> 00:21:41,280 that your annual dividend will be equal to 1.75% times the face value of 80. It's 185 00:21:41,280 --> 00:21:46,480 like a coupon. Remember you take the coupon rate times the face value you get 186 00:21:46,480 --> 00:21:56,560 the value of the coupon. That's what this is. Really quickly here let me get a 187 00:21:56,560 --> 00:22:10,360 calculator up here and I'll take 0.0175 times $80. So every year for each 188 00:22:10,360 --> 00:22:25,120 share you own you get $1.40 per share and that $1.40 must be paid before a 189 00:22:25,120 --> 00:22:35,240 common dividend is paid. That's why I put that prior there and if it's not paid 190 00:22:35,240 --> 00:22:41,680 then the dividend then the common shareholders cannot be have a dividend 191 00:22:41,680 --> 00:22:53,760 declared for them. Now if it is cumulative preferred if the company 192 00:22:53,760 --> 00:23:03,100 doesn't pay the preferred dividend one year it has to pay it plus the new 193 00:23:03,100 --> 00:23:10,920 dividend the next year and that goes on and on. So as long as it's cumulative 194 00:23:10,920 --> 00:23:17,240 preferred as long as the company hasn't caught up with its preferred dividends 195 00:23:17,240 --> 00:23:24,520 the common shareholders will not get a dividend. So that's the nice thing about 196 00:23:24,520 --> 00:23:31,160 cumulative. It's not pleasant though if you're a common shareholder. If you were 197 00:23:31,160 --> 00:23:37,080 looking around for some common stock you like dividends. It's a little 198 00:23:37,080 --> 00:23:44,360 fixed income and you notice oh wait this company has cumulative preferred. That 199 00:23:44,360 --> 00:23:50,600 means if the company ever fell down and couldn't cover its preferred dividend 200 00:23:50,600 --> 00:23:56,680 you wouldn't get a dividend as a common stock shareholder. Furthermore if it's 201 00:23:56,680 --> 00:24:01,880 cumulative that company could not be able to pay its preferred dividend for 202 00:24:01,880 --> 00:24:07,200 years and you will never see a dividend until it catches up if it ever does. 203 00:24:07,200 --> 00:24:14,160 That's how bad it is. Preferred dividend preferred common as I said preferred 204 00:24:14,160 --> 00:24:19,560 stock used to be kind of popular not really anymore. Don't see much of it not 205 00:24:19,560 --> 00:24:26,080 as much as you used to and one thing companies they are it's like a real 206 00:24:26,080 --> 00:24:34,600 commitment. Now one thing that I have seen is preferred that is convertible 207 00:24:34,600 --> 00:24:41,960 where the company can't or it could be the invest it could be the preferred 208 00:24:41,960 --> 00:24:49,960 shareholders can decide to turn the preferred into the value equivalent of 209 00:24:49,960 --> 00:24:58,120 common. That's I I don't know maybe it's just me and the numbers that I look at 210 00:24:58,120 --> 00:25:04,560 but I've seen more of that now than I did 20 years ago. Preferred being issued 211 00:25:04,560 --> 00:25:10,000 but it has a convertibility provision in it that it can be turned into common 212 00:25:10,000 --> 00:25:15,600 stock which of course would be good for the common stockholders out there in a 213 00:25:15,600 --> 00:25:23,680 way because otherwise that preferred would hold off dividends for the common 214 00:25:23,680 --> 00:25:28,400 it could forever but if it can if the company converted it to common stock 215 00:25:28,400 --> 00:25:33,520 then they're all on the same playing field. That's that would be one good 216 00:25:33,520 --> 00:25:38,880 thing about. The bad thing about that would be if that stock is converted into 217 00:25:38,880 --> 00:25:46,600 common stock it waters down the common stock. Okay suppose that there are 10 218 00:25:46,600 --> 00:25:51,480 million shares of common stock outstanding and a million shares of 219 00:25:51,480 --> 00:25:58,880 preferred could each be converted to a share of common. That would mean that 220 00:25:58,880 --> 00:26:03,600 suddenly there were not 10 million shares of common stock there were 11 221 00:26:03,600 --> 00:26:09,280 million shares of common stock. So that would water down your percentage 222 00:26:09,280 --> 00:26:15,040 ownership for your common stock holdings if you're just a common stock 223 00:26:15,040 --> 00:26:25,720 holder. There's one other thing no by the way common stock is a preferred stock 224 00:26:25,720 --> 00:26:32,960 is easy to price it's a joke because it's a no growth perpetuity. That dividend 225 00:26:32,960 --> 00:26:40,280 goes on forever. So let's say that's a discount rate for preferred stock right 226 00:26:40,280 --> 00:26:48,760 now the dividends from preferred stock is let's say 2% 2.00%. So the price of 227 00:26:48,760 --> 00:27:01,960 the preferred would be nothing but a dollar forty over point oh two that being 228 00:27:01,960 --> 00:27:09,200 dividend the flat dividend divided by the discount rate. It's a it's a classic 229 00:27:09,200 --> 00:27:18,440 no growth perpetuity and if I do that it should come out below $80 take 1.40 230 00:27:18,440 --> 00:27:34,400 divided by 0.02 yeah that's $70. Notice just like bonds if the market wants 2% 231 00:27:34,400 --> 00:27:43,920 and the company pays 1.75% then the price will be at a discount to par. It's 232 00:27:43,920 --> 00:27:48,240 like bonds when the required rate of return by the investors the yield is 233 00:27:48,240 --> 00:27:53,040 higher than the coupon then the bond will sell it at a discount to par. It's 234 00:27:53,040 --> 00:28:02,160 the same thing. It's a very easy much easier formula but there you go. That's all 235 00:28:02,160 --> 00:28:14,840 there is to that. One thing I would be remiss if I didn't bring it up. With 236 00:28:14,840 --> 00:28:20,320 common stock getting off preferred stock for a month getting away from 237 00:28:20,320 --> 00:28:30,280 preferred stock. Now this refers primarily to common stock. Generally 238 00:28:30,280 --> 00:28:48,600 speaking, common stock will have preemptive rights. It works like this. I've 239 00:28:48,600 --> 00:28:56,200 got 10 million shares of stock outstanding and I want to do a public 240 00:28:56,200 --> 00:29:03,000 offering for 5 million shares. 241 00:29:03,000 --> 00:29:26,760 Suppose that you own a million shares. That would mean that your position, your 242 00:29:26,760 --> 00:29:36,960 your ownership of the company stands at 1 million shares over 10 million shares. 243 00:29:37,720 --> 00:29:45,280 So you have a 10% ownership of the company. Now suppose the company says 244 00:29:45,280 --> 00:29:58,600 we're going to do a public offering of 5 million shares. That would mean that the 245 00:29:58,600 --> 00:30:16,280 total after the new issue would be 15 million. That would take you down to a 246 00:30:16,280 --> 00:30:35,560 million over 15 million. That would reduce your ownership position. Take you 247 00:30:35,560 --> 00:30:51,080 go down to 6.67% ownership. Preemptive rights mean that you have first dibs to 248 00:30:51,080 --> 00:31:07,960 keep your position. So in other words, you would have a preemptive right to buy 249 00:31:07,960 --> 00:31:19,800 5,500,000 shares. So that your final position would be 1,500,000 shares 250 00:31:19,800 --> 00:31:30,320 over 15 million shares which of course would mean that you're back up to 10% 251 00:31:30,320 --> 00:31:33,320 ownership. 252 00:31:33,320 --> 00:31:52,880 Whoops, 1,500,000 over 15 million which puts you back up to 10%. You have the 253 00:31:52,880 --> 00:32:03,800 right to hold your ownership stake. You don't have to, but you have the right to. 254 00:32:03,800 --> 00:32:11,440 Now the interesting part of this is, well I'll get into that in just a minute. This is 255 00:32:11,440 --> 00:32:17,320 just preemptive rights. That's all it means is that you, this, there are 5 256 00:32:17,320 --> 00:32:25,480 million shares. There has to be enough shares that can be bought during a 257 00:32:25,480 --> 00:32:32,120 certain time period by existing owners up to the point where they would hold 258 00:32:32,120 --> 00:32:37,320 their position. Now I might choose, well I can't really afford 500,000 shares. I 259 00:32:37,320 --> 00:32:44,520 could buy 200,000. So you could subscribe for 200,000 under your preemptive rights. 260 00:32:44,520 --> 00:32:49,320 You could subscribe for any amount up to what would bring you back to your 261 00:32:49,320 --> 00:32:57,240 original position. Anything you buy after that, you're on your own for it. The real 262 00:32:57,240 --> 00:33:03,560 question though, do you want to exercise your preemptive rights? There are reasons 263 00:33:03,560 --> 00:33:10,200 why you would want to to maintain your position of control in the company, 264 00:33:10,200 --> 00:33:18,720 but there are some reasons why you might not want to do that. Some of those reasons 265 00:33:18,720 --> 00:33:27,320 go to this. The company is going to buy, sell stock. Let's say it's a 266 00:33:27,320 --> 00:33:31,320 seasoned offering. In other words, the company's been public. It's got 267 00:33:31,320 --> 00:33:35,840 outstanding stock out there. It just wants to raise more money by selling 268 00:33:35,840 --> 00:33:44,320 stock. The problem is this. First of all, why would a company want to raise equity 269 00:33:44,320 --> 00:33:50,560 capital? As you'll see next week and the week after that, equity capital is a lot, 270 00:33:50,560 --> 00:33:56,320 usually a lot more expensive than debt capital. So in other words, the cost 271 00:33:56,320 --> 00:34:07,080 a company selling common stock to raise money is going to be lifting its 272 00:34:07,080 --> 00:34:12,440 weighted average cost of capital. So why would it do that? But there's another 273 00:34:12,440 --> 00:34:21,080 reason too. Company, think about the logic. If you are the insiders of a 274 00:34:21,080 --> 00:34:27,320 company and you're looking at the stock price and projecting what it will do 275 00:34:27,320 --> 00:34:32,320 based upon the company's knowledge of the prospects for cash flows and all 276 00:34:32,320 --> 00:34:42,100 that. You look at the stock price. Would you as the company want to sell 277 00:34:42,100 --> 00:34:49,080 your stock price when you had determined that the stock was near its high or near 278 00:34:49,080 --> 00:34:56,720 its low? In other words, if I'm going to sell 500,000 shares of stock and I'm 279 00:34:56,720 --> 00:35:03,080 going to sell that and I think that right now the company's stock is at $20 a 280 00:35:03,080 --> 00:35:09,880 share. Later I think that I see projecting that in about a year it's 281 00:35:09,880 --> 00:35:18,920 going to be $10 a share. When would I sell through that offering? Would I sell 282 00:35:18,920 --> 00:35:24,040 it through the offering now when it's $20 a share or would I wait until it 283 00:35:24,040 --> 00:35:31,460 fell to $10 a share? The obvious answer is I'd sell it when it was at $20 a 284 00:35:31,460 --> 00:35:37,160 share. So in other words, there is good reason to believe the company sells 285 00:35:37,160 --> 00:35:45,000 stock when their internal numbers tell them that the stock is near its high. 286 00:35:45,000 --> 00:35:50,800 And then it's going to fall from that high. Otherwise, why would they sell the 287 00:35:50,800 --> 00:35:56,040 stock when they wait? Oh no, we better wait until it falls to $10 a share so 288 00:35:56,040 --> 00:36:04,440 that we raise 5 million times 10 instead of 5 million times 20. No, they're 289 00:36:04,440 --> 00:36:08,920 going to sell a stock when they project that it is going to be near its high 290 00:36:08,920 --> 00:36:18,880 when the offering goes live. That's the problem. You have to be suspicious of 291 00:36:18,880 --> 00:36:25,920 stocks. So if you're exercising preemptive rights, you would be exercising 292 00:36:25,920 --> 00:36:30,680 those like all the other suckers who are going to buy the stock during the 293 00:36:30,680 --> 00:36:36,560 offering. So you would want the company to give you some kind of a deal to 294 00:36:36,560 --> 00:36:41,360 exercise your preemptive rights. Otherwise, you're just buying it at the 295 00:36:41,360 --> 00:36:48,680 high like every sucker out there in the open market is going to. That's a good 296 00:36:48,680 --> 00:36:54,760 reason not to exercise your preemptive rights. A good reason to exercise them is 297 00:36:54,760 --> 00:37:02,180 that that maintains your control over the company. You had 10% control and if 298 00:37:02,180 --> 00:37:06,800 you don't exercise your preemptive rights, your control goes down to 6 and 299 00:37:06,800 --> 00:37:12,320 2 thirds percent, which is might not be something you want. You want to maintain 300 00:37:12,320 --> 00:37:18,500 your control because that's the only way you think that the company can do what 301 00:37:18,500 --> 00:37:24,160 you want it to. What you and other investors have in mind instead of a 302 00:37:24,160 --> 00:37:35,760 bunch of newbies jumping in on it and getting positions. That's about stock and 303 00:37:35,760 --> 00:37:42,760 all that. That's the latest it's been today. 304 00:37:42,760 --> 00:37:55,000 I think, oh, I don't know. 305 00:37:55,000 --> 00:38:18,920 Let me show you one last thing. Valuing the company. The classic approach would 306 00:38:18,920 --> 00:38:29,760 say that the value is going to be the sum from i equals 1 to infinity of the 307 00:38:29,760 --> 00:38:36,920 free cash flow at year i divided by 1 plus weighted average cost of capital 308 00:38:36,920 --> 00:38:43,560 to the i-th power. In other words, the infinite stream of annual free cash 309 00:38:43,560 --> 00:38:52,720 flows, for example, discounted back to the present. Theoretically, that's great. 310 00:38:52,720 --> 00:38:58,240 Practically speaking, it's a pain in the butt because you have to project the 311 00:38:58,240 --> 00:39:05,760 free cash flows for every year from now to eternity. Typically, we don't do that. 312 00:39:05,760 --> 00:39:11,800 We go out about 10 years and every year whatever we're projecting the free cash 313 00:39:11,800 --> 00:39:19,680 flow to be is going to be even more and more uncertain. It's done though. We do it 314 00:39:19,680 --> 00:39:24,920 that way and that's the way I teach it in some classes. There are other ways to do 315 00:39:24,920 --> 00:39:32,000 it too and I'll go through one of those right now. Now there is a complicated 316 00:39:32,000 --> 00:39:39,680 formula for enterprise value, EV enterprise value, but there is a quick 317 00:39:39,680 --> 00:39:48,000 dirty way to do it. You go to the financial site like Standard Poor's 318 00:39:48,000 --> 00:39:59,120 Global Net Advantage and you get the enterprise value average of the industry 319 00:40:01,400 --> 00:40:08,000 and then you divide that by the earnings before interest and taxes and 320 00:40:08,000 --> 00:40:18,560 depreciation and allowance of the industry and then you multiply that by 321 00:40:18,560 --> 00:40:26,760 earnings before interest and taxes and depreciation and amortization of the 322 00:40:26,760 --> 00:40:40,320 company and this will give you the enterprise value of the company. Like I 323 00:40:40,320 --> 00:40:47,840 said, there's a complicated formula to get enterprise value directly. You do this 324 00:40:47,840 --> 00:40:52,560 and that and all that. This is the way that I've seen it being done. It's 325 00:40:52,560 --> 00:40:57,000 quite popular. You just go to Standard Poor's Net Advantage and you say, all 326 00:40:57,000 --> 00:41:01,760 right this company is in this industry. What's the enterprise value of the 327 00:41:01,760 --> 00:41:07,980 industry? The number will be right there. Okay, what is the average EBITDA of the 328 00:41:07,980 --> 00:41:12,880 industry? It's right there in the Global Net Advantage and then you take the 329 00:41:12,880 --> 00:41:18,400 company itself and you look at its financials and calculate EBITDA. In 330 00:41:18,400 --> 00:41:22,840 other words, earnings before interest and taxes, operating income, plus depreciation 331 00:41:22,840 --> 00:41:27,280 and amortization, which you can get from the free cash from the statement of 332 00:41:27,280 --> 00:41:35,000 cash flows. That'll give you a decent estimate of enterprise value, which is 333 00:41:35,000 --> 00:41:43,040 one of the ways that we can say the value of this company is. It's just one of 334 00:41:43,040 --> 00:41:49,800 those things we do and it's a short dirty way. The book emphasizes the more 335 00:41:49,800 --> 00:41:55,880 complicated way, but I think it actually mentions that. The mention should be, oh 336 00:41:55,880 --> 00:42:02,560 by the way, this is the easy way. This is the way we do it usually. But anyway, 337 00:42:02,560 --> 00:42:08,520 you've got a quiz to take. I want you to crank it up and when you are finished 338 00:42:08,520 --> 00:42:15,160 with that quiz, that's all I have for you. I thank you.