What is a share really worth?

Name: Business Tutor
Address: Burnaby, BC, CA
Telephone: +1-604-916-5838
Price range: C$30–C$129

A share is a claim to future dividends. Price it as their present value, whether they stay flat, grow steadily or grow in stages, then read the same price through the P/E ratio.

Part 1 · Shares and dividends · Step 1 of 12

A share is ownership. A bond is a loan

The firm is wound up with $120M of assets. Who is paid, in order

1. Bondholders · owed $60Mgets $60M

2. Preferred shareholders · stated value $25Mgets $25M

3. Common shareholders · whatever is leftgets $35M

Part 1 · Shares and dividends · Step 1 of 12

A share is ownership. A bond is a loan

A stock (or share) is a piece of ownership in a corporation; a bond is a loan to it. Bondholders are promised interest and their money back on a set date. Shareholders get dividends and any rise in the price (capital gains), with no promise and no maturity date, so stocks are riskier. Common shareholders vote and are the residual claimants: they are paid last. Preferred shareholders sit in between: a promised dividend (usually cumulative, so missed dividends must be made up before common shareholders get any), senior to common but junior to debt, and usually no vote.

Try it: Drag the firm’s value below $60M. Common shareholders get nothing, but they owe nothing either.

Value of the firm’s assets ($ millions)$120M

	Pays	Paid	Votes
Bond	interest, then the principal back	1st	no
Preferred	a fixed dividend, usually cumulative	2nd	rarely
Common	dividends if declared, plus capital gains	last	yes

Common shareholders get the $35M left after everyone with a fixed claim is paid. That is why they gain the most when the firm does well and lose first when it does badly.

Check yourself

True, false or uncertain? Valuing a stock relies on projections of future cash flows, while a bond is valued from fixed cash flows.

Exam coming up and two-stage growth still feels slippery?

Bring your problem sets. We work through them together until every type feels routine.

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What is a share really worth?

A share is ownership. A bond is a loan

A share is ownership. A bond is a loan

A steady dividend grower: the price now, later, and after a rate rise

Exam coming up and two-stage growth still feels slippery?

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