Asset-Liability and Liquidity Management

CHAPTER 3Equity Valuation

The equity of a company is the difference between its assets (what it owns) and its liabilities (what it owes). A common stock represents an ownership interest in the equity of a company. For example, if company XYZ has 1,000,000 outstanding shares of common stock, a holder of one share has a 1/1,000,000 ownership interest in the equity of the company. A holder of a common stock, or equity security, also has the right to a proportion of the earnings of the issuing company. The board of directors of the company may decide to distribute part of the periodic profit to the shareholders, a payment known as a dividend. The most common form of the dividend is the cash dividend, where shareholders receive cash payments based on the number of shares they own at a certain date. Retained earnings is the part of the profits that have not been distributed as dividends. At the declaration date the board of directors of a company declares dividend payment for those who own stocks at the record date (a day in the future of the declaration date). Ex-dividend date, which is usually two business days before the record date, is the cutoff point that defines who receives the dividend and who doesn't. Holders of shares of stock that are purchased at ex-dividend date or after do not receive a dividend payment for that period while those who owned the stock before the ex-dividend date are eligible to receive a dividend for each share they own. Payment date is when dividends ...