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Ebook Foundations of finance (8/E): Part 2

Part 2 book “Foundations of finance” has contents: The valuation and characteristics of stock, the cost of capital, capital-budgeting techniques and practice, cash flows and other topics in capital budgeting, determining the financing mix, dividend policy and internal financing, short-term financial planning, and other contents. | Find more at www.downloadslide.com 8 The Valuation and Characteristics of Stock Learning Objectives 1 Identify the basic characteristics of preferred stock. Preferred Stock 2 Value preferred stock. Valuing Preferred Stock 3 Identify the basic characteristics of common stock. Common Stock 4 Value common stock. Valuing Common Stock 5 Calculate a stock’s expected rate of return. The Expected Rate of Return of Stockholders In the entertainment industry, Netflix was a well-recognized success story. That is, it was a success until 2011 when it changed how it charged its customers who subscribed to its services. Previously, you could stream videos to your television or computer or order videos through the mail, all for about $10. The firm’s management changed the subscription plan so that you had to purchase the two plans separately, paying about $8 for each. Thus, if you wanted to continue with what you had previously, the cost became almost $16—a 60-percent increase in your cost. The price increase sparked 80,000 comments on the company’s Facebook page. Netflix lost subscribers as well as stock market value in the wake of the controversial price increase. To compound the problem, pay channel Starz, which controls the rights to movies from Sony Pictures and Walt Disney Pictures, announced it would not renew a deal allowing Netflix to stream those films. Some analysts considered the partnership with Starz to be worth as much as $300 million. Netflix’s CEO responded with a letter, saying, “We hate making our subscribers upset with us, but we feel like we provide a fantastic service and we're working hard to further improve the quality and range of our streaming content.” Not only did Netflix lose customers, but the stockholders saw the value of their stock plummet. In one day, the price was down 17 percent. By year end, the stock price had declined from almost $300 to slightly more than $70, with the price still in the $80 range in June 2012. Lazard .