2. Types of common stock Aa Aa True or False: To segment the rights to which certain common shareholders are entitled, companies often separate common equity into more than one class of shares called classified stock. False True Consider this case: The CEO of EchoStar Communications, Charlie Ergen, owned around 5% of the company's stock, but his multiple votes per share gave him around 90% of the vote. Source: "Dish Network 2010 Annual Report," on Dish Network Investor Relations, http://files.shareholder.com/downloads/ DISH/1330128565x0x480914/DC45515A-D65F-475D-B6C2-CFB3AE7A1006/DISH__ _Web_Posting_-_3.30.11.pdf. Based on this example, which of the following statements is true? O Classified shares are not issued with the purpose of providing super-voting rights to a certain class of investors. Classified shares have super-voting rights, which give more control to a certain class of investors. 3. Stock prices and intrinsic values Aa Aa Benjamin Graham, the father of value investing, once said, "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine." In this quote, Benjamin Graham was referring to the key difference between the "price" and the "value" of a security. In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? O A stock's intrinsic value is based on the fundamental cash flows and the company's risk. The intrinsic value of a stock is based only on the perceived risk in the company. You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock? A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth A company that has been distributing a portion of their earnings every quarter for the past six years 2. Types of common stock Aa Aa True or False: To segment the rights to which certain common shareholders are entitled, companies often separate common equity into more than one class of shares called classified stock. False True Consider this case: The CEO of EchoStar Communications, Charlie Ergen, owned around 5% of the company's stock, but his multiple votes per share gave him around 90% of the vote. Source: "Dish Network 2010 Annual Report," on Dish Network Investor Relations, http://files.shareholder.com/downloads/ DISH/1330128565x0x480914/DC45515A-D65F-475D-B6C2-CFB3AE7A1006/DISH__ _Web_Posting_-_3.30.11.pdf. Based on this example, which of the following statements is true? O Classified shares are not issued with the purpose of providing super-voting rights to a certain class of investors. Classified shares have super-voting rights, which give more control to a certain class of investors. 3. Stock prices and intrinsic values Aa Aa Benjamin Graham, the father of value investing, once said, "In the short run, the market is a voting machine, but in the long run, the market is a weighing machine." In this quote, Benjamin Graham was referring to the key difference between the "price" and the "value" of a security. In November 2006, Citigroup's stock (NYSE: C) was trading at $49.59. Following the credit crisis of 2007-2008 and by the end of October 2009, Citigroup's stock price had plummeted to $4.27. Several banks went under, and others saw their stock prices lose more than 60% of their value. Based on your understanding of stock prices and intrinsic values, which of the following statements is true? O A stock's intrinsic value is based on the fundamental cash flows and the company's risk. The intrinsic value of a stock is based only on the perceived risk in the company. You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the discounted dividend model to estimate the value of the company's stock? A company that is in a high-growth stage and plans to retain all its earnings for the next few years to support its growth A company that has been distributing a portion of their earnings every quarter for the past six years