subject about Common stock valuation.

i need you to explain about this base on book fundamental:

1. preemptive right, 2 classes of common stock, common stock has unlimited liability.

this is found from book

SEC bega However, How large investors can work together toomde management changes. These rulings have helped keep managers focused on holder concerns, which means the maximization of stock prin 9.1b The Preemptive Right Prentary Common stockholders often have the right, called the preemptive right, to pur promptive right is automatically included in every corporate chatter; in other chase on a pro rata basis any additional shares sold by the firm. In some states, the states, it must be specifically inserted into the charter. The purpose of the preemptive right is twofold. First, it prevents the man- agement of a corporation from issuing a large number of additional shares and purchasing those shares itself. Management could use this tactic to seize control of the corporation and frustrate the will of the current stockholders. The second, and Preemptive Right A provision in the corpo rate charter or bylaws that gives common stock holders the right to pur- chase on a pro rata bask new issues of common stock for convertible securities) Dor more important reason for the preemptive right is to protect stockholders from dilution of value. For example, suppose 1.000 shares of common stock, each with $100,000. If an additional 1,000 shares were sold at $50 a share, or for $50.000, this would raise the firm's total market value to $150,000. When the new total market value is divided by the 2.000 total shares now outstanding, a value of $75 a share is obtained. The old stockholders would thus lose $25 per share, and the new stockholders would have an instant profit of $25 per share. Thus, selling common stock at a price below the market value would dilute a firm's price and transfer wealth from its present stockholders to those who were allowed to purchase the new shares. The preemptive right prevents this. TEST Identify some actions that companies have taken to make takeovers more difficult What is the preemptive right, and what are the two primary reasons for its existence? 9-2 TYPES OF COMMON STOCK Although most firms have only one type of common stock, in some instances classified stock is used to meet special needs. Generally, when special classi- fications are used, one type is designated Class A, another Class B, and so forth. Small, new companies seeking funds from outside sources frequently use different types of common stock. For example, when Google went public, it sold Class A Classified Stock Common stock thote given a special design tion such as Glass A Class B to meet spec needs of the compar 302 Part 3 Financial Assets Founders Shares Stock owned by the form founders that enables them to maintain control over the company without having to own cdiority of stock stock to the public while its Class B stock was retained by the company's insider. The key difference is that the Class B stock has 10 votes per share while the Class A stock has 1 vote per share. Google's Class B shares are predominantly held by the company stwo founders and its current CEO. The use of classified stock thus having to own a majority of the common stock. For this reason, Class B stock of enables the company's founders to maintain control over the company without this type is sometimes called founders' shares. Since dual-clase share structures of sometimes criticized because they may enable insiders to make decisions that are this type give special voting privileges to key insiders, these structures are Most firms have no classified shares, but a firm that does could designate its Note that Class A, "Class B, and so forth, have no standard meanings counter to the interests of the majority of stockholders DERS re Class B shares as founders' shares and its Class A shares as those sold to the public, while another could reverse those designations. Still other firms could General Motors acquired Hughes Aircraft for $5 billion, it paid in part with a new Class H common, GMH, which had limited voting rights and whose divi. dends were tied to Hughes's performance as a GM subsidiary. The reasons for the new stock were that (1) GM wanted to limit voting privileges on the new classified stock because of management's concern about a possible takeover and (2) Hughes's employees wanted to be rewarded more directly on Hughes's own performance than would have been possible through regular GM stock. These Class H shares disappeared in 2003 when GM decided to sell off the Hughes unit SELF TEST What are some reasons why a company might use classified stock? 9-3 STOCK PRICE VERSUS INTRINSIC VALUE We saw in Chapter 1 that a manager should seek to maximize the value of his or ent market price her firm's stock. In that chapter, we also emphasized the difference between stock price and intrinsic value. The stock price is simply the current market price, and it is easily observed for publicly traded companies. By contrast, intrinsic value, which represents the "true" value of the company's stock, cannot be directly TRUE" value of observed and must instead be estimated. Figure 9.1 illustrates once again the connection between stock price and intrinsic value. E company's As the figure suggests, market equilibrium occurs when the stock's price OOK equals its intrinsic value. If the stock market is reasonably efficient, gaps IMATED between the stock price and intrinsic value should not be very large and they should not persist for very long. However, in some cases, an individual company's stock price may be much higher or lower than its intrinsic value. During several years leading up to the credit crunch of 2007-2008, most of the LIBRIUM large investment banks were reporting record profits and selling at record prices. However, much of those earnings were illusory because they did not reflect the huge risks that existed in the mortgage-backed to ristic firms were purchasing n with