MMW MODULE 9: STOCKS, BONDS & MUTUAL FUNDS stock at a profit.

stock at a profit. Many companies offer two classes of stock to Preference share is divided into categories:
appeal to different types of investors.
❖ STOCKS 1. NON-PARTICIPATING
CLASSES OF STOCKS
Corporations are built and expanded with money known as - The stockholders receive only the fixed dividend and no
capital, which is raised by issuing and selling shares of stock. 1. ORDINARY SHARES more.
Stocks - With ordinary share, an investor shares directly in the 2. PARTICIPATING
-are shares in the ownership of the company. represent success or failure of the business. When the company
ownership shares of a corporation. Ownership in a company is does well, the dividends and price of the stock may rise, - The stockholders may receive additional dividends if the
measured by the number of shares an investor owns. and the investors make money. When the company company does well.
Stockholder does poorly, it does not pay dividends and the price of ✓ Convertible preference means the stock may be
-A person who owns a share or stocks in a certain company. the stock may fall. exchanged for a specified number of ordinary shares in the
These investors acquire not only a share of the ownership of the future.
corporation but also the right to receive income in the form of 2. PREFERENCE SHARES
dividends. Each ownership portion, or share, is represented by a - With preference share, the dividends are fixed, Steps to distribute dividends on preference and ordinary
stock certificate. regardless of how the company is doing. When the share:
Dividend board of directors of a company declare a dividend, the 1. If the preference share is cumulative, any dividends that are
-the amount of stockholder’s share of the company’s earning or preference shareholders are paid before the ordinary. If in arrears are paid first; then the preference dividend is paid
profit. the company goes out of business, the preference for the current period. When the dividend per share is
Dividend Per Share shareholders have priority over the ordinary stated in pesos (n0-par stock), go to Step 2. When the
-ratio of the dividends to the number of shares. shareholders as far as possibly getting back some of dividend per share is stated as a percent (par stock),
Stock market their investment. multiply the par value by the dividend rate.
-a place where stocks can be bought or sold. The stock market - Preference share is issued either with or without a par
in the Philippines is governed by the Philippines Stock Exchange value. When the stock has a par value, the dividend is Dividend per share (preference) = Par value x Dividend
(PSE). specified as a percent of par. For example, cach share of rate
Market Value 8%, P100 par value preference share pays a dividend of
-the current price of a stock at which it can be sold. 2. Calculate the total amount of the preference share dividend
P8.00 per share (P100 x .08) per year. When preference by multiplying the number of preference shares by the
Stock Yield Ratio share has no par value, the dividend is stated as a peso
-ratio of the annual dividend per share and the market value per dividend per share.
amount. Note, however, that Section 6 of the
share. Also called current stock yield. Corporation Code of the Philippines states that Total preference dividend= Number of shares x Dividend
Par Value preference shares of stock may be issued only as par per share
-the per share amount as stated on the company certificate. value shares.
Unlike market value, it is determined by the company and 3. Calculate the total ordinary share dividend by subtracting
✓ Cumulative preference share receives dividends each year.
remains stable over time. the total preference share dividend from the total dividend
When no dividends are paid one year, the amount owed,
declared.
known as dividends in arrears, accumulates. Ordinary
Dividends on Preference and Ordinary Share shareholders cannot receive any dividends until all the Total ordinary dividend = Total dividend - Total preference
dividends in arrears have been paid to cumulative dividend
Generally, if the company does well, the investor or shareholder preference shareholders.
will receive dividends, which are distributions of the company's
profits. If the share price goes up, the stockholder can sell the
4. Calculate the dividends per share for ordinary share by Illustration: Mog Company has 100,000 shares of P100 par The current yield for a stock is determined by dividing the
dividing the total ordinary share dividend by the number of value, 6%, cumulative preference share and 2,500,000 shares of annual dividend per share by the current price of the stock.
shares of ordinary share. ordinary share. Although no dividend was declared last year, a
P5,000,000 dividend has been declared this year. Calculate the Current yield = Annual dividend per share
Dividend per share (ordinary) = Total ordinary dividend amount of dividends due the preference shareholders and the Current price of the stock
Number of shares (ordinary) dividend per share of ordinary share. Illustration: Calculate the current yield for Prettier Than Pink
Corporation stock, which pays a dividend of P1.70 per year and
is currently selling at P34.50 per share.
Illustration: Kash Corporation has 2,500,000 shares of ordinary 1. Because the preference share is cumulative, and the
share outstanding. If a dividend of P4,000,000 was declared by company did not pay dividends last year, the preference Current yield = 1.70
the company directors last year, what are the dividends per shareholders are entitled to the dividends in arrears and the 34.50 = .0492753 = 4.93%
share of ordinary share? dividends for the current period.
Dividend per share (preference) = Par value x Dividend rate
Since Kash has no preference share, the ordinary shareholders = 100 x .06 • Price-Earnings Ratio of a Stock
will receive the entire dividend. Go directly to Step 4. = P6.00 per share
Price-to-earnings ratio
Dividend per share (ordinary) 2. Total preference dividend (per year) = Number of shares x
= Total ordinary dividend /Number of shares (ordinary) Dividend per share - Commonly called the price-earnings ratio or P/E ratio.
= 4,000,000/ 2,500,00 Total preference dividend (per year)= 100,000 x 6.00 = P600,000 - One of the most widely used tools for analyzing a stock.
= P1.60 per share Total preference dividend = 600,000 (arrears) + 600,000 - This number shows the relationship between the price of
(current year) = P1,200,000 stock and the company’s earnings for the past 12 months.
Illustration: The board of directors of Sabell Developers, Inc., - Found by dividing the current price per share by the earnings
declared a dividend at P300,000. The company has 60,000 3. Total ordinary dividend = Total dividend - Total preference per share.
shares of preference share that pay P0.50 per share and dividend
100,000 shares of ordinary share. Calculate the amount of Total ordinary dividend = 5,000,000 - 1,200,000 = P3,800,000 Basic earnings per share is determined by dividing net income
dividends due the preference shareholders and the dividend per by ordinary shares outstanding. Earnings should be the net
share of ordinary share. 4. Dividend per share (ordinary) income after deducting dividends on preference share. Ordinary
=Total ordinary dividend /Number of shares (ordinary) shares outstanding should be the weighted average number of
1. Since the preference dividend is stated in pesos (P0.50 per = 3,800,000/ 2,500,000 ordinary shares outstanding during the period. Note that the
share), the first step is dispensed with. Proceed to step 2. = P1.52 per share earnings per share figure is an amount attributable to every
ordinary share outstanding during a particular period.
2. Total preference dividend = Number of shares x Dividend per
Enterprises whose shares are publicly traded are required to
share • Current Yield for a Stock disclose earnings per share information.
Total preference dividend = 60,000 x .50 = P30,000
3. Total ordinary dividend = Total dividend - Total preference Current yield The price-earnings ratio is an important indicator because it
dividend reflects "buyer confidence" in a particular stock compared with
- a way of evaluating the current value of a stock. It tells how
Total ordinary dividend = 300,000 - 30,000 = P270,000 the stock market as a whole. For example, a P/E ratio of 20, or
much the dividend is as a percentage of the current price of the
4. Dividend per share (ordinary) 20:1. means that buyers are willing to pay 20 times the current
stock. When a stock pays no dividend, there is no current yield.
=Total ordinary dividend /Number of shares (ordinary) earnings for a share of stock. The price-earnings ratio of a stock
= 270,000/ 100,000 - One way to measure how much an investor is earning on a is most useful when compared with the P/E ratios of the
= P2,70 per share stock compared with other investments is by calculating the company in previous years and with the ratios of other
current yield. companies in the same industry.
The price-earnings ratio of a stock is computed as follows: On the other hand, the proceeds² from selling stock include the dividends paid the investor, minus, of course, any commissions
selling price less brokerage commission. and other fees.
1. Divide the current price of the stock by the earnings per share
ROI = Net gain + Total dividends
for the past 12 months: The proceeds from sale less the cost of purchasing stock is the Total cost of stock purchase
gain or loss.
Price-earnings ratio = Current price per share
Earnings per share Illustration: Illustration: Using the data in the previous illustration and
assuming that a total of P1,300 in dividends was received for
Buying Transaction: the year, Ben's ROl is calculated as follows:
2. Round answer to the nearest whole number (may be written
as a ratio, x:1) Ben Aman decides to buy a stock whose market price is P10.00
and with a par value of P1.00. Based on the Board Lot Table, the ROI = (12,805 -10,150) +1,300
Illustration: Alex stock is currently selling at P104.75. If the 10,150
minimum number of shares he can buy at a regular transaction
company had earnings per share of P3.60 last year, calculate the ROI = 0.3897 or 38.97%
is 1,000 shares. In this case, the amount that he needs is about
price-earnings ratio of the stock.
P10,000.00 plus charges. His required cash outflow will be as
Price-earnings ratio = Current price per share follows: Ben's ROI at 38.97% is a very good return.
Earnings per share
Market Price Per Share P10.00
Price-earnings ratio = 104.75
Multiply by Minimum No. of Shares 1,000
3.60 = 29.09722 = 29 or 29:1
P10,000.00
Add: Broker's Commission (1.5%) 150.00
The ratio shows that investors are currently willing to pay 29
Total Cash Outlay P10,150.00
times the earnings for 1 share of Alex stock.

Selling Transaction:
Cost, Proceeds and Gain (or Loss) on a Stock Transaction
After a year, Ben opts to sell all the shares he previously bought.
Investors take on the risks of purchasing stocks in the hope of Current market price is P13.00 per share. In this case, the
making money. Although they are more risky than many other proceeds of the sale is about P13,000 less charges. His cash
types of investment, over the years stocks have shown they are inflow will be as follows:
capable of generating spectacular returns in some periods and
Market Price Per Share P13.00
steady returns in the long run. One investment strategy is to
Multiply by Minimum No. of Shares 1,000
buy stocks and keep them for the dividends paid by the
P13,000.00
company each quarter. Another strategy is to make money from
Less: Broker's Commission (1.5%) 195.00
the profit (or loss) of buying and selling the stock. Simply put,
Net Cash Receivable P12,805.00
investors generally want to buy low and sell high.
The cost of purchasing stock includes not only the purchase
1

price but also brokerage commission. Brokerage commission Return on Investment