CP

Common Stock Valuation

Common stock represents an ownership interest in a corporation, but to the typical

investor a share of common stock is simply a piece of paper characterized by two

features:

1. It entitles its owner to dividends, but only if the company has earnings out of which
   dividends can be paid, and only if management chooses to pay dividends rather
   than retaining and reinvesting all the earnings. Whereas a bond contains a promise
   to pay interest, common stock provides no such promise—if you own a stock, you
   may expecta dividend, but your expectations may not in fact be met. To illustrate,
   Long Island Lighting Company (LILCO) had paid dividends on its common stock
   for more than 50 years, and people expected those dividends to continue. However,
   when the company encountered severe problems a few years ago, it stopped paying
   dividends. Note, though, that LILCO continued to pay interest on its bonds; if it
   had not, then it would have been declared bankrupt, and the bondholders could
   potentially have taken over the company.


2. Stock can be sold at some future date, hopefully at a price greater than the purchase
   price. If the stock is actually sold at a price above its purchase price, the investor

Common Stock Valuation 193

TABLE 5-1 Initial Public Stock Offerings in 2001

% Change from Offer
U.S.
Issue Offer Proceeds in 1st Day’s through
Issuer (Business) Date Price (millions) Trading Dec. 31

The Best Performers

Verisity 3/21/01 $ 7.00 $ 26.8
14.3%
170.7%
Magma Design Automation 11/19/01 13.00 63.1
46.1
129.2
Monolithic System Technology 6/27/01 10.00 50.0
12.2
108.0
Williams Energy Partners 2/5/01 21.50 98.9
11.6
91.2
Nassda 12/12/01 11.00 55.0
40.5
85.6
Accenture 7/18/01 14.50 1,900.2
4.6
83.1
PDF Solutions 7/26/01 12.00 62.1
26.3
77.9
Willis Group Holdings 6/11/01 13.50 310.5
23.0
73.3
Select Medical 4/4/01 9.50 98.3
6.6
71.3
Odyssey Healthcare 10/30/01 15.00 62.1
15.0
68.3

The Worst Performers

Briazz 5/2/01 $ 8.00 $ 16.0
0.4% 88.9%
ATP Oil & Gas 2/5/01 14.00 84.0 0.0 79.9
Investors Capital Holdings 2/8/01 8.00 8.0 6.1 64.9
Align Technology 1/25/01 13.00 149.5
33.2 64.6
Torch Offshore 6/7/01 16.00 80.0
0.4 62.8
Enterraa 1/10/01 4.50 5.2 4.2 60.4
Tellium 5/17/01 15.00 155.3
39.5 57.5
Smith & Wollensky Restaurant 5/22/01 8.50 45.0 8.6 55.3
General Maritime 6/12/01 18.00 144.0 6.9 47.2
GMX Resources 3/15/01 8.00 10.0 0.0 46.9

aWent public as Westlinks and changed name later

Source:Kate Kelly, “For IPOs, Market Conditions Go from Decent to Downright Inhospitable,” The Wall Street Journal,January 2, 2002, R8. Copyright ©
2001 Dow Jones & Co., Inc. Reprinted by permission of Dow Jones & Co. via Copyright Clearance Center.

Stocks and Their Valuation 189