chapter 8 overview of equity securities presenter venue date
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CHAPTER 8 OVERVIEW OF EQUITY SECURITIES
PresenterVenueDate
EXHIBIT 8-1 COUNTRY AND REGIONAL CONTRIBUTIONS TO GLOBAL GDP AND EQUITY MARKET CAPITALIZATION
(2007)
Source: MacroMavens, IMF World Economic Outlook 2008, Standard & Poor’s BMI Global Index weights.
EXHIBIT 8-2 EQUITY MARKETS RANKED BY TOTAL MARKET CAPITALIZATION AT THE END OF
2008 (BILLIONS OF U.S. DOLLARS)
Rank Name of Market
Total U.S. Dollar Market
Capitalization Total U.S. Dollar Trading Volume
Number of Listed Companies
1 NYSE Euronext (U.S.) $9,208.9 $33,638.9 3,011
2 Tokyo Stock Exchange Group $3,115.8 $5,607.3 2,390
3 NASDAQ OMX $2,396.3 $36,446.5 2,952
4 NYSE Euronext (Europe) $2,101.7 $4,411.2 1,002
5 London Stock Exchange $1,868.2 $6,271.5 3,096
6 Shanghai Stock Exchange $1,425.4 $2,600.2 864
7 Hong Kong Exchanges $1,328.8 $1,629.8 1,261
8 Deutsche Börse $1,110.6 $4,678.8 832
9 TSX Group $1,033.4 $1,716.2 3,841
10 BME Spanish Exchanges $948.4 $2,410.7 3,576
Source: Adapted from the World Federation of Exchanges 2008 Report (see http://www.world-exchanges.org).
EXHIBIT 8-3 REAL RETURNS ON GLOBAL EQUITY SECURITIES, BONDS, AND BILLS DURING 1900-2008
Source: E. Dimson, P. Marsh, and M. Staunton (2009)
EXHIBIT 8-6 INTERNATIONAL COMPARISONS OF STOCK OWNERSHIP IN SELECTED COUNTRIES: 2000–2008
2000 2002 2004 2006 2008 Australia – Direct/Indirect 52% 50% 55% 46% 41% Canada – Shares/Funds 49 46 49 N/A N/A Germany – Shares/Funds 19 18 16 16 14 Hong Kong – Shares 22 20 24 N/A 22 New Zealand 24 N/A 23 26 N/A South Korea – Shares 7 8 8 7 N/A Switzerland – Shares/Funds 34 25 21 21 21 Sweden – Shares 22 23 22 20 18 U.K. – Shares/Funds 26 25 22 20 18 U.S. – Direct/Indirect N/A 50 49 N/A 45
Source: Adapted from the 2008 Australian Share Ownership Study conducted by the Australian Securities Exchange (see http://www.asx.com.au). For Australia and the United States, the data pertain to direct and indirect ownership in equity markets; for other countries, the data pertain to direct ownership in shares and share funds. Data not available in specific years are shown as “N/A.”
COMMON SHAREHOLDERS
• Share in the operating performance of the company.
Ownership interests
• Claim on assets after all liabilities have been paid.
Residual claimants
• Voting rights on major corporate decisions.
Governance participants
VOTING RIGHTS
Voting rights
Statutory voting
Cumulative voting
Share classes
Vote by proxy
EMBEDDED OPTIONS
Callable common shares Putable common
shares
PREFERENCE SHARES (PREFERRED STOCK)
Rank above common stock for dividend payments and liquidation claims
Shareholders do not share in the firm’s operating performance
Dividends are fixed and typically higher than common dividends
DIVIDENDS ON PREFERENCE SHARES
CumulativeNoncumulativ
e
ParticipatingNonparticipat
ing
POSSIBLE ADVANTAGES OF CONVERTIBLE PREFERENCE SHARES
Earn a higher dividend
Opportunity to share in profits
Benefit from a rise in the price of the common shares
Price is less volatile than the common share price
PRIVATE EQUITY SECURITIESEquity securities
Private
Venture capital
Leveraged buyouts
Private investment in public equity
Public
INVESTING IN NONDOMESTIC EQUITY SECURITIES
Direct investment
•Buy and sell shares directly in foreign markets.
Depository receipts
(DR)
•Global depository receipts (GDR)•American depository receipts (ADR)•Global registered share (GRS)•Basket of listed depository receipts (BLDR)
EXHIBIT 8-16 SUMMARY OF THE MAIN FEATURES OF AMERICAN DEPOSITORY RECEIPTS
Level I (Unlisted)
Level II (Listed)
Level III (Listed)
Rule 144A (Unlisted)
Objectives Develop and broaden U.S. investor base with existing shares
Develop and broaden U.S. investor base with existing shares
Develop and broaden U.S. investor base with existing/new shares
Access qualified institutional buyers (QIBs)
Raising capital on U.S. markets?
No No Yes, through public offerings
Yes, through private placements to QIBs
SEC registration Form F-6 Form F-6 Forms F-1 and F-6
None
Trading Over the counter (OTC)
NYSE, NASDAQ, or AMEX
NYSE, NASDAQ, or AMEX
Private offerings, resales, and trading through automated linkages such as PORTAL
Listing fees Low High High Low Size and earnings requirements
None Yes Yes None
Source: Adapted from Boubakri, Cosset, and Samet (2008): Table 1.
RETURN CHARACTERISTICS OF EQUITY SECURITIES
Dividend incomePrice change (capital gain)
Foreign exchange gains or losses
Reinvested dividends
EXHIBIT 8-17 IMPACT OF REINVESTED DIVIDENDS ON CUMULATIVE REAL RETURNS IN THE U.S. EQUITY MARKET: 1900–2008
Source: Dimson, Marsh, and Staunton (2009).
METHODS FOR ESTIMATING RISK AND RETURN
Historical data•Average rate of return•Standard deviation
Probability distribution of possible returns•Expected return•Standard deviation
PREFERENCE SHARES ARE LESS RISKY THAN COMMON SHARES
Less risk
Known liquidation
value
Priority claim on income
Fixed dividend
EMBEDDED OPTIONS AND RISK
Higher risk:• Callable• Nonputable• Noncumulative
Lower risk:• Noncallable • Putable• Cumulative
WHY ISSUE EQUITY?
Raise capital
Finance revenue-generating activities
Ensure going concern status
Increase liquidity
Mergers and acquisitions
Stock-based compensation
GOALS FOR MANAGING EQUITY
Increase book value
Maximize market value
• Increase net income• Retain more earnings• Issue shares
• Manage investors’ expectations
ACCOUNTING RETURN ON EQUITY (ROE)
Financial Year Ending31 Dec 2008 31 Dec 2007 31 Dec 2006
PfizerNet income $8,104,000 $8,144,000 $19,337,000Total stockholders’ equity $57,556,000 $65,010,000 $71,358,000
%2.132/)000,010,65$000,556,57($
000,104,8$ROE
%9.112/)000,358,71$000,010,65($
000,144,8$ROE
2/BVEBVE
NIROE
2008
2007
1
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MARKET VALUE, BOOK VALUE, AND PRICE-TO-BOOK RATIO
Pfizer Market price $16.97 Total shares outstanding 6,750,000 Total shareholders’ equity $57,556,000 Total market value of equity $114,547,500
Market value of equity = Market price per share × Shares outstandingMarket value of equity = US$16.97 × 6,750,000 = US$114,547,500
Book value of equity per share = Total shareholders’ equity/Shares outstandingBook value of equity per share = US$57,556,000/6,750,000 = US$8.53
Price-to-book ratio = Market price per share/Book value of equity per sharePrice-to-book ratio = US$16.97/US$8.53 = 1.99
THE COST OF EQUITY
Company wants to raise equity capital
Company not contractually obligated to shareholders
What is the cost of equity?
INVESTOR’S REQUIRED RATE OF RETURN
Investor’s minimum required rate of return
Cost of equity
Estimate with pricing models: dividend discount model (DDM),
capital asset pricing model (CAPM), etc.
SUMMARY
• Types of equity securities
• Importance and relative performance of equity securities
• Ownership characteristics and voting rights
• Investing in nondomestic equities
• Risk and return characteristics
• Market value and book value
• Cost of equity, (accounting) return on equity, and investor’s required return