Investments Chapter8

8/12/2019 Investments Chapter8

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CHAPTER 8

OVERVIEW OF EQUITY SECURITIES

Presenter

Venue

Date



EXHIBIT 8-1 COUNTRY AND REGIONALCONTRIBUTIONS 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 TOTALMARKET CAPITALIZATION AT THE END OF 2008

(BILLIONS OF U.S. DOLLARS)

Rank Name of Market

Total U.S. DollarMarket

Capitalization Total U.S. DollarTrading Volume

Number of ListedCompanies

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 (seehttp://www.world-exchanges.org).



EXHIBIT 8-3 REAL RETURNS ON GLOBAL EQUITYSECURITIES, BONDS, AND BILLS DURING 1900-2008

Source: E. Dimson, P. Marsh, and M. Staunton (2009)



EXHIBIT 8-6 INTERNATIONAL COMPARISONS OFSTOCK 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 bythe Australian Securities Exchange (see http://www.asx.com.au). For Australiaand the United States, the data pertain to direct and indirect ownership in equitymarkets; for other countries, the data pertain to direct ownership in shares andshare funds. Data not available in specific years are shown as “N/A.”



COMMON SHAREHOLDERS

• Share in the operatingperformance of the company.

Ownershipinterests

• Claim on assets after allliabilities have been paid.

Residualclaimants

• Voting rights on majorcorporate decisions.Governanceparticipants



VOTING RIGHTS

Votingrights

Statutoryvoting

Cumulativevoting

Shareclasses

Vote by proxy



EMBEDDED OPTIONS

Callablecommonshares Putable common

shares



PREFERENCE SHARES (PREFERRED STOCK)

Rank above common stock for dividendpayments and liquidation claims

Shareholders do not share in the firm’soperating performance

Generally do not have voting rights

Dividends are fixed and typically higherthan common dividends



DIVIDENDS ON PREFERENCE SHARES

Cumulative Noncumulative

Participating Nonparticipating



POSSIBLE ADVANTAGES OF CONVERTIBLEPREFERENCE SHARES

Earn a higher dividend

Opportunity to share in profits

Benefit from a rise in the price of the commonshares

Price is less volatile than the common shareprice



PRIVATE EQUITY SECURITIES

Equitysecurities

Private

Venturecapital

Leveragedbuyouts

Private

investment inpublic equityPublic



INVESTING IN NONDOMESTIC EQUITYSECURITIES

• Buy and sell shares directly in foreignmarkets.

Directinvestment

• Global depository receipts (GDR)• American depository receipts (ADR)• Global registered share (GRS)

• Basket of listed depository receipts(BLDR)

Depository

receipts(DR)



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 withexisting shares

Develop and broaden U.S.investor base withexisting shares

Develop and broaden U.S.investor base withexisting/newshares

Access qualifiedinstitutional buyers (QIBs)

Raising capital onU.S. markets?

No No Yes, through public offerings

Yes, through private placements

to QIBsSEC registration Form F-6 Form F-6 Forms F-1 and F-

6 None

Trading Over the counter(OTC)

NYSE, NASDAQ, orAMEX

NYSE, NASDAQ, orAMEX

Private offerings,resales, andtrading throughautomatedlinkages such as

PORTALListing fees Low High High Low

Size and earningsrequirements

None Yes Yes None

Source: Adapted from Boubakri, Cosset, and Samet (2008): Table 1.



RETURN CHARACTERISTICS OF EQUITYSECURITIES

Dividendincome

Price change (capitalgain)

Foreign exchangegains or losses

Reinvesteddividends



EXHIBIT 8-17 IMPACT OF REINVESTED DIVIDENDS ONCUMULATIVE REAL RETURNS IN THE U.S. EQUITY MARKET:

1900 –2008

Source: Dimson, Marsh, and Staunton (2009).



METHODS FOR ESTIMATING RISK ANDRETURN

Historical data

• Average rate of return• Standard deviation

Probability distribution ofpossible returns

• Expected return• Standard deviation



PREFERENCE SHARES ARE LESS RISKY THANCOMMON SHARES

Knownliquidation

value

Priorityclaim onincome

Fixeddividend



EMBEDDED OPTIONS AND RISK

Higher risk:

• Callable

• Nonputable

• Noncumulative

Lower risk:

• Noncallable

• Putable• Cumulative



WHY ISSUE EQUITY?

Raise capital

Finance revenue-generating activities

Ensure goingconcern status

Increase liquidity

Mergers andacquisitions

Stock-basedcompensation



GOALS FOR MANAGING EQUITY

Increasebook

value

Maximize

marketvalue

• Increase net income• Retain more earnings• Issue shares

• Manage investors’

expectations



ACCOUNTING RETURN ON EQUITY (ROE)

Financial Year Ending

31 Dec 2008 31 Dec 2007 31 Dec 2006

Pfizer

Net income $8,104,000 $8,144,000 $19,337,000

Total 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

t t

t

t



MARKET VALUE, BOOK VALUE, ANDPRICE-TO-BOOK RATIO

PfizerMarket price $16.97Total shares outstanding 6,750,000Total shareholders’ equity $57,556,000Total 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

Companywants to raiseequity capital

Company notcontractuallyobligated toshareholders

What is

the costof equity?



INVESTOR’S REQUIRED RATE OF

RETURN

Investor’s minimum required rate of

returnCost 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

Documents

Investments Chapter8