Finance - Lucia Staszkiewicz, Piotr Staszkiewicz

Finance (eBook)

A Quantitative Introduction

Lucia Staszkiewicz, Piotr Staszkiewicz (Autoren)

eBook Download: PDF | EPUB

2014 | 1. Auflage
186 Seiten
Elsevier Science (Verlag)
978-0-12-802798-1 (ISBN)

Many students want an introduction to finance. Those who are quantitatively-oriented learners can benefit in particular from an introduction that puts more emphasis on mathematics and graphical presentations than on verbal descriptions. By illustrating core finance facts and concepts through equations and graphical material, Finance: A Quantitative Introduction can help people studying business management, marketing, accounting, and other subjects. By using few lengthy verbal explanations and many illustrations, it can teach readers quickly and efficiently. - Chapter-concluding questions (with answers) and case studies enhance its utility as a textbook and a reference - Mixture of theory and problem-solving contains enough mathematical tools to help readers assess facts and evaluate real data in practical tasks - Short, simple presentation is perfect for non-native English speakers

Piotr Staszkiewcz is a Polish economist interested in auditing and financial markets. He is a public auditor registered at KIBR (Polish Audit Association). He earned his Ph.D. in macroeconomics from Wroclaw Economic University in 2003. From 2003 to 2005 he served as a member of the Management Board of Low Silesia Chamber of Auditors. In 2009 he was appointed to the Polish Auditor Examination Commission by the Polish Ministry of Finance. He is also a fellow of the Polish Economic Association.

Chapter 10

Residual Rights Market

Abstract

A typical residual right instrument is a common share. The most commonly-used techniques for stock valuation are discounted cash flows and relative valuation.

Keywords

relative valuation

DCF

time series

P/E

10.1. Share types

The equity market is the residual rights market. A typical instrument on this market is a share. The term “equity” comes from accounting where it refers to the total assets less total liabilities (and provisions). “Residual right” is a term with its roots in law. It means that the holder of such a right may claim the remaining assets of an entity after all of the creditors have been paid off. Both terms therefore have the same meaning in substance but different roots.

Another word for ordinary (equity) shares is stock. The term stock is also used in the context of finished goods (production) in-house; thus, sometimes the context can play a significant role.

Below is a visual classification of residual instruments:

Types of shares:

• Ordinary (equity) shares are standard shares with no special rights or restrictions.

• Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders.

• Participating preference shares. The fixed rate of dividends is guaranteed as well as participation in surplus profit.

• Convertible preference shares. They can be converted into equity shares within a certain period.

• Partly paid shares are issued without the company requiring payment of the full issue price. At a specified future date or dates, the company is entitled to call for all or part of the outstanding issue price, and the shareholder at the time of the call is legally obliged to pay the call.

• Cumulative preference shares give holders the right that, if a dividend cannot be paid in a certain year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has any distributable profits.

• Noncumulative preference shares. A fixed rate of dividends is payable, but only if there is sufficient profit.

• Redeemable shares – the company can buy the shares back at a future date – this can be at a fixed date or another date at the discretion of the company.

• Employee shares. Shares issued to employees or management at discounted rates. Usually subject to specific requirements (time, price, number, etc.).

• Nonvoting shares carry no rights to vote and usually no right to attend general meetings either but they give return in the form of dividend.

• Deferred ordinary shares. Shares on which no dividend is paid until other classes of shares have received a minimum dividend. Thereafter, they will usually be fully participating.

In some companies, different classes of shares with the same rights are issued to different people, and the deeds provide that the managers may change the dividends between the different classes. Such shares are often described by a letter of the alphabet (so-called “alphabet shares”).

Nonvoting shares are often issued to employees so that some of their remuneration can be paid as dividends. Such form of payment can be more tax-efficient for the company and the employees in some jurisdictions. The same is sometimes done for members of the main shareholders’ families or silent partners in the business.

Voting shares, dividend shares, and capital shares (representing other rights than voting and dividends). It happens that three classes of shares are created with class “A” having all voting rights, class “B” having all dividend rights, and class “C” having all capital rights. It is possible for different shareholders to have different percentages of the rights for these purposes. As a simple example, shareholder Mike may have 10% of the voting rights (“A” shares), 60% of the dividend rights (“B” shares), and 30% of the capital rights (“C” shares). Shareholder John has 70% of the votes, 50% of the dividends, and 80% of the capital.

Pre-emptive rights (or “rights of pre-emption”) are any rights shareholders may have to be offered shares in a company before they are made available to anyone else. They can arise on the share issue or transfer of shares. The pre-emptive rights are the primary tool to conserve the shareholders’ power and prevent the dilution of shareholding. These rights are also used to maintain a balance between shareholders’ voting.

A special type of these rights are the subscription rights. They are used to convert the rights to new issue shares. The value of subscription right is given by:

=Sc−SiN+1

where

V = value of the subscription right,

Sc = current price of the share,

Si = issue price of the share, and

N = number of rights necessary to purchase one new share.

Example:

ABC plc stock is traded now at 100 euros on the stock exchange. The nominal price of one share of new issue is 70 euros. To acquire one share of new issue, two subscription rights are necessary. What is the value of the subscription right?

Solution:

=Sc−SiN+1=100−703=10 euros

There are usually no legal definitions of share classes and the same class of share will have different rights in different companies. But, in general, all shares’ values are based on the value of the company that they represent. Note that the holders of the shares in the parent company, which is controlling subsidiaries, actually assess the value of his/her stock based on the consolidated position of their business.

The convertible loans holder can convert a loan into a specified number of shares of common stock in the issuing company or cash of equal value. This instrument is a loan with embedded option; thus, it can be split as:

price (value) of convertible loans = loan price without the option − price of option.

In accounting, the value of loan is shown separately in the liability section of the balance sheet while the value of option is an equity element.

Large non-US companies can be listed on a US exchange as well as an exchange in their home country. In order to be listed on a US exchange these companies must maintain a block (% of equity) of shares at a bank in the United States. On this basis, the holding bank establishes American depositary shares and issues an American depositary receipt (ADR) for each share a trader acquires.

Small companies that do not qualify and cannot meet the listing requirements of exchanges may be traded over-the-counter (OTC) by an off-exchange mechanism in which trading occurs directly between parties. Examples of OTC markets:

• OTC Bulletin Board (OTCBB)

• OTC Markets Group

Note:

If you have a share in a parent company that controls other companies, you have part of the control of all consolidated assets, not just on the parent company’s individual assets. However, if a subsidiary is fully owned and makes substantial losses, they will be consolidated and negatively affect the value of the entire group and, therefore, will also negatively impact the value of your shares.

10.2. Analysis methods

There are different methods for stock analysis. In general, these methods can be grouped as follows:

1. Fundamental analysis

2. Stock quoting time series analysis

3. Portfolio analysis

4. Behavioral analysis

5. Econometric modeling.

The fundamental analysis is based on economic theories applied to historical data of the entity. The analysis consists of subareas such as macroeconomic, microeconomics, industrial, segmental, companies’ government, and financial analysis. All of them are strongly associated with the entity, mainly the data from its financial statement. Recently, due to globalization, financial data have become more standardized and more achievable; thus, this analysis becomes easier. A disadvantage of the fundamental analysis is that the data are subject to company discretion in terms of its quality and timing. Because of this, both assurance services (mainly audit and due diligence) and short selling are developing.

Stock quoting time series analysis is popular among investors. In contrast to fundamental analysis, the quoting provided by the stock is a stream of data that is recognized as being correct and reliable. Another characteristic of the quoting is that the data are usually of high frequency (on continuous quoting the data are provided with the tick interval, which might be more frequent than one second). Because of that nature, the mathematical and econometric models (besides simple technical trends...

Erscheint lt. Verlag	1.12.2014
Sprache	englisch
Themenwelt	Recht / Steuern ► Wirtschaftsrecht
	Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
	Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Bankbetriebslehre
ISBN-10	0-12-802798-3 / 0128027983
ISBN-13	978-0-12-802798-1 / 9780128027981

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