The components of an ordinary share?
Part-owner (voting rights)
Variable profit distributions (dividends)
Ranked after debt providers and preference shares
Components of preference shares?
No voting rights
Fixed dividends
Ranked after debt providers but before ordinary shares
Explain what American depositary receipts are?
Can be traded in US but represents a specified no. of shares in a non-US company.
US Bank purchase a number of non-US shares, then sells certificate of beneficial ownership
Traded on NASDAQ and NYSE
Dividends is US $
Available in other currencies i.e., global depositary receipts
What are the three methods of equity issuance?
PLACING - shares placed with institutional investors by issuing house (Investment Bank).
INTERMEDIARIES OFFER - A number of brokers place an issue with their clients
OFFER FOR SALE - New shares offered by an issuing house (IB) to the general public
Types: offer for sale by tender: invites offer from public. Offer for sale by subscription - underlying company offers the issue to the public.
Explain rights issues
Existing shareholders have the right to subscribe or new shares in proportion to their current holdings at a discount to current market price.
What is the Ex right price formula?
ERP = Old MV + Finance Raised / new total no. of shares
What is the rights price formula?
Rights price = (ex-rights price - issue price)
Explain what scrip/bonus/capitalisation issues are?
Existing shareholders have the right to subscribe for new shares in proportion to their current holdings for FREE
How is a scrip different from a stock split?
a stock split is just 1 share split into two 0.5 shares, nominal value is the same
Define holding period return and whats its equation?
The return from holding ordinary shares comes from dividends and capital gains (or losses)
Calc:
((End Value - Start Value) + Dividend income / Start Value) x 100
What is the dividend yield and its equation? What are its limitations
Summarises the current income level from the shares
Dividend yield = (Dividend / Share price) x 100
Ignores share price and based on current year dividends
What is dividend cover and its equation
Indicates whether a firm will be capable of maintaining its current level of dividends
Dividend cover (multiple) = EPS (earnings per share/dividend per share (DPS).
What is the gordon growth model
A dividend discount model, the standard tool for valuing equities in the UK
Assumes that dividends will grow at a constant rate over time and share price at the present value of future dividends (in perpetuity)
What is the gordon G M equations for when you’re
Given dividend in one years time?
Given current years dividend?
Po = D1 / (R - G)
Po = Do(1+G) / R - G)
Po = Current price
Do = Current dividend
D1 = dividend in one year
R = Investors required return
G = Growth rate in dividend
How do you calculate the growth rate in dividends
= Retention ratio x Return on equity
in more detail
(retained earnings / total earnings) x return on equity
What are the two types of valuation process based on discounting?
Absolute value techniques e.g., gordon GM
Relative value techniques
Equity value = earnings power x market price multiple
what different types of earnings power metrics are there?
Profit - earnings x p/e multiple
Sales - price / sales
Net Assets - P / book value
Cashflows - price / cashflow
What is the earnings per share calculation?
Basic EPS = Earnings (attributable to ordinary shares) / no. of ordinary shares
What does earnings attributable to ordinary shares mean
Earnings after; interest, tax, preference dividends
What is diluted EPS?
Only if potentially dilutive securities in issue e.g., convertibles, stock, options and warrants.
Dilutive could result in new ordinary shares being issued
What is the price to earnings ratio?
Measure of potential future growth (and therefore future share price performance)
What are price earning ratio equations?
Trailing (Historic PE) = Price / Historic EPS
Leading (prospective PE = price / forecast EPS
Pro/Con of Price to Book value
Assets unlikely to have a negative book value but book value is subject to accounting distortions
Pro/Con of Price to Sales ratio
Sales are less subject to accounting distortions, but sales doesnt mean profits, sales are generated by equity and debt finance.
