Chapter 7 share valuation

PowerPoint to accompany Chapter 7 Share Valuation Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Learning Goals:  Differentiate between debt and equity capital.  Describe the rights, characteristics and features of ordinary and preference shares.  Describe how shares are issued.  Understand the concept of market efficiency and share valuation.  Discuss the free cash flow valuation model and the different ways of estimating ordinary share values.  Explain the relationships between financial decisions, return, risk and the firm’s value.  . Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Debt & Equity Capital  Capital: Long term funds of a firm  Debt Capital: Long term borrowing incurred by the firm (loans, bonds etc).  Equity Capital: Long term funds provided by the firm’s shareholders (preference and ordinary). Can be raised internally (retained earnings) or externally (selling of shares). Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Debt & Equity Capital Page 302. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Ordinary Shares  The basic and most common type of issued share.  Ordinary shareholders are the residual owners of the firm.  Liability is limited.  No guarantee of cash flows.  Holder’s are usually rewarded with dividends and capital gains. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Ordinary Shares  Three ownership types: 1. Privately Owned 2. Closely Owned 3. Publicly Owned  No par value.  Holder’s have pre-emptive rights.  Generally have voting rights attached (but in some cases wont).  Can be issued internationally. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Preference Shares  May have a par value.  Are generally by nature quasi debt.  Less risk than ordinary shares.  Generally no voting rights.  Preference over ordinary shareholders in the distribution of income and assets.  Generally place restrictive covenants upon the firm.  Generally cumulative.  May have a conversion feature. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Venture Capital  Privately raised external equity capital used to fund early stage firms with attractive growth prospects.  Investment comes from:  Venture capitalists: Providers of venture capital: typically formal businesses that maintain strong oversight of the firms they invest in and have clearly defined exit strategies  Angel capitalists: Wealthy individual investors who do not operate as a business but invest in promising early-stage companies in exchange for a portion of the firm’s equity. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Issuing Ordinary Shares  Ordinary shares can be sold to the primary market via:  A Public Offering  A Rights Offering  A Private Placement Figure 7.1, page 307. Copyright © 2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442518193/ Gitman et al / Principles of Managerial Finance / 6th edition Share Quotations  Are used by financial managers, existing and potential investors to monitor share price.  Include information such as current price data and statistics on recent price behaviour.  Published in financial newspapers (Australian Financial Review) and business sections of major newspapers.