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.