Equities

• Ordinary Shares

  • Part owner of the company
  • Come with voting rights
  • Receive dividends
  • Rank AFTER debt and preference shares
• Preference shares

  • No voting rights
  • Fixed dividend
  • Rank after debt but before ordinary shares
• American Depositary Receipts (ADRs)

  • Can be traded in the US but represents a specified number of shares in a non-US company
  • US banks purhcase a number of non-US shares, and sell a certificate of beneficial owernship

  Traded on NYSE and NASDAQ

  • Dividends paid in USD
• Global depository receipts

  • A negotiable financial instrument representing shares in a foreign company
• Placing


  An example of equity issuance. The cheapest way

  • New shares placed with institutional investors by an investment bank (issuing house)
  • Private sale of new shares to specific individuals as a way of raising capital
  • The investment bank chooses who gets access
• Intermediaries Offer


  A number of brokers place an issue with their clients

  • An offer of shares to intermediaries for them to offer to their clients
• Offer for sale


  General new shares offered by an issuing house (investment bank) to the general public

  • Offer for sale by tender (public offers by issuing house)
  • Offer for sale subscription (underlying company offers to the public)
• Rights Issue

  Existing shareholders have the right to new shares in proportion to their current holdings, at a discount to current market price.

  • E.G., a 1:10 rights issue with price 10p where the current price is 200p
• Scrip / Bonus / Capitalisation Issues / Stock Splits


  Free new shares in proportion to current holdings, given to existing shareholders
• Holding Period Return

  ((End Value - Start Value) + Dividend Income / Start Value) * 100
• Dividend Yield


  Summarises current level of income from shares

  • Ignores share price changes
  • Based on current dividends, not any future changes

  % = (Dividend / Share Price) * 100
• Dividend Cover

  Indicates whether a firm will be capable of maintaining its current dividend level

  Dividend Cover = EPS/DPS
• Gordon's Growth Model


  P = D / r-g

  • Assumes dividends will grow at a constant rate, g, over time
  • Share price is present vale of future dividends in perpetuity

  R = Investor's required return rate
• Dividend Growth Rate

  G = (Retained earnings / Total earnings)* Return on equity (ROE)
• Relative Value Models (Multiples)


  Relative Value: based on market multiples

  • Based on similar firms
  • Equity value = earnings power x Market price multiple
  • Quicker valuation methods, used as a rationale for DCFs
• Absolute Value Models (DCFs)

  • Based on discounting cashflows
  • E.G., Gordon's growth model
  • More complicated
• EPS

  Earnings Per Share

  Earnings / Number of ordinary shares

  • Earnings after Interest, tax, and preference dividends
• Diluted EPS


  Dilutive securities in issue, e.g., convertibles, stock options, or warrants

  • If exercised, these increase the number of common shares in issue, which 'dilutes' the EPS
• PE Ratio


  Historic PE = Price / Historic EPS

  Prospective PE = Price / Forecast EPS

  
  

  Measures of potential future profit growth
• Limitations of PE ratio

  • You have to have positive earnings
  • Based on accounting profit
• P/B

  Price to Book Ratio

  • Assets unlikely to have a negative book value, BUT still subject to accounting distortions
• P/S Ratio

  Price to Sales Ratio

  • Sales less subjective to accounting distortios
  • Do not necessarily mean profits
  • Sales are generated by equity and debt finance
• EBITDA / EV 


  Earnings before interest, tax, depreciation and amortisation to enterprise value ratio
• Dividend Cover

  How many times a company can pay a dividend in current earnings

  
• Theoretical nil paid price

  the value of the rights to purchase additional shares in a rights issue, assuming that the rights are "nil-paid"

  TNPP = Cum rights price - Issue price / Number of rights per existing shares

  OR

  TNPP = TERP - Issue price
• TERP

  Theoretical Ex rights price

  TERP=(Number of old shares * Cum rights price) + (Number of new shares * issue price) / Total shares
• Dividend Cover

  EPS / Gross dividend per share
• A relatively high PE ratio:

  Indicates a high price in relation to earnings; which is suggestive of good future growth prospects, and indicates a lower yield
• P/E

  If the P/E is high, the share price has risen more than earnings

  This will depress dividend yield, so the PE ratio and yield of a high growth company is likely to be High/Low
• Holding Period Return

  A measure of total returns

  • Change in market price plus income received (and reinvested) / market price at the start of the period
• Cum Div Value

  Calculate the P0, given dividend D0

  • Add the dividend, as the purchaser of the share is entitled to the next dividend payment as well as all future payments
• Value of Rights

  Ex Rights Price - subscription price

  The monetary value of the rights given to existing shareholders to purchase additional shares at a discounted price.