CH 10: Equity and property markets Flashcards

1
Q

Ordinary Shares

3

A
  • Ordinary shares are securities held by the owners of an organization
  • Ordinary shareholders have the right to receive all distributable profits of a company after debtholders and preference shareholders have been paid.
  • They also have the right to attend and vote at general meetings of the company
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2
Q

Describe the cashflows on an ordinary share from the perspective of the investor

3

A

Share purchase:
- An initial lump sum negative cashflow equal to the price paid for the share plus dealing expenses

Dividend payments:
- A regular series of positive cashflows representing a share in the company’s profits
- The timing of these payments is generally known
- The amount is unknown and variable
- Over time profits, and hence dividends, and expected to increase broadly in line with growth in GDP
- The company may choose not to distribute all of its profits but to retain some for new projects, expansions or to subsidize dividends in poorer years.

Final payment:
- There is no redemption payment – dividends can be assumed to continue indefinitely
- However, there will be a final positive cashflow, which is unknown in amount and timing if:
1. The investor sells the share, or the company buys it back
2. The company winds up and there is residual funds to distribute

DIV payout = DIV/EPS

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3
Q

Investment and risk characteristics of equities

A
  • S: Depends on profitability of the company, wound up receive residual assets
  • Y: Provide a long-term real yield as company profits grow in line with inflation/GDP
  • Y: Higher expected returns than government bonds over the long term
  • S: Dividend and market values (supply and demand) can be volatile
  • T: Equities can generally be held in perpetuity
  • E: Dealing expenses are linked to marketability, main is bid-offer spread
  • E: Currency risk if internation equity
  • M: Marketability depends on the size of the company. Larger better.
  • T: Income + CGT
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4
Q

Quoted/ Listed shares

1,5

A
  • Shares of companies listed on a stock exchange, make up the majority of available equities.

Companies listed meet exchange requirements so listed shares are:
* Highly regulated - more security
* More marketable
* More divisible
* More info available
* Easier to value

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5
Q

Categorisation of shares by industry

4,3,2

A

Practicality:
* Most companies within an industry are affected by similar factors
* The info comes from a common source and is presented in a similar way
* No-one can be an expert in all areas
* It adds structure to the decision-making process

Correlation of investment performance: (due to factors affect all companies)
* Resources: Similar resources used. (similar input costs)
* Markets: Supply same markets.(similar affect to change in demand)
* Structure: Financial structure same(affected same to change of interest)

Problems with grouping:
* Companies operate in multiple sectors
* Heterogeneity of companies within sector

- share prices of companies in the same sector tend to be correlated

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6
Q

Preference shares

1,3

A
  • A particular class of share that generally ranks ahead of ordinary shares.
    Normally entitled to a specified rate of dividend, and, unlike ordinary shareholders, not to residual profits.

Features:
* dividend on a preference share is usually a fixed percentage of the par value and is always paid before any distribution to ordinary shareholders.
* Dividends don’t have to be paid if profits are insufficient, arrears paid off next payment of dividends before ordinary.
* No voting rights

Cumulative property of pref shares

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7
Q

Reasons for buying back shares

4

A
  • Excess cash that cannot be used profitably and is
    returned to shareholders
  • Excess cash may only earn deposit rate of interest,
    thus improves earning per share for remaining shares
  • May be more tax-efficient than dividends
  • Company may wish to change capital structure from
    equity financing to debt financing
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8
Q

Characteristics of Property

A
  • S: Depend on tenant riskiness. Old- no income generated (Obsolescence risk)
  • Y: Real returns generated, hedge for inflation
  • Y: Expect higher returns ( less marketable and secure)
  • S: Capital values can be volatile. Cycles
  • T: MT/LT (high transfer cost)
  • E: High. Management and maintenance
  • E: Currency risk if international
  • M: Unmarketable(Not divisible, unique assets, subjective valuation)
  • T: Income + CGT
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9
Q

Advantages and disadvantages of direct property investment

5,4

A

Advantages of direct investment:
- Diversification of overall portfolio
- Less volatile than property shares
- Control over property portfolio management
- Loss on forced sale unlikely
- Exposure (property company may invest in buildings under construction, multiple risks associated)

Disadvantages of direct investment:
* Afforadability: too expensive for single investors
* Low marketability: High costs buy/sell
* Subjective valuation: not known till sale
* Expertise needed: To generate profits

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10
Q

Indirect property investment

2,4

A

Investment via:
* Shares in property companies
* Units in a pooled property fund: Open-ended unitised fund / closed- ended investment trust

R-E-I-T-S: real estate investment trust/company
* Own, manage, operate real estate portfolioof rentals.
* Able to invest in large property/ developments
* Listed on JSE, shares traded
* Exposed to development/expense/tenant risks

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11
Q

Advantages of indirect property investment

A
  • Diversification within the property market (property companies offer greater spread of risk)
  • Market prices / performance measurement - no visible market price for real property.
  • Marketability - property shares are more marketable than direct investments.
  • Management expertise (company can afford expertise)
  • Advantage of size (large companies may invest in large properties, too big for direct investors)

Disadvantages?

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12
Q

NAV

2

A
  • NAV = ASSETS/#Shares share value discount or premium
  • Property shares usually stand at a discount to NAV due to subjective value of properties

Property assets may be purchased cheaply.

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13
Q

Prime property

A
Property most attractive to investors. Score highly on:
S - Size
T - Tenant quality
A - Age & condition
L - Location
L - Lease structure

C - Comparability

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14
Q

Investment and risk characteristics of property to be considered:

A

M-Marketability
U- Uniqueness
S- Size
T- Type of Property (determines the running yield)

P- Political Risk
R- Real long term RETURNS (property is a real asset)
O- Obsolescence
V- Valuation
I- Indivisibility
D- Diversification
E- High Management and dealing EXPENSES

F- FORCED sales
I- stepped INCOME stream
V- Volatility
E- Expertise available

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15
Q

What to consider when comparing direct to indirect property investments:

A

C- Control
E- Expenses
D- Diversification
E- Expertise

M- Marketability
E- Exposure to other sectors
E- Equity correlation for instance
T- Taxation

Volatility
Valuation
Gearing
Forced Sales

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