Ch 3 - Public Markets Flashcards
What are internal stakeholders?
Executives, management team, board of directors, employees
Internal stakeholders are individuals within the organization who have a direct interest in its success.
What are external stakeholders?
Private investors, lending institutions, governments, regulatory bodies, vendors/suppliers, competitors
External stakeholders are individuals or entities outside the organization that are affected by its actions.
Who are public shareholders?
Entities that have an ownership stake in the business through the purchase of company shares in the public market
Public shareholders are unique to public companies.
What role do market analysts play?
They make predictions about future public company performance based on publicly available information
Market analysts can indirectly affect the market value of companies.
Why do public markets exist?
To connect those who want capital with those who have capital available to earn a return
This connection facilitates investment opportunities.
What are the two ways investors expect to profit from public companies?
- Share price appreciation
- Dividends
Investors may benefit from increases in share prices or receive dividends.
What is book value per share?
Total equity available divided by number of shares outstanding
It reflects the net asset value on a per-share basis.
How does market value differ from book value?
Market value is based on what the market believes the company is worth, while book value is based on accounting values
Market value usually does not appear on the balance sheet.
What are Initial Public Offerings (IPOs)?
Initial offerings sold primarily to large private and institutional investors
IPOs are a way for companies to raise capital by selling shares to the public.
What are preferred shares?
Shares that represent ownership but do not have voting rights
Preferred shareholders have priority over common shareholders in asset liquidation.
What are cumulative preferred shares?
Preferred shares that entitle holders to receive all dividends in arrears plus current year’s dividends
This ensures shareholders receive any missed payments before common shareholders.
What are non-cumulative preferred shares?
Preferred shares that do not have a right to receive dividends in arrears
Holders may miss dividends if not declared in a given period.
How are dividends communicated for preferred shares?
As an annual dollar figure per share or as a dividend yield percentage
This indicates the income shareholders can expect from their investment.
What is the declaration date for dividends? Is a J/E required?
The date when the board of directors approves and declares a dividend
J/E of
DR. Dividends (SE)
CR. Dividends Payable (L)
Required
On this date, the dividend becomes a legal obligation.
What is the record date for dividends? Is a J/E required?
The date when the company prepares a list of current shareholders eligible for dividends. NO J/E REQUIRED
Only shareholders on this date receive dividends.
What is the payment date for dividends? Is a J/E required?
The date when the company recognizes the payment of dividends to shareholders
J/E OF
DR. Dividends Payable (L)
CR. Cash (A)
REQUIRED
This is when cash is actually disbursed.
What is the weighted-average cost of capital (WACC)?
The cost to acquire additional financing expressed as a percentage. Companies try to minimize their WACC
Companies aim to minimize their WACC.
What is the difference between bonds and equity in financing?
Bonds represent a promise to repay with interest, while equity represents ownership in the company
Companies can issue bonds in public markets similar to shares.
What is the order of priority among stakeholders during liquidation?
- Debtholders
- Bondholders
- Preferred Shareholders
- Common Shareholders
This order determines who gets paid first in the event of liquidation.
Fill in the blank: The __________ represents the total equity available divided by the number of shares outstanding.
book value per share
Fill in the blank: The __________ is used to connect investors with companies seeking capital.
public market
How do you alllocate dividends on common and preferred shares?
- Calculate dividend to be paid to preferred shareholders, including any preferred dividends in arrears if applicable
- Assign remaining to common shareholders
[EXAMPLE: ALLOCATE DIVIDENDS]
Company has 250,000 shares of 1.50 cumulative preferred shares outstanding and 300,000 common shares. At the end of fiscal year 2022, company declares a dividend of $800,000. Business did not pay a dividend in fiscal year 2021.
Following ‘How to Allocate’ Steps…
1. 250,000 x 1.5 = 375,000 + 375,000 (from 2021) = $750,000 dividend payment for preferred shares
2. Remaining: $50,000 dividends for common shareholders
What’s a dividend yield? What’s par value?
Dividend yield: percentage that tells us how much the company pays in dividends relative to the value of each share.
Par value: value of each share
