chapter 3 Flashcards
public markets
why do stakeholders play an important part in the operations of a business
they affect the direction of it
- internal drive the business decisions that move a company forward
- external will impact those business decisions to a certain degree dependent on the type of stakeholders
what stakeholders are unique to public companies?
public shareholders + market analysts
define public shareholders + their characteristics
entities that have an ownership stake in the business results from the purchase of company shares through the public market - they may own a extremely small fraction or a substantial piece of the business
define market analysts + their characteristics
individuals who work for financial firms that make predictions about future public company performance -
how do the predictions of market anlaysts affect the business?
predictions are publicly available and often indirectly affect the market value of the companies they make predictions about
why do public markets exist?
the public market exists to facilitate a mutually beneficial exchange between a company that wants or needs access to capital with an individual that has capital available and wants to earn a return on that capital
how do investors expect to porfit from buying shares of a public comany?
- share price appreciation - investors hope that the prices of share in the capital markets increases over time - at which point they can sell them for a profit
- dividends - investors will invest with the expectation that the company will return profits to the shareholders through consistent payment of dividends
how is a company’s value determined?
determined by the present value fo a company’s future cash flows
how is the market value of a company’s shares subject to change?
predictions of the company’s share price - if positive, they rise, if negative they will fall
predictions from market analysts and actual result may affect it as well - if they outperform the expectations, share prices rise, if they don’t, share price falls
what’s the book value of a company’s shares
the company’s net asset value on a per-share basis
are the market value and book value fo a company’s shares different?
yes,
define stock dividends
the investor can receive additional shares of teh company
what happens if a company stops issuing dividends
perceived very unfavourably by the public markets
what happens when a private corporation is started
the owners first inject capital (cash) into the company in exchange for shares
define an intial public offering
represents the first time a company’s newly issued shares are sold in the public markets
what happens when a company decides to go public
a number of parties are involved (investment banks, lawyers, auditors, and securities exchange experts + regulators) - investment banks play a critical role in pre-marketing the IPO to large accredited private investors and institutional investors. IB ultimately influence the demand + initial price of the share at the time of the IPO
lawyers help facilitate the transactions, auditors + securities exchange professional ensure all the accounting records + paperwork are appropriate based on the requirements
the initial offering is almost exclusively sold to those large private + institutional investors in large quantities - exception: the investment brokers is one of those institutional investors and decides to sell their allotment of share to the public
what type of market do the public engage in when they purchase shares?
the secondary market (usually)
who determines the price of the shares when there’s an IPO share issuance
the price is determined by the primary market
once all the IPO shares are sold, does the common share balance on the B/S change?
no, unless additional shares are subsequently sold in the markets (seasoned equity offering or follow-on public offering_ or the company repurchases previously issued shares
define preferred shares
represents a degree of ownership that typically does not have voting rights - they are often guaranteed consistent dividend payments for an indefinite period of time
if the company is force to liquidate, the preferred shareholders are entitled to the assets of the company ahead of the common shareholders
what type of shares are sold in an IPO?
common shares
define culmulative preferred shares
a class of preferred shares that represents shares with special dividend rights - holders of this type of share are entitled to receive all dividends in arrears (dividends that weren’t pai in prior period) and the current year’s dividends, ahead of any dividends being paid to the common shareholders
define non-cumulative preferred shares
another class of preferred shares that don’t have the special dividend right to receive dividends in arrears
why do owners of companies create and issue different classes of shares
they want voting power to remain with a particular group - by issuing multiple shares they can structure the voting rights in a way that ensures other parties don’t accumulate too much voting power (or even potentially take over a company)
