Lecture 5- The share market

Question 1

What is an emerging firm?

Answer 1

A business that aspires to grow into a company

Question 2

How do small businesses grow into companies?

Answer 2

Through venture capital markets to finance its development

Question 3

What are the two types of venture capitalists?

Answer 3

1) Business Angeles- wealthy, contribute to development
2) Venture capital fund managers- raise funds from super funds, and invest in a number of new businesses to spread the risk of a loss

Question 4

What do preference shares offer?

Answer 4

Priority

Question 5

What are the two methods of assessing the share value?

Answer 5

1) Technical analysis- past data to identify future trends or behavioural techniques
2) Fundamental analysis- attempts to estimate a shares fair value using pricing models

Question 6

What are the two types of fundamental analysis?

Answer 6

‘Top down’ = global economy> economy> sector> industry> firms management
‘Bottom up’= financial statements and market data using ratios

Question 7

What is the P/E ratio?

Answer 7

Price to earning- the share price divided by earnings per share

Question 8

What does a higher P/E ratio indicate or a lower one indicate?

Answer 8

Higher P/E ratio= expectation earnings will grow quickly

Low P/E ratio= mean the earnings are risky

Question 9

How do we forecast the future earnings?

Answer 9

Future= P/E (current) x earnings change (which assumes the earning change is permanent and the P/E ratio is unaffected by the earnings change)

Question 10

What does Gordon’s dividend growth model sate?

Answer 10

The value of a share is equal to the PV of its future payments

Question 11

What is an IPO and what is their purpose?

Answer 11

Initial public offering- the first issue of shares

Question 12

What does the issue process involve?

Answer 12

1) Select a manager (arranger) for IPO» issue documents including prospectus» financial statements are prepared and audited» due diligence is performance- meaning any claims in prospectus are verified

Question 13

Who are IPOs conducted under?

Answer 13

ASIC and ASX rules that require a prospectus

Question 14

What is the purpose of the prospectus?

Answer 14

Accurate and comprehensive information and to help in the marketing of shares

Question 15

What does the pricing phenomon state?

Answer 15

IPOs are typically underpriced- that is the UPO price is is less than the closing price on the first day of listing on the market ‘money left on table

Question 16

How is additional equity raised?

Answer 16

Retained earnings, rights issue (existing shareholders), private placements (selling shares to one group)

Question 17

What is the role of the ASX?

Answer 17

• Determines listing rules
• Trades ordinary and preferences shares
• As a secondary market- price discovery, liquidity and pools investor funds

Question 18

What is corporate governance?

Answer 18

Managment of a business, supervision and accountability of management and the ways which stakeholders influence decisions

Question 19

What is market discipline

Answer 19

Occurs where changes in a share price influence the behaviour of senior management

Question 20

What kinds of orders does the ASX trade accept? Who has access to ASX trade

Answer 20

Limit or at market orders?

Only brokers have access- however they may have internet based systems that enable their clients to enter orders

Question 21

What is chess?

Answer 21

The transfer and settlement system- where change in share ownership are recorded electronically, and where settlement occurs in t+3 (that is- three days later)

Question 22

How do share price indicies contribute to price discoveries?

Answer 22

Revealing general price movements in share markets against he perfomrance of individual shares and active funds managers