Market Value of Securities Flashcards
What is the CF from stockholders?
Stock issue
- initial issue (start-up)
- repeat issue
What is the CF to stockholders?
- dividends
- share repurchase
- liquidating/selling the company
What are the types of stock markets?
Primary market and secondary market
What is done on the primary market?
IPOs (Initial Public Offerings) and SEOs (Seasoned Equity Offerings)
What is an Initial Public Offering?
When a private firm goes public. It is essentially a transfer of ownership.
What is done on the secondary market?
Investors trade with other investors.
What is the effect of the secondary market on the firm?
It does not affect the firm directly.
To whom do we issue shares?
- general public
- current stockholders (rights issue)
- private placing (venture capitalists private equity)
Using what method do we set the market price?
Using the Dividend Discount Model
How do we calculate the stock price when we expect future perpetual dividends?
stock price = div / required return
How do we calculate the stock price when we expect future perpetual growing dividends?
stock price = div / (required return - growth rate)
When is the best time to do a stock issue?
It is best to issue stock when the times are good - stock prices are high and interest rates are low
What is dilution?
When we issue new shares we divide the market value over more shares which decreases the current shareholders’ value.
How do we calculate Post Issue Price (PIP)?
market value after issue / total number of shares
What is a rights issue?
Existing shareholders get first right to buy the new shares at the new issue price.
How many rights do existing shareholders get?
One right per issue they own
How do we calculate how many rights per new share we need?
Number of existing shares / number of new shares
How do we calculate the value of a right?
value of a right = (PIP - issue price) / number of rights per new share
What is the advantage of a rights issue?
Existing shareholders are compensated for dilution.
How do we calculate market value?
Expected CF to all investors / R
How do we calculate the wealth effect?
- existing shareholders = original shares * (PIP - original share price)
- new shareholders = new shares * (PIP - issue price)
1 + 2 = total wealth effect
OR
new market value - old market value
What is a stock split?
Doesn’t create value, just divides company value over more shares
Why do we do a stock split?
It makes the shares more accessible to smaller investors
How do we calculate the wealth effect per original share?
(PIP - original share price) + value of a right
