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afm 182 > unit 3 | public markets > Flashcards

unit 3 | public markets Flashcards

1
Q

define stakeholders

A

Parties with an interest in a company (can either affect or be affected by the business)

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2
Q

Internal Stakeholders

A
  • Access to internal info not publicly available
  • May be involved in the management of org.
  • Makes business decisions that will drive the company forward
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3
Q

External Stakeholders

A

No knowledge of internal information

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4
Q

Internal Stakeholders Examples

A

Executives (CEO, CFO, COO)
Management team (directors, managers)
Board of directors
Private investors
Employees

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5
Q

External Stakeholders Examples

A

Lending institutions (banks, credit unions)
Governments
Regulatory bodies
Vendors/suppliers
Competitors

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6
Q

Public Shareholders

A

Entities with an ownership stake in the business resulting from the purchase of company shares through public markets

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7
Q

Market Analysts

A

Individuals working for financial firms that make predictions about future public company performance
- Predictions are publicly available & indirectly affect the market value of the companies

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8
Q

What does Public Markets (Capital Markets) do?

A

Facilitate a mutually beneficial exchange between those who have capital & those who want or need capital

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9
Q

2 Ways Investors Expect to Profit

A
  1. Share price appreciation
  2. Dividends
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10
Q

Share price appreciation

A

The increase in share price over time in the capital market, at which point sold for profit (“unrealized” returns)
- Company value is determined by the present value of a company’s future cash flows

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11
Q

Market value

A

price of shares based on what the market believes the company is worth

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12
Q

Book value

A

Net asset value (TA - TL) on a per-share basis

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13
Q

Dividends (profit ver)

A

Company returning profits to shareholders through consistent/increasing payments of dividends (realized returns → when sold or closed out)

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14
Q

Initial Public Offering

A

The first time a company’s newly issued shares are sold in public markets

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15
Q

what do investment banks do during IPO?

A

Investment banks influence demand & initial price of shares at the time of IPO

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16
Q

what do lawyers do during IPO?

A

Lawyers facilitate transactions

17
Q

what do auditors & securities exchange professionals do during IPO?

A

Auditors & securities exchange professionals ensure accounting records & paperwork follow requirements

18
Q

Who are IPOs sold to

A

IPO are exclusively sold to large private & institutional investors in large quantities
- Exception: Investment broker can sell their allotment of shares to the public

19
Q

Who determines IPO price

A

IPO price is determined by the primary market (large private & institutional investors)

20
Q

Seasoned equity offering/follow-on public offering

A

Common share balance on BS doesn’t change unless additional shares are sold or the company repurchase previously issued shares

21
Q

Common shares

A
  • Primary type of share & sold during IPO
  • Issued when the company is first established + at IPO time
  • Universal to all companies
22
Q

Preferred shares

A
  • Represents a degree of ownership in a company without voting rights
  • Guaranteed consistent dividend payments indefinitely
  • Priority to asset liquidation
23
Q

Cumulative preferred shares

A

Class of shares that represents shares with special dividend rights
- Entitled to receive all dividends in arrears + current year’s dividends (priority)

24
Q

Non-cumulative preferred shares

A

Class of shares without the special dividend right to receive dividends in arrears

25
Q

Why do companies have multiple classes of shares?

A
  • The company decides rights & limitations of each class of shares
  • Issuing multiple classes of shares allows the company to structure voting rights to ensure that power resides with a particular group
26
Q

Dividend (definition ver)

A

The distribution of a company’s earnings to its shareholders
- Distributed quarterly (sometimes annually)
- BOD has authority to declare a dividend
- May be paid out as cash (cash dividends) or by issuing additional shares to the shareholders (stock dividends) → considered when the company doesn’t have enough cash
- Can stop paying, but unfavourable by the public markets

27
Q

3 Dates to Consider - Cash Dividends

A
  1. Declaration date
  2. Record date
  3. Payment date
28
Q

Declaration date

A
  • the BOD approve & declare a dividend
  • Dividend becomes legal obligation

DR. Retained earnings
CR. Dividends payable

29
Q

Record date

A
  • when the corporation prepares a list of all the current shareholders
  • Dividends are only paid to shareholders who own shares on the declaration date
  • No J/E
30
Q

Payment date

A

the company recognizes the payment of the dividend to the shareholders

DR. Dividends payable
CR. Cash/Common shares

31
Q

Dividend on Preferred Shares (how is it calculated)

A

Typically communicated as an annual dollar figure (per share) or annual dividend percentage
- Dividend % → Dividend yield → a financial ratio that shows how much a company pays out in dividends each year as a percentage of its stock price

32
Q

Dividend on Common & Preferred Shares

A
  1. Calculate the dividend to be paid to preferred shareholders (including dividends in arrears)
  2. Assign the remaining dividend to common shareholders
33
Q

Financing decision

A

a company deciding to take on more debt or equity

34
Q

Debt - Pro

A
  • No dilution of ownership
  • Once debt is paid off, no further commitment to lender required
  • Tax savings, as interest is an expense that reduces taxable income
35
Q

Debt - Con

A
  • Requires continuous repayment (principal & interest)
  • Rising interest rates can increase cost of borrowing
  • Assets can be seized if business cannot pay back the loan
  • Company might need to meet certain bank covenants
36
Q

Equity - Pro

A
  • No legal requirement of continuous repayment
  • Less restrictive on the use of funds
37
Q

Equity - Con

A
  • Dilution of ownership/control
  • High pressure to achieve results as shareholders expect continuous share appreciation/dividend payments
  • Difficult & costly to raise equity
  • Will require new governance, reporting, processes, regulatory requirements, etc.

afm 182 (11 decks)

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