unit 3 | public markets

Question 1

define stakeholders

Answer 1

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

Question 2

Internal Stakeholders

Answer 2

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

Question 3

External Stakeholders

Answer 3

No knowledge of internal information

Question 4

Internal Stakeholders Examples

Answer 4

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

Question 5

External Stakeholders Examples

Answer 5

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

Question 6

Public Shareholders

Answer 6

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

Question 7

Market Analysts

Answer 7

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

Question 8

What does Public Markets (Capital Markets) do?

Answer 8

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

Question 9

2 Ways Investors Expect to Profit

Answer 9

1. Share price appreciation
2. Dividends

Question 10

Share price appreciation

Answer 10

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

Question 11

Market value

Answer 11

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

Question 12

Book value

Answer 12

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

Question 13

Dividends (profit ver)

Answer 13

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

Question 14

Initial Public Offering

Answer 14

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

Question 15

what do investment banks do during IPO?

Answer 15

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

Question 16

what do lawyers do during IPO?

Answer 16

Lawyers facilitate transactions

Question 17

what do auditors & securities exchange professionals do during IPO?

Answer 17

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

Question 18

Who are IPOs sold to

Answer 18

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

Question 19

Who determines IPO price

Answer 19

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

Question 20

Seasoned equity offering/follow-on public offering

Answer 20

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

Question 21

Common shares

Answer 21

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

Question 22

Preferred shares

Answer 22

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

Question 23

Cumulative preferred shares

Answer 23

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

Question 24

Non-cumulative preferred shares

Answer 24

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

Question 25

Why do companies have multiple classes of shares?

Answer 25

- 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

Question 26

Dividend (definition ver)

Answer 26

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

Question 27

3 Dates to Consider - Cash Dividends

Answer 27

1. Declaration date 2. Record date 3. Payment date

Question 28

Declaration date

Answer 28

- the BOD approve & declare a dividend - Dividend becomes legal obligation DR. Retained earnings CR. Dividends payable

Question 29

Record date

Answer 29

- 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

Question 30

Payment date

Answer 30

the company recognizes the payment of the dividend to the shareholders DR. Dividends payable CR. Cash/Common shares

Question 31

Dividend on Preferred Shares (how is it calculated)

Answer 31

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

Question 32

Dividend on Common & Preferred Shares

Answer 32

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

Question 33

Financing decision

Answer 33

a company deciding to take on more debt or equity

Question 34

Debt - Pro

Answer 34

- 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

Question 35

Debt - Con

Answer 35

- 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

Question 36

Equity - Pro

Answer 36

- No legal requirement of continuous repayment - Less restrictive on the use of funds

Question 37

Equity - Con

Answer 37

- 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.