Tài chính doanh nghiệp - Chapter 6: Investors in the share market

Chapter 6Investors in the Share MarketWebsites:  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonLearning ObjectivesAppreciate the range of investment choices available for the investorIdentify relevant issues for potential investorsUnderstand the factors that influence a company’s share priceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.1 IntroductionRecall from previous chaptersPublicly listed corporationPrimary and secondary marketsOrdinary shares have the potential to provide a return to investors by way of dividends and capital gainsDepth of the marketThe overall capitalisation of corporations listed on the stock exchange (SX)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.1 Introduction (cont.)LiquidityThe volume of trading relative to the size of the market i.e. turnoverEfficient price discoveryThe speed and efficiency that new information is reflected in the current share priceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.2 Stock Exchange InvestmentThe SX offers a wide range of security types to the investorSecurities listed on the SX are categorised into industry groups allowing investors a choice within a range of economic sectorsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.2 Stock Exchange Investment (cont.)Two types of risk impact on security returnsSystematic riskFactors that generally impact on shares prices in the market e.g. economic growth, and changes in interest rates and exchange ratesUnsystematic riskFactors that specifically impact on the share price of a corporation e.g. resignation of the CEO, technology failure, board problemsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.2 Stock Exchange Investment (cont.)Diversified investment portfolioA portfolio containing a wide range of securitiesDiversifies away most of the unsystematic risk of the individual securitiesTherefore, investors will not receive higher returns for unnecessarily bearing unsystematic riskCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson62. Stock Exchange Investment (cont.)Diversified investment portfolio (cont.)The remaining risk is systematic risk which is measured by betaBeta is a measure of the sensitivity of of the price of an asset relative to the marketExpected portfolio return is the weighted average of expected returns of each sharePortfolio variance (risk) is the correlation of pairs of securities within the portfolioCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.2 Stock Exchange Investment (cont.)Investors may take either anActive investment approachPortfolio structure is based on share analysis, new information and risk-return preferencesPassive investment approachPortfolio structure is based on the replication of a specific share market index e.g. industrial or telecommunications sector indexCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.2 Stock Exchange Investment (cont.)Investors need to consider asset allocation within a share portfolioRisk versus returnInvestment time horizonIncome versus capital growthDomestic and international sharesAsset allocation may beStrategicTacticalCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.3 Buying and Selling SharesIndirect investment in sharesInvestor purchases units in a unit trust or managed fund e.g. equity trustDirect investment in sharesInvestor buys and sells shares through a stockbrokerDiscount broker i.e. phone and InternetFull-service advisory brokerConsideration of liquidity, risk, return etc.Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.4 TaxationPre-dividend imputation (prior to 1987)Dividends were taxed twice—first at company level (as profits) and then at an investor’s marginal rateDividend imputation (since 1987)Removed the double taxation of dividendsInvestors receive imputation credit for the tax a company pays on a franked dividendCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.4 Taxation (cont.)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.4 Taxation (cont.)Capital gains tax on shares purchasedPrior to 19/9/1985 tax free19/9/1985–21/9/1999Taxpayer’s marginal tax rate applied if held less than 12 monthsTaxpayer’s marginal tax rate applied to indexed capital gain if held over 12 monthsSince 21/9/199950% discounted gain, orIndexed capital gain or 50% discounted gain if purchased 19/9/1985–21/9/1999Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.5 Financial Performance IndicatorsPotential investors are concerned with the future level of a company’s performanceCompany’s performance affects both the profitability of the company and the variability of the cash flowsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.5 Financial Performance Indicators (cont.)Indicators of company performanceCapital structureLiquidityDebt servicingProfitabilityShare priceRiskCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Capital structureProportion of company assets (funding) obtained through debt and equityUsually measured by debt to equity ratio (D/E)Higher debt levels increase financial risk i.e. firm may not be able to meet interest paymentsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Capital structure (cont.)Proportion of company assets (funding) obtained through debt and equity (cont.)Also measured by proprietorship ratio which is the ratio of shareholder’s funds to total assetsIndicates firm’s longer-term financial viability/stability; and, a higher ratio indicates less reliance on external fundingCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)LiquidityThe ability of a company to meet it’s short-term financial obligationsMeasured by current ratioFails to consider the not very liquid nature of certain current assets i.e. inventory(6.2)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Liquidity (cont.)Measured by liquid ratio The higher the current and liquid ratios, the better the liquidity position of a firmCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Debt servicingAbility to meet debt-related obligations i.e. interest and repayment of debtMeasured by debt to gross cash flow ratioIndicates number of years of cash flow required to repay firm debtCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Debt servicing (cont.)Measured by interest coverage ratio(6.4)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)ProfitabilityWide variation in the measurement of profitabilityEarnings before interest and tax (EBIT) to total funds ratio Earnings per share (EPS)(6.5)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Profitability (cont.)Wide variation in the measurement of profitability (cont.)EBIT to long-term funds ratio(6.6)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Profitability (cont.)Wide variation in the measurement of profitability (cont.)Return on equity (net income/equity)Higher ratios indicate greater profitability(6.7)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Share priceRepresents investors’ view of the present value of future net cash flows of a firmShare price performance indicatorsPrice to earnings (P/E)Share price divided by earnings per shareA higher P/E indicates more growth in future net cash flowsCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Share price (cont.)Share price performance indicators (cont.)Share price to net tangible assets (P/NTA)Measure the theoretical premium or discount a firm’s share price is trading relative to its NTACopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)RiskVariability (uncertainty) of the share priceRecall, there are two components to riskSystematic risk (often referred to as beta)Arises from factors affecting the whole market e.g. state of the domestic economy and world economyCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonIndicators of company performance (cont.)Risk (cont.)Recall, there are two components to risk (cont.)Non-systematic riskArises from firm-specific factors e.g. management competence, labour productivity, financial and operational risksCan be eliminated in a well-diversified portfolioCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of SharesShare price is mainly a function of supply and demand for a shareSupply and demand are influenced mainly by informationShare price is considered to be the present value of future dividend payments to shareholdersNew information that changes investors’ expectations about future dividends will result in a change in the share priceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Estimating the price of a shareGeneral dividend valuation modelWhere(6.8)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Estimating the price of a share (cont.)Valuing a share with a constant dividendValuing a share with constant dividend growth(6.9)(6.12)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Cum-dividend and ex-dividendDividends are payments made to shareholders, expressed as cents per shareDividends are declared at one date and paid at a later specified dateDuring the period between the two dates, the shares have the future dividend entitlement attached i.e. cum-dividendCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Cum-dividend and ex-dividend (cont.)Once the dividend is paid the shares are traded ex-dividendTheoretically the share price will fall on the ex-dividend date by the size of the dividendExample Share price cum-dividend $1.00 Dividend paid 0.07 Theoretical ex-dividend price 0.93Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Bonus share issuesWhere a company has accumulated reserves, it may distribute these to existing shareholders by making a bonus issue of additional sharesAs with dividends, there will be a downward adjustment in share price when shares go ex-bonusCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Bonus share issues (cont.)As no new capital is raised, there is no change in the assets or expected earnings of the companyExample—if a bonus 1:4 issue is made Cum-bonus price $5.00 Market value of 4 cum-bonus shares 20.00 Theoretical value of 5 ex-bonus shares 20.00 Theoretical value of 1 ex-bonus share 4.00Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Share splitsInvolves division of the number of shares on issueInvolves no fundamental change in the structure, or asset value of the companyTheoretically the share price will fall in the proportion of the splitExample—5 for 1 split Pre-split share price $50.00 Theoretical ex-split share price $10.00Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Pro-rata rights issueInvolves an increase in the company’s issued capitalTypically issued at a discount to market priceTheoretically, the market price will fall by an amount dependent onThe number of shares issuedThe size of the discountCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Pro-rata rights issue (cont.)Example—market price cum-rights $1.00, with 1:5 rights issue priced at $0.88 Cum-rights share price $1.00 Market value of 5 cum-rights shares 5.00 Plus new cash from 1:5 issue 0.88 Market Value of 6 ex-rights shares 5.88 Theoretical ex-rights share price 0.98Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.6 Pricing of Shares (cont.)Pro-rata rights issue (cont.)A renounceable right is a right that can be sold before it is exercisedThe value of the right is determined by Equation 6.13(6.13)Copyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.7 Stock Market Indices and Published Share InformationStock market indicesMeasure of the price performance of a share market or industry sector e.g.Performance benchmark indexMeasures overall share market performance based on capitalisation and liquidityTradeable benchmark indexA narrow index used as the basis for pricing certain derivative productsMarket indicator indexMeasure of overall share market performanceCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.7 Stock Market Indices and Published Share Information (cont.)Indices may bePrice-weighted e.g. Dow JonesCapitalisation-weighted e.g. ASX All OrdsPublished share informationNewspapers and financial journals provide share market information to varying depths e.g. Australian Financial ReviewCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye WatsonChapter Organisation6.1 Introduction6.2 Stock Exchange Investment6.3 Buying and Selling Shares6.4 Taxation6.5 Financial Performance Indicators6.6 Pricing of Shares6.7 Stock Market Indices and Published Share Information6.8 SummaryCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.8 SummaryFactors a share investor should consider includeDiversification, portfolio return and riskActive or passive investmentDirect or indirect investmentTaxationCompany financial performance indicatorsCapital structure, liquidity, debt servicing, profitability, share price, riskCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson6.8 Summary (cont.)Factors that influence a company’s share price includeExpected future dividendsBonus shares issuesShare splitsPro-rata rights issuesVarious share market indices exist that provide a measure of the price performance of a sector or of the market overallCopyright  2003 McGraw-Hill Australia Pty Ltd PPTs t/a Financial Accounting by WillisSlides prepared by Kaye Watson