Tài chính kế toán - Chapter 6: Investors in the share market

Chapter 6Investors in the share marketWebsites:www.ato.gov.auwww.asx.com.auLearning objectivesConsider the role of an investor in the share market and appreciate the range of investment choices available to the investorUnderstand the process of buying and selling shares, the risks involved, and the importance of taxation when investingDescribe indicators of financial performanceDemonstrate share pricing methodsConsider the importance of share-market indices and published share informationChapter organisation6.1 Share-market investment6.2 Buying and selling shares6.3 Taxation6.4 Financial performance indicators6.5 Pricing of shares6.6 Stock-market indices and published share information6.7 Summary6.1 Share-market investment Investors buy shares to receive returns from dividends and capital gains (losses)Other factors encouraging investment in securities quoted on a stock exchange (SX)Depth of the marketOverall capitalisation of corporations listed on an SXLiquidity of the marketVolume of trading relative to the size of the marketEfficient price discoverySpeed and efficiency with which new information is reflected in the current share price(cont.)6.1 Share-market investment (cont.)The SX offers a wide range of security types to the investorSecurities listed on the SX are categorised into industry groups, allowing investors a choice from a range of economic sectors(cont.)6.1 Share-market investment (cont.)Two types of risk impact on security returns1. Systematic riskFactors that generally impact on share prices in the market; e.g. economic growth, and changes in interest rates and exchange rates2. Unsystematic riskFactors that impact specifically on the share price of a corporation; e.g. resignation of the CEO, technology failure, board problems(cont.)6.1 Share-market investment (cont.)Diversified investment portfolioA portfolio containing a wide range of securitiesDiversifies most of the unsystematic risk of the individual securitiesInvestors will not receive higher returns for unnecessarily bearing unsystematic riskThe remaining risk is systematic risk, which is measured by betaBeta is a measure of the sensitivity of the price of an asset relative to the market(cont.)6.1 Share-market investment (cont.)Diversified investment portfolio (cont.)Expected portfolio return is the weighted average of expected returns of each sharePortfolio variance (risk) is the correlation of pairs of securities within the portfolio(cont.)6.1 Share-market investment (cont.)Investors may take one of two approaches1. Active investment approachPortfolio structure is based on share analysis, new information and risk-return preferences2. Passive investment approachPortfolio structure is based on the replication of a specific share-market index, e.g. industrial or telecommunications sector indexSome managed funds are index fundsPortfolios are structured to fully or partially replicate a specific share-market index(cont.)6.1 Share-market investment (cont.)Investors need to consider asset allocation within a share portfolioRisk versus returnInvestment time horizonIncome versus capital growthDomestic and international sharesAsset allocation may be:strategictactical(cont.)6.1 Share-market investment (cont.)The recent global financial crisis has caused much concern, particularly among those in or approaching retirementA large amount of retirement savings is invested in the share marketFor those nearing retirement the investment horizon is shorter, particularly if money will be withdrawn from the share market upon retirementWhen market prices fall sharply, these individuals are adversely affected. Importantly, they have the least time to recover their losses (before retirement)Chapter organisation6.1 Share-market investment6.2 Buying and selling shares6.3 Taxation6.4 Financial performance indicators6.5 Pricing of shares6.6 Stock-market indices and published share information6.7 Summary6.2 Buying and selling sharesDirect investment in sharesInvestor buys and sells shares through a stockbrokerDiscount broker, i.e. phone and InternetFull-service advisory brokerConsideration of liquidity, risk, return, charges, taxation, social security, etc.Indirect investment in sharesInvestor purchases units in a unit trust or managed fund, e.g. equity trustsChapter organisation6.1 Share-market investment6.2 Buying and selling shares6.3 Taxation6.4 Financial performance indicators6.5 Pricing of shares6.6 Stock-market indices and published share information6.7 Summary6.3 TaxationPre-dividend imputation (prior to 1987)Dividends were taxed twice—first at company level (as profits) and then at the investor’s marginal rateDividend imputation (since 1987)Removed the double taxation of dividendsInvestors receive franking credit for the tax a company pays on a franked dividend(cont.)6.3 Taxation (cont.)(cont.)6.3 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 if held at least 12 months; orindexed capital gain or 50% discounted gain if purchased 19/9/1985–21/9/1999Chapter organisation6.1 Share-market investment6.2 Buying and selling shares6.3 Taxation6.4 Financial performance indicators6.5 Pricing of shares6.6 Stock-market indices and published share information6.7 Summary6.4 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 flowsIndicators of company performanceCapital structureLiquidityDebt servicingProfitabilityShare priceRisk(cont.)6.4 Financial performance indicators (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 payments(cont.)6.4 Financial performance indicators (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 shareholders’ funds to total assetsIndicates firm’s longer term financial viability/stability; a higher ratio indicates less reliance on external funding(cont.)6.4 Financial performance indicators (cont.)LiquidityThe ability of a company to meet its short-term financial obligationsMeasured by current ratioFails to consider the not very liquid nature of certain current assets, such as inventory(cont.)6.4 Financial performance indicators (cont.)Liquidity (cont.)Measured by liquid ratioThe higher the current and liquid ratios, the better the liquidity position of a firm(cont.)6.4 Financial performance indicators (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 total firm debt(cont.)6.4 Financial performance indicators (cont.)Debt servicing (cont.)Measured by interest coverage ratio(cont.)6.4 Financial performance indicators (cont.)ProfitabilityWide variation in the measurement of profitabilityEarnings before interest and tax (EBIT) to total funds ratioEarnings per share (EPS)(cont.)6.4 Financial performance indicators (cont.)Profitability (cont.)Wide variation in the measurement of profitability (cont.)EBIT to long-term funds ratio(cont.)6.4 Financial performance indicators (cont.)Profitability (cont.)Wide variation in the measurement of profitability (cont.)Return on equity (net income/equity)Higher ratios indicate greater profitability(cont.)6.4 Financial performance indicators (cont.)Share priceRepresents investors’ view of the present value of future net cash flows of a firmShare price performance indicatorsPrice to earnings ratio (P/E)Share price divided by earnings per shareA higher P/E indicates more growth in future net cash flowsShare price to net tangible assets ratio (P/NTA)Measures the theoretical premium or discount at which a firm’s share price is trading relative to its NTA(cont.)6.4 Financial performance indicators (cont.)RiskVariability (uncertainty) of the share priceTwo components1. Systematic risk (often referred to as beta)Arises from factors affecting the whole market, e.g. state of the domestic economy and world economy2. Non-systematic riskArises from firm-specific factors, e.g. management competence, labour productivity, financial and operational risksCan be eliminated in a well-diversified portfolioChapter organisation6.1 Share-market Investment6.2 Buying and Selling Shares6.3 Taxation6.4 Financial Performance Indicators6.5 Pricing of Shares6.6 Stock-market Indices and Published Share Information6.7 Summary6.5 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 price(cont.)6.5 Pricing of shares (cont.)Estimating the price of a shareGeneral dividend valuation model Where:(cont.)6.5 Pricing of shares (cont.)Estimating the price of a share (cont.)Valuing a share with a constant dividend (D0)Valuing a share with constant dividend growth (g)(cont.)6.5 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-dividend(cont.)6.5 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 0.93(cont.)6.5 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-bonus(cont.)6.5 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 $4.00(cont.)6.5 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 $10.00(cont.)6.5 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 on the:number of shares issuedsize of the discount(cont.)6.5 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 funds from 1:5 issue 0.88 Market value of 6 ex-rights shares 5.88 Theoretical ex-rights share price (5.88/6) 0.98(cont.)6.5 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 6.12Chapter organisation6.1 Share-market investment6.2 Buying and selling shares6.3 Taxation6.4 Financial performance indicators6.5 Pricing of shares6.6 Stock-market indices and published share information6.7 Summary6.6 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 performance(cont.)6.6 Stock-market indices and published share information (cont.)Market indicator indicesPrice-weighted, e.g. Dow JonesWeighting of a company proportional to its share price Capitalisation-weighted, e.g. S&P/ASX All OrdsWeighting of a company proportional to market capitalisationShare-price index measures capital gains/losses from investing in an index-related portfolioAccumulation index includes share price changes and reinvestment of dividends(cont.)6.6 Stock-market indices and published share information (cont.)Market indicator indices (cont.)Global industry classification standard (GICS) comprises 10 standard international industry sector indices; e.g. energy, materials, industrials Published share informationNewspapers and financial journals provide share-market information to varying degrees of detail; e.g. Australian Financial ReviewChapter organisation6.1 Share-market investment6.2 Buying and selling shares6.3 Taxation6.4 Financial performance indicators6.5 Pricing of shares6.6 Stock-market indices and published share information6.7 Summary6.7 SummaryFactors a share investor should considerDiversification, portfolio return and riskActive or passive investmentDirect or indirect investmentTaxationCompany financial performance indicatorsCapital structure, liquidity, debt servicing, profitability, share price, risk(cont.)6.7 Summary (cont.)Factors that influence a company’s share priceExpected 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 overall