Week 5

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21/03/2013

Debt & Equity Capital
• Capital: Long term funds of a firm

Topic 10 part 1
Share valuation

Based on slides prepared By
Alex Proimos, John Wiley & Son

Debt & Equity Capital

• Debt Capital: Long term borrowing incurred by
the firm (loans, bonds etc).
• Equity Capital: Long term funds provided by the
firm’s shareholders (preference and ordinary).
Can be raised internally (retained earnings) or
externally (selling of shares).

The market for shares
Basic facts
 Equity securities are a company‟s certificates of
ownership.
 At the end of June 2009, more than $1.10 trillion worth

of public equity securities were outstanding
 44% of the adult population who shares either directly

of indirectly (majority of the holdings are through
superannuation funds)

Issuing Ordinary Shares

• Ordinary shares can be sold to the primary market via:
– A Public Offering
– A Rights Offering
– A Private Placement

The market for shares
Secondary markets
 Outstanding shares of a company are bought and sold
among investors.
 From investor‟s perspective, secondary markets

provide marketability at a fair price for shares of
securities they own
 Active secondary market enables companies to sell

their new debt or equity issues at lower funding costs
than can companies without secondary markets that
sell similar securities

1

21/03/2013

The market for shares
Secondary markets and their efficiency
 Virtually all secondary equity market transactions in
Australia take place on the ASX
 In terms of total volume of activity and total
capitalisation of companies listed, NYSE is world‟s
largest and NASDAQ is second largest
 There are four types of secondary markets

The market for shares
Secondary markets and their efficiency
 Secondary markets farthest from our ideal of complete
price information are those in which buyer and seller
must seek each other out directly.
 A thorough search among all possible partners is

seldom done to locate the best price.

 Each differs according to amount of price information

available to investors, which in turn, affects market‟s
efficiency

The market for shares
Secondary markets and their efficiency
 Securities that sell in direct search markets are
usually bought and sold infrequently:
Thus no third party (broker or dealer) has incentive to
serve the market
 Good examples of direct search markets:

Sales of small private companies‟ ordinary shares
and private placement transactions
 Direct search is the least efficient type of secondary
market.

The market for shares
Dealer
 Market efficiency is improved if someone in
marketplace can provide continuous bidding (selling or
buying) for the security
 Dealers provide this service by holding inventories of

securities, which they own, then buying and selling
from inventory to earn profit

The market for shares
Broker
 Brokers bring buyers and sellers together to earn a
fee, called a commission
 Brokers‟ extensive contacts provide a pool of price

information that individual investors could not
economically duplicate themselves
 By charging a commission less than cost of direct

search, they give investors incentives to utilise
information by hiring them as brokers

The market for shares
Dealer
 Advantage of dealer over brokered market is that
brokers cannot guarantee an order will be executed
promptly:
- Dealers can offer guarantee, because they have
inventory of securities
 A dealer market eliminates need for time consuming

search for fair deal by buying and selling immediately
from dealers‟ inventory of securities

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21/03/2013

The market for shares
Dealer
 NASDAQ is best-known example of dealer market

The market for shares
Auction
 In an auction market, buyers and sellers confront each other directly and bargain over price.
 The ASX originally operated as an „open out-cry‟ market

...
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