Week 5

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