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Equity - Introduction to Equity

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Equity Definition
Capital Structure
Types of Shares
GDR , Structured
Risk Return
Basics of Valuation
Warrants , Ex -Cum . Bonus

Published in: Economy & Finance
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Equity - Introduction to Equity

  1. 1. Capital Structure Companies Raise money by issuing debt or equity securities or in combination .Capital Structure refers to composition of debt and equity capital . A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.
  2. 2. Capital Structure Example : A company has total capital of 10000 cr out of which 4000 cr is debt and 6000cr is equity , so capital structure of 40% debt and 60 % equity . It is called a leverage(or levered) company as debt is part of the capital . 100% equity capital company is called unleveraged (or unlevered) company .
  3. 3. Types of Shares Two main type of equity shares are Common shares or ordinary shares A common share indicates the ownership of the company The majority of stocks sold are common stocks. Common stock offers the potential for growth through rising share prices and increasing dividends. Preferred shares It is called preferred as owners of preferred stock get dividends before common stock holders. Preferred stock offers regular income through fixed dividends and the potential for growth through rising share prices. The prices of preferred stock tend to be more stable than the prices of common stock. Preferred stock may offer features such as the right to redeem your shares at certain times or to convert your shares to common shares at a certain price — known as convertible preferred shares. However, preferred stock doesn’t normally come with voting rights.
  4. 4. Types of shares Common Shares Preferred Shares . Common shareholders are generally entitled to: dividend payments – but there’s no guarantee you’ll receive dividends, and no guaranteed amount if you do. vote at shareholders meetings – shareholders typically get 1 vote per share, and can vote to elect company directors and on other corporate matters at the annual shareholder meeting, or by completing a shareholder ballot online or by mail. You have the right to vote because you're taking a greater risk with common shares. claim on the company’s assets – if the company goes bankrupt and is liquidated. But common shareholders get paid last — behind tax authorities, employees, creditors and preferred shareholders. Preferred shareholders are generally entitled to: fixed dividend payments – that usually don't change, whether or not the company does well. Dividends are paid to preferred shareholders before any dividends are paid to common shareholders. If the company can't pay the dividend on preferred shares in a year, it may carry it forward and pay it in future years. claim on company assets – preferred shareholders have priority over common shareholders if the company goes bankrupt and is liquidated.
  5. 5. Common Stock vs Preferred Stock Common Preferred Infinite life – No maturity Usually not issued on par value May or May not At par value with dividend rate
  6. 6. Cash flow and voting rights Hybrid between stock and debt
  7. 7. Common Shares Common shares are issued by pvt ltd or public limited companies which are listed on exchanges and liquid . Can issue one class or different classes of shares like class A or Class B
  8. 8. Limited liability-Share holder
  9. 9. Preferred stock Companies can issue more than single issue like series A , series B , they carry there own stated dividend and may differ in features like Fixed annual dividend Option to convert the preferred stock in to specified number of common shares Redemption ( issuing company can buy back as per pre defined terms ) Can be Cumulative : to pay any missed dividend Non cumulative: not require to pay missed dividends for prior years before paying dividend to common share holders.
  10. 10. Preferred stock
  11. 11. Priority of claim: in the event of company is liquidity assets are distributed according to priority of claim. Debt is liability of the company . Debt investors have higher claim on companies assets than equity After the claim of Debt investors it is preferred share holders who are in line to receive what they are due Common share holders are last in the line and are residual claimants in the company. Debt Security Preferred Share Common Share
  12. 12. Global Depositary Receipts
  13. 13. Global Depositary Reciepts
  14. 14. Global Depositary Receipts
  15. 15. Convertible Bonds
  16. 16. Convertible Bonds
  17. 17. Warrants
  18. 18. Warrants
  19. 19. Debt – Equity : Risk and Return
  20. 20. Global Return
  21. 21. Valuation of Equity Shares Three Important types Discounted Cash Flow analysis Relative Valuation Asset Based Valuation
  22. 22. Valuation of Equity Shares Discounted Cash Flow It is based on Time Value of Money concept. It is estimation of PV of future cash flows from the company Dividends are regular cash flows other version id dividend cash flow analysis.
  23. 23. Valuation of Equity Shares
  24. 24. Relative Valuation
  25. 25. Relative Valuation Commonly used multiples Price to earnings Ratio Price to Book Value Price to Earnings growth Price to Sales
  26. 26. Relative Valuation
  27. 27. Relative Valuation
  28. 28. Asset Based Valuation
  29. 29. Asset Based Valuation
  30. 30. Some of the actions which effect number of common shares out standing Selling Shares to public for first time is called Initial Public offering Subsequent offers are called secondary equity offering Buying back shares from existing share holders by company is called as Share buy back or share repurchase Stock split or stock dividend – issuing one share for every 2 shares owned Issuing new stock after warrants New company creation from existing – Spin off
  31. 31. IPO On issuance of new shares to public , the share holder of the pvt company will dilute owners percentage holding and also the EPS dilation . As his number of shares remain same but total out standing shares increase If existing share holder does not buy shares , his ownership percentage comes down Same holds for secondary issues . Some times rights are given to shareholders to buy new shares.
  32. 32. Repurchase Companies may opt to repurchase directly from exchange or give offer to existing share holders. Instead of dividend they may offer the buy back . This effectively reduces the total shares out standing This increases EPS .
  33. 33. Stock Splits – Stock Dividend
  34. 34. Stock Splits – Stock Dividend Number of out standing shares increases proportionally based on current holding.
  35. 35. Cum Dividend Ex dividend Cum-dividend (CD) comes before Ex-dividend (XD). A stock is said to be CD indicates that the company is paying out dividend in the near future which serves like a preempt notice to investors. The company would have announced the amount of dividend to be paid out but has yet to. If the shareholder sells a CD stock, he/she is not entitled to the dividend. There has to be a cut off date that the company has to set, so as to confirm the list of shareholders to receive dividend. When the list is finalized, the stock is said to go XD. Once XD status is declared, the shareholder who sells his/her shares will still be entitled the dividends, while the new owner will not. Usually XD stocks will be accompanied by a drop in stock price, an amount equivalent to the dividend payout. This is consistent and fair – by giving out the dividends, the company’s asset is said to be decreased and hence, the stock price should fall. It is fair to the new shareholders who get the stocks after XD, they did not receive the dividends and they are buying into a company with a lower asset. Thus, the bottom line is dividend payout is not a concern for buying or selling of shares.

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