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Chapter 10 PowerPoint


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Chapter 10 PowerPoint

  2. 2. PRIVATE EQUITY <ul><li>Venture Capital </li></ul><ul><ul><li>Financing for high risk start-up ventures </li></ul></ul><ul><ul><li>Dollars for Equity position </li></ul></ul><ul><ul><li>VC profits when venture goes public (IPO) </li></ul></ul><ul><ul><ul><li>Secondary registration required </li></ul></ul></ul>
  3. 3. PUBLIC EQUITY: COMMON STOCK <ul><li>Corporate Charter; shareholder rights </li></ul><ul><ul><li>Elect directors </li></ul></ul><ul><ul><li>Amend the charter </li></ul></ul><ul><ul><li>Raise capital </li></ul></ul><ul><ul><li>Approve mergers </li></ul></ul><ul><ul><li>Preemptive rights </li></ul></ul><ul><li>Classes Of Common </li></ul><ul><ul><li>Voting </li></ul></ul><ul><ul><li>Non-Voting </li></ul></ul><ul><ul><li>Weak voting </li></ul></ul>
  4. 4. PUBLIC EQUITY: COMMON STOCK <ul><li>Lettered stock; </li></ul><ul><ul><li>Privately issued to investors resale </li></ul></ul><ul><ul><li>Covered by SEC rules (i.e., 144a) </li></ul></ul><ul><li>D. Rights Offerings </li></ul><ul><ul><li>Right granted by the corporate charter </li></ul></ul><ul><ul><li>New shares must be offered to current holders (rights) </li></ul></ul><ul><ul><li>Rights (R) may be exercised or sold to public </li></ul></ul>
  5. 5. PREFERRED STOCK <ul><li>Hybrid Security </li></ul><ul><ul><li>Fixed payouts like bonds </li></ul></ul><ul><ul><li>An equity investment like common </li></ul></ul><ul><li>Attributes Of Preferred Stock </li></ul><ul><ul><li>Par value; meaningful in bankruptcy or liquidation </li></ul></ul><ul><ul><li>Cumulative Features; missed dividends must be made up </li></ul></ul><ul><ul><li>Participating; in years of high profits, an extra dividend </li></ul></ul><ul><ul><li>Non-Voting; except as provided in corporate charter </li></ul></ul><ul><ul><li>Convertibility; typically into common </li></ul></ul>
  6. 6. NEW ISSUES OF STOCK (IPOS) <ul><li>Typically below current market prices </li></ul><ul><li>Process </li></ul><ul><ul><li>Developing Prospectus </li></ul></ul><ul><ul><li>Price the issue </li></ul></ul><ul><ul><li>Distribute the issue </li></ul></ul><ul><ul><li>Transaction Costs: Spread, fees </li></ul></ul><ul><li>Shelf Registrations </li></ul><ul><ul><li>Corporation can plan issues up to two years to completion </li></ul></ul><ul><ul><li>Permits issuer to time issuance for best price action </li></ul></ul>
  7. 7. SECURITY MARKETS <ul><li>Organized Exchanges </li></ul><ul><ul><li>NYSE, AMEX, Tokyo (TSE), London (LSE), etc </li></ul></ul><ul><ul><li>Restricted participation, trading rules strictly specified </li></ul></ul><ul><ul><li>Traders (members) own seats (Specialists, Floor traders) except NYSE – buy “license” to trade </li></ul></ul><ul><ul><li>Sale of seats must be approved (Pre-qualifications must be met) </li></ul></ul><ul><ul><li>Transactions tend to be centralized; advantageous for price discovery </li></ul></ul>
  8. 8. SECURITY MARKETS <ul><li>Over-The-Counter (OTC) NASDAQ, </li></ul><ul><ul><li>Government Sec, Money Markets, Foreign Exchange </li></ul></ul><ul><ul><li>Transactions tend to be decentralized; price discovery less efficient </li></ul></ul><ul><ul><li>Liquidity more expensive in terms of bid-ask spreads </li></ul></ul><ul><ul><li>Bulletin Board: price listing for &quot;penny&quot; stocks </li></ul></ul><ul><ul><li>Pink Sheets: teeny-tiny fractional price low volume stocks </li></ul></ul>
  9. 9. SECURITY MARKETS <ul><li>Stock Market Information </li></ul><ul><ul><li>Ticker Symbol </li></ul></ul><ul><ul><li>52-Week Price Range (Hi-Lo) </li></ul></ul><ul><ul><li>Dividend </li></ul></ul><ul><ul><li>Dividend Yield </li></ul></ul><ul><ul><li>Price-Earnings Ratio (TTM) </li></ul></ul><ul><ul><li>Volume (in hundreds = round lots) </li></ul></ul><ul><ul><li>Closing Price, change from previous close </li></ul></ul><ul><ul><li>Indexes (DJIA, SP500, NASDAQ) </li></ul></ul>
  10. 10. SECURITY MARKETS <ul><li>Auction Markets </li></ul><ul><ul><li>Orders of traders are directly matched </li></ul></ul><ul><ul><li>NYSE Members may act as dealers (specialists) or brokers (traders) </li></ul></ul><ul><li>E. Cost of Liquidity Services: Bid–Ask Spread </li></ul><ul><ul><li>Bid = highest unexecuted price to buy </li></ul></ul><ul><ul><li>Ask = lowest unexecuted price to sell </li></ul></ul>
  11. 11. MARKET MONITORING <ul><li>SEC: reporting requirements </li></ul><ul><ul><li> (web site for SEC reports) </li></ul></ul><ul><li>Sarbanes-Oxley (2002) </li></ul><ul><ul><li>Cannot audit books of firm any one of whose CEO or CFO formerly worked for the auditing firm </li></ul></ul><ul><ul><li>Require outside directors to be on audit committee </li></ul></ul><ul><ul><li>Members of audit committee may not receive special compensation </li></ul></ul><ul><ul><li>Require CEO / CFO certification of correctness </li></ul></ul><ul><ul><li>Failure to comply draws fines and imprisonment </li></ul></ul>
  12. 12. HOMEWORK QUESTIONS <ul><li>What characteristic of preferred stock causes sensitivity to interest rate changes? </li></ul><ul><li>What does it mean when a preferred stock is cumulative & participating ? </li></ul><ul><li>What are preemptive rights and why are they important to common stockholders? </li></ul><ul><li>How do we measure the cost of liquidity? </li></ul><ul><li>How does an auction market differ from a dealer market? </li></ul><ul><li>What has been the major impact of Sarbanes-Oxley on the stock markets? </li></ul>