l2 - intnl capital markets & securities(1) (1)
TRANSCRIPT
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International Corporate
Finance
International Capital Markets &
Securities
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Financial Markets (1)
• A financial market can be defined as “theparticipants, commentators and facilitators whichcontribute to setting the price of a financial asset”
• Participants• Investors
• Traders
• Commentators• !uit" anal"sts and credit rating agencies
• #acilitators• $tock e%changes and investment banks
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Financial Markets (2)
• Capital markets
• &ong'term securities () * "ear from issue to maturit"+
• one" markets• $hort'term securities (- * "ear from issue to maturit"+
• .erivative markets
• #utures and options
• #oreign e%change markets
• Currencies and forwards
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Longterm !ecurities
• &ong'term securities are issued to investors forcash in the primar" capital market b"/• Companies 0 issue e!uities and bonds to finance growth
• 1overnments 0 issue bonds to make up ta% shortfall
• The investor has legal rights to receive future cashflows from the issuer/
• !uities 0 dividends and li!uidation proceeds• 2onds 0 interest and redemption proceeds
• Previousl" issued securities trade (are bought andsold+ in the secondar" capital market
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#lobal Companies
&isted companies ranked b" e!uit" market capitalisation/
# Company Country Sector Market
capitalisation
* Apple 3$A Technolog" 4567bn
6 %%on obil 3$A 8il 9 1as 4:7;bn
; Petrochina China 8il 9 1as 4::<bn
*< =ovartis $wit>erland Pharmaceuticals 46;?bn
*@ o"al .utch 3B 8il 9 1as 4*6bn
Source: Financial Times Global 500 at 31st March 2015
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Importance o% !ecurit& 'rices
• Compan" directors are concerned about securit"prices in the secondar" market/
• #inancial efficienc" 0 share price and bond price• $hareholder wealth creation 0 share price
• emuneration 0 share price
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!ecurit& 'ricing
• The secondar" market price of a securit" is set b"the interaction of participants when the" trade/• Price rises when more bu"ers than sellers
• Price falls when more sellers than bu"ers
• Participants trade a securit" because the" havedifferent opinions on its intrinsic value
• The intrinsic value of a securit" is/• .etermined b" the amount, timing and certaint" of its
e%pected future cash flows
• $ubDective and not (necessaril"+ the same as its price
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Intrinsic *alue +,uities
• %pected future e!uit" cash flows depend uponthe performance of the issuer/
•.ividend pa"ments 0 amount and timing uncertain butt"picall" rise over time
• .isposal proceeds 0 amount uncertain as will dependupon market price when shareholder sells
• &i!uidation proceeds 0 amount and timing uncertainalthough t"picall" >ero if issuer fails
• !uit" anal"sts advise on future corporateperformance
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Intrinsic *alue on/s
• %pected future bond cash flows depend uponthe survival of the issuer/
• Interest pa"ments 0 amount and timing known withcertaint" and fi%ed unless issuer fails
• edemption proceeds 0 amount and timing knownwith certaint" and fi%ed unless issuer fails
• .isposal proceeds 0 uncertain as will depend uponmarket price when bondholder sells
• Credit rating agencies advise on likelihood offuture failure of issuer
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!hare 'rices (1)
• 8pinions on the intrinsic value of a compan" (andits share price+ are likel" to change when newinformation is made public b"/
• The issuing compan"• #inancial results and trading updates
• anagement changes
• ergers and ac!uisitions
• Third parties• Close competitors
• conomic data
• !uit" anal"sts forecast upgrades E downgrades
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!hare 'rices (2)
$hare price performance can be stated in absolute termsandEor in relative terms to iFeF an e!uit" inde%
Share
price
Index
value
elative performance of share price/ '*7G H 6G '13%
Index change !%
"solute change 1$%
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!hare 'rices (3)
easons for relative underperformance of the share price
Share price
Index value
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+,uit& In/ices
Indices reflect share prices of constituent companies
CountryMain stockexchange
Main index Constituentcompanies
1! monthperformance
3B &ondon #T$ *<< *<< H*G
3$A =ew Jork$tandard 9PoorKs 7<<
7<< H;G
Lapan Tok"o =ikkei 667 H*G
1erman" #rankfurt Metra .a% :< H*7G
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Market +cienc&
• In an efficient market, securit" prices are fair andcan be trusted to/
• eflect the marketKs consensus opinion on its intrinsicvalue at a point in time
• eact full", rapidl" and rationall" to an" newinformation which is relevant to its intrinsic value
• Nence, directors can be confident that actionswhich create or destro" shareholder wealth willbe reflected in the share price
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+cient Market &pothesis (1)
#ama (*5<+ distinguished three levels ofinformational efficienc" in the e!uit" market/
1eak efficiency'• Prices full", rapidl" and rationall" reflect all information contained
in past prices
• =ot possible to make consistent abnormal returns b" predictingfuture price movements based on past price movements
• Possible to make consistent abnormal returns b" using publicl"available andEor privatel" available (inside+ information
• Strongly supported y tests of empirical evidence
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+cient Market &pothesis (2)
! Semistrong efficiency'
• Prices full", rapidl" and rationall" reflect all information containedin past prices and all relevant publicl" available information
• =ot possible to make consistent abnormal returns b" using pastprices or publicl" available information
• Possible to make consistent abnormal returns b" using insideinformation
• (airly )ell supported y tests of empirical evidence despiteanomalies ie'
• %istence of star investors
• arnings announcement effect
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+cient Market &pothesis (3)
3 Strong efficiency'
• Prices full", rapidl" and rationall" reflect all information containedin past prices and all relevant publicl" available information and
all relevant inside information• =ot possible to make consistent abnormal returns with an"
information
• *ot )ell supported y tests of empirical evidence ie'
• Abnormal returns b" directors dealing in their compan"Ksshares
• Abnormal returns made b" (prosecuted+ insider dealers
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+cient Market &pothesis (4)
• Ohat would be the immediate impact on theshare price of a compan" which trades in amarket which is weak to semi'strong efficient if it/
• Announces financial results which are in line withe%pectations
• Announces better than e%pected financial results
• Issues a profits warning• Oins a maDor new contract
• Announces that the chief e%ecutive officer hasresigned
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+,uit& *aluation
• The academic theor"/• The intrinsic value of a compan" is the present value of its
e%pected future cash flows discounted at an appropriate,
risk'adDusted, rate• The realit"/
• #uture compan" cash flows are inherentl" uncertain
• an" and var"ing factors affect the discount rate
• =on cash flow methodologies to estimate e!uit" value areused in practice/
• Price arnings atio (P+
• .ividend Jield (.J+
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'rice +arnings atio (1)
• #ormula• P share price Q prospective annual earnings per
share
• Calculation guidance• Prospective annual earnings per share is the
consensus e!uit" anal"st forecast (aFkFaF brokerestimate+ for the ne%t financial "ear end which can be
found in financial databases• The earnings per share forecast should be on an
“underl"ing and full" diluted” basis
• P is a multiple iFeF *?F7%
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'rice +arnings atio (2)
• Considerations• Cannot use if compan" is loss'making
• #orward looking but inherent uncertaint" in forecasts
• arnings per share is partl" subDective (accountingprofits+
• easure of relative (not absolute+ value
• Current 3B Inde% Ps• #T$ *<< ' *5F?%
• #T$ 67< ' *?F%
(source: www.ft.com)
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'rice +arnings atio (3)
• Inferences
• P market average HE' 6 (+ suggests shares arefairl" valued but is this Dustified
• P - market average ' 6 suggests shares areundervalued but this ma" be Dustified b" iFeF poorprofit growth outlook
• P ) market average H 6 suggests shares areovervalued but this ma" be Dustified b" iFeF strongprofit growth outlook
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i5i/en/ 6iel/ (1)
• #ormula
• .J prospective annual dividend per share Q shareprice
• Calculation guidance
• Prospective annual dividend per share is theconsensus e!uit" anal"st forecast (aFkFaF broker
estimates+ for the ne%t financial "ear end which canbe found in financial databases
• .J is a percentage iFeF :F7G
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i5i/en/ 6iel/ (2)
• Considerations• Cannot use if compan" has a >ero dividend polic"
• #orward looking
• .ividends per share are obDective
• easure of relative and absolute value
• Current 3B Inde% .JKs
• #T$ *<< ' :F?G• #T$ 67< ' 6F7G
(source: www.ft.com)
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i5i/en/ 6iel/ (3)
• Inferences
• .J market average HE' *G (+ suggests shares arefairl" valued
• .J ) market average H*G suggests shares areundervalued but this ma" be Dustified b" iFeF poordividend growth prospects or possible dividend cut
• .J - market average '*G suggests shares areovervalued but this ma" be Dustified b" iFeF fastdividend growth prospects
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7e& 'oints
• The main corporate securities are shares 9 bonds
• Companies issue securities in primar" capital
markets to raise finance for growth• aDor secondar" capital markets are semi'strong
efficient
• The price of a securit" is not necessaril" the sameas its value
• !uit" valuation methodologies can onl" provideestimates of value
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e5iew 8 'reparation
• +evie)'
• ead chapter 6 of the ke" te%t (Oatson 9 Nead ;th edF+
• $elf'test !uestions 6 9 : (answers provided+
• ,reparation'
• $eminar !uestions• !uit" indices
• !uit" valuation
• fficient market h"pothesis
• =e%t lecture• International Trade and #oreign %change
• ead chapter *6 of the ke" te%t