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Finance
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Commentators
Equity analysts and credit rating agencies
Facilitators
Stock exchanges and investment banks
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Money markets
Short-term securities (< 1 year from issue to maturity)
Derivative markets
Futures and options
Long-term Securities
Long-term securities are issued to investors for
cash in the primary capital market by:
Companies issue equities and bonds to finance growth
Governments issue bonds to make up tax shortfall
Global Companies
Listed companies ranked by equity market capitalisation:
Country
Sector
Market
capitalisation
Apple
USA
Technology
$725bn
Exxon Mobil
USA
$356bn
Petrochina
China
$330bn
Switzerland
Pharmaceuticals
$268bn
UK
$192bn
Company
10 Novartis
14 Royal Dutch
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Security Pricing
The secondary market price of a security is set by
the interaction of participants when they trade:
Price rises when more buyers than sellers
Price falls when more sellers than buyers
Third parties
Close competitors
Economic data
Equity analysts forecast upgrades / downgrades
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Share price
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Equity Indices
Indices reflect share prices of constituent companies
Country
UK
USA
Japan
Germany
Main stock
exchange
Main index
London
FTSE 100
100
+1%
New York
Standard &
Poors 500
500
+6%
Tokyo
Nikkei
225
+19%
Frankfurt
Xetra Dax
30
+15%
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Constituent
12 month
companies performance
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Market Efficiency
In an efficient market, security prices are fair and
can be trusted to:
Reflect the markets consensus opinion on its intrinsic
value at a point in time
React fully, rapidly and rationally to any new
information which is relevant to its intrinsic value
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Equity Valuation
The academic theory:
The intrinsic value of a company is the present value of its
expected future cash flows discounted at an appropriate,
risk-adjusted, rate
The reality:
Future company cash flows are inherently uncertain
Many and varying factors affect the discount rate
Non cash flow methodologies to estimate equity value are
used in practice:
Price Earnings Ratio (PER)
Dividend Yield (DY)
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Calculation guidance
Prospective annual earnings per share is the
consensus equity analyst forecast (a.k.a. broker
estimate) for the next financial year end which can be
found in financial databases
The earnings per share forecast should be on an
underlying and fully diluted basis
PER is a multiple i.e. 18.5x
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Calculation guidance
Prospective annual dividend per share is the
consensus equity analyst forecast (a.k.a. broker
estimates) for the next financial year end which can
be found in financial databases
DY is a percentage i.e. 3.5%
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Key Points
The main corporate securities are shares & bonds
Companies issue securities in primary capital
markets to raise finance for growth
Major secondary capital markets are semi-strong
efficient
The price of a security is not necessarily the same
as its value
Equity valuation methodologies can only provide
estimates of value
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Preparation:
Seminar questions
Equity indices
Equity valuation
Efficient market hypothesis
Next lecture
International Trade and Foreign Exchange
Read chapter 12 of the key text
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