CHAPTER 8 OVERVIEW OF EQUITY SECURITIES Presenter Venue Date

EXHIBIT 8-1 COUNTRY AND REGIONAL CONTRIBUTIONS TO GLOBAL GDP AND EQUITY MARKET CAPITALIZATION (2007) Source: MacroMavens, IMF World Economic Outlook 2008, Standard & Poor’s BMI Global Index weights.

EXHIBIT 8-2 EQUITY MARKETS RANKED BY TOTAL MARKET CAPITALIZATION AT THE END OF 2008 (BILLIONS OF U.S. DOLLARS) Source: Adapted from the World Federation of Exchanges 2008 Report (see

EXHIBIT 8-3 REAL RETURNS ON GLOBAL EQUITY SECURITIES, BONDS, AND BILLS DURING Source: E. Dimson, P. Marsh, and M. Staunton (2009)

EXHIBIT 8-6 INTERNATIONAL COMPARISONS OF STOCK OWNERSHIP IN SELECTED COUNTRIES: 2000–2008 Source: Adapted from the 2008 Australian Share Ownership Study conducted by the Australian Securities Exchange (see For Australia and the United States, the data pertain to direct and indirect ownership in equity markets; for other countries, the data pertain to direct ownership in shares and share funds. Data not available in specific years are shown as “N/A.”

COMMON SHAREHOLDERS Share in the operating performance of the company. Ownership interests Claim on assets after all liabilities have been paid. Residual claimants Voting rights on major corporate decisions. Governance participants

VOTING RIGHTS Voting rights Statutory voting Cumulative voting Share classes Vote by proxy

EMBEDDED OPTIONS Callable common shares Putable common shares

PREFERENCE SHARES (PREFERRED STOCK) Rank above common stock for dividend payments and liquidation claims Shareholders do not share in the firm’s operating performance Generally do not have voting rights Dividends are fixed and typically higher than common dividends

DIVIDENDS ON PREFERENCE SHARES CumulativeNoncumulative ParticipatingNonparticipating

POSSIBLE ADVANTAGES OF CONVERTIBLE PREFERENCE SHARES Earn a higher dividendOpportunity to share in profits Benefit from a rise in the price of the common shares Price is less volatile than the common share price

PRIVATE EQUITY SECURITIES Equity securities Private Venture capital Leveraged buyouts Private investment in public equity Public

INVESTING IN NONDOMESTIC EQUITY SECURITIES Buy and sell shares directly in foreign markets. Direct investment Global depository receipts (GDR) American depository receipts (ADR) Global registered share (GRS) Basket of listed depository receipts (BLDR) Depository receipts (DR)

EXHIBIT 8-16 SUMMARY OF THE MAIN FEATURES OF AMERICAN DEPOSITORY RECEIPTS Source: Adapted from Boubakri, Cosset, and Samet (2008): Table 1.

RETURN CHARACTERISTICS OF EQUITY SECURITIES Dividend income Price change (capital gain) Foreign exchange gains or losses Reinvested dividends

EXHIBIT 8-17 IMPACT OF REINVESTED DIVIDENDS ON CUMULATIVE REAL RETURNS IN THE U.S. EQUITY MARKET: 1900–2008 Source: Dimson, Marsh, and Staunton (2009).

METHODS FOR ESTIMATING RISK AND RETURN Historical data Average rate of return Standard deviation Probability distribution of possible returns Expected return Standard deviation

PREFERENCE SHARES ARE LESS RISKY THAN COMMON SHARES Known liquidation value Priority claim on income Fixed dividend

EMBEDDED OPTIONS AND RISK Higher risk: Callable Nonputable Noncumulative Lower risk: Noncallable Putable Cumulative

WHY ISSUE EQUITY?

GOALS FOR MANAGING EQUITY Increase book value Maximize market value Increase net income Retain more earnings Issue shares Manage investors’ expectations

ACCOUNTING RETURN ON EQUITY (ROE) Financial Year Ending 31 Dec Dec Dec 2006 Pfizer Net income$8,104,000$8,144,000$19,337,000 Total stockholders’ equity$57,556,000$65,010,000$71,358,000

MARKET VALUE, BOOK VALUE, AND PRICE-TO-BOOK RATIO Market value of equity = Market price per share × Shares outstanding Market value of equity = US$16.97 × 6,750,000 = US$114,547,500 Book value of equity per share = Total shareholders’ equity/Shares outstanding Book value of equity per share = US$57,556,000/6,750,000 = US$8.53 Price-to-book ratio = Market price per share/Book value of equity per share Price-to-book ratio = US$16.97/US$8.53 = 1.99

THE COST OF EQUITY Company wants to raise equity capital Company not contractually obligated to shareholders What is the cost of equity?

INVESTOR’S REQUIRED RATE OF RETURN Investor’s minimum required rate of return Cost of equity Estimate with pricing models: dividend discount model (DDM), capital asset pricing model (CAPM), etc.

SUMMARY Types of equity securities Importance and relative performance of equity securities Ownership characteristics and voting rights Investing in nondomestic equities Risk and return characteristics Market value and book value Cost of equity, (accounting) return on equity, and investor’s required return