1. EQUITY MARKETS

2. Private Equity -VCF -Private equity funds Public Equity -primary market -secondary market -ownership and voting rights -Preferred stocks (vs. Common stocks) -

5. How investor decisions affect stock prices -valuation (overvalued / undervalued) -different valuation methods are used by investors Question: Do stock transactions between investors in the secondary market affect the capital structure of the issuer?capital structure No, it just transfer stock ownership

9. Initial Public Offerings (IPO) http://en.wikipedia.org/wiki/IPO http://en.wikipedia.org/wiki/IPO -Process of going public -Developping a prospectus (SEC) -pricing (slide 7) -allocation of IPO shares (leadunderwriter+syndicate) -transaction costs (7%) -underwriter effort to ensure price stability -Lockup period -Timing of IPOs -Initial first-day return of IPOs (vs. LT performance) -Flipping shares

10. POSSIBLE OFFER PRICETOTAL SHARES DEMANDEDTOTAL PROCEEDS TO THE ISUER $13 $12 3,000,000 3,500,000 $39,000,000 $42,000,000 $11 $10 4,000,000 4,300,000 $44,000,000 $43,000,000

11. Secondary Offerings -Effect on price -Timing Repurchase agreement -Effect on price -Timing

13. The Trading Floor http://www.youtube.com/watch?v=VeNDB3OlhUE http://en.wikipedia.org/wiki/SuperDot Bloomberg stock quote and caracteristics

14. STOCK VALUATION AND RISK -fundamental analysis vs. Technical analysis -Price/earning ratio (PE or PER (french)) -Dividend discount model -Free cash flow model (no dividends, use cash flow - liabilities/nb of shares)

16. 1.Price / Earning ratio (P/E) -Based on expected rather than recent earning Valuation per share = expected earning per share x mean Industry P/E bloom DES bloom S5 FA -consider a firm that is expected to generate earnings of $3 a share next year. If the mean P/E ratio of competitors in the same industry is 15, then the valuation of the firm’s share is…….. $45

19. 2. Dividend Discount Model (DDM) Price of any asset = Sum present value of its future cash flow Stock --------------  PV of future dividends = ∑ Div ------------- (1+ R) t T: period Div=dividend R= discount rate

20. A stock is expected to pay a dividend of $7 for life. This constant dividend represents a perpetuity, or an annuity that lasts forever. Assuming that the required rate of return by investors (HF) R on the stock is 14%, the PV of the future dividends is : 7/0.14 = $50 ? 1 - [1/(1+r) t ] PV stock = Div ------------------- r

21. Dividends are never the same forever and tend to increase or decrease

22. Constant Growth dividend Model PV of stock = D/ (R – G) D=dividend R=required rate of return by investor (20% by HF) G= dividend growth rate (4%)

23. DDM PV of stock = D/ (R – G) Valuation per share = expected earning per share x mean Industry P/E Limitations of DDM and P/E valuation models?(p265)

25. Adjusting the DDM with P/E model ∑ PV future dividend to be received over the investment horizon = S t PV of the forecasted price at which the stock will be sold at the end of the investment horizon (EPS forecast or EPS growth rate) Value of a stock = Forecast earnings = Earning t 0 (1+G) t G= expected earning growth (p266) Stock price in t years(S t ) = forecast earning per share x mean Industry P/E Pb 5 page 291)

26. Required Rate of Return -Risk free rate vs. Risk premium Capital Asset Pricing Model Arbitrage Pricing Model

27. CAPM -Model concerned with Systematic risk, risk resulting from exposure to market movements (vs. Unsystematic risk avoidable through diversification) R asset = R free + Beta ( R market return - R free ) R asset = Rate at which the dividends must be discounted (R market return - R free ) = 7% based on historical data R free = newly issued Treasury bond (P. 266)

28. Arbitrage Pricing Model (APT) E(R)= B 0 + ∑ Bi Fi E(R)= expected return of asset B 0 = a constant Bi = sensitivity of the asset return to particular force Fi= ∑ values of factors

29. Factors affecting stock prices Economic Factors: -impact of economic growth -impact of interest rates -impact of the dollars’s exchange rate Market related factors: -investor sentiment -january effect Firm specific factors: -change in dividend policy -earnings surprises -expectations