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) Rank 1 2 3 4 5 6 7 8 Name of Market NYSE Euronext (U.S.) Tokyo Stock Exchange Group NASDAQ OMX NYSE Euronext (Europe) London Stock Exchange Shanghai Stock Exchange Hong Kong Exchanges Deutsche Börse Total U.S. Dollar Market Capitalization Total U.S. Dollar Trading Volume Number of Listed Companies $9,208.9

$3,115.8

$33,638.9

$5,607.3

3,011 2,390 $2,396.3

$2,101.7

$1,868.2

$36,446.5

$4,411.2

$6,271.5

2,952 1,002 3,096 $1,425.4

$1,328.8

$1,110.6

$2,600.2

$1,629.8

$4,678.8

864 1,261 832 9 TSX Group $1,033.4

$1,716.2

3,841 10 BME Spanish Exchanges $948.4

$2,410.7

3,576

Source

: Adapted from the

World Federation of Exchanges 2008 Report

http://www.world-exchanges.org). (see

EXHIBIT 8-3 REAL RETURNS ON GLOBAL EQUITY SECURITIES, BONDS, AND BILLS DURING 1900-2008

Source

: E. Dimson, P. Marsh, and M. Staunton (2009)

EXHIBIT 8-6 INTERNATIONAL COMPARISONS OF STOCK OWNERSHIP IN SELECTED COUNTRIES: 2000 –2008 A ustralia – Direct/Indirect C anada – Shares/Funds Germany – Shares/Funds H ong Kong – Shares N ew Zealand South Korea – Shares S witzerland – Shares/Funds Sweden – Shares U.K. – Shares/Funds U.S. – Direct/Indirect 2000 52% 49 19 22 24 7 34 22 26 N/A 2002 50% 46 18 20 N/A 8 25 23 25 50 2004 55% 49 16 24 23 8 21 22 22 49 2006 46% N/A 16 N/A 26 7 21 20 20 N/A 2008 41% N/A 14 22 N/A N/A 21 18 18 45

Source

: Adapted from the

2008 Australian Share Ownership Study

conducted by the Australian Securities Exchange (see http://www.asx.com.au). 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 Ownership interests

• Share in the operating performance of the company.

Residual claimants

• Claim on assets after all liabilities have been paid.

Governance participants

• Voting rights on major corporate decisions.

VOTING RIGHTS

Statutory voting Vote by proxy Voting rights Cumulative voting Share classes

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

Cumulative Noncumulative Participating Nonparticipating

POSSIBLE ADVANTAGES OF CONVERTIBLE PREFERENCE SHARES Earn a higher dividend Opportunity 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 Public Venture capital Leveraged buyouts Private investment in public equity

INVESTING IN NONDOMESTIC EQUITY SECURITIES

Direct investment

• Buy and sell shares directly in foreign markets.

Depository receipts (DR)

• Global depository receipts (GDR) • American depository receipts (ADR) • Global registered share (GRS) • Basket of listed depository receipts (BLDR)

EXHIBIT 8-16 SUMMARY OF THE MAIN FEATURES OF AMERICAN DEPOSITORY RECEIPTS Objectives Raising capital on U.S. markets? SEC registration Trading Listing fees Size and earnings requirements

Level I (Unlisted)

Develop and broaden U.S. investor base with existing shares

Level II (Listed)

Develop and broaden U.S. investor base with existing shares No Form F-6 Over the counter (OTC) Low None No Form F-6 NYSE, NASDAQ, or AMEX High Yes

Level III (Listed)

Develop and broaden U.S. investor base with existing/new shares Yes, through public offerings

Rule 144A (Unlisted)

Access qualified institutional buyers (QIBs) Yes, through private placements to QIBs None Forms F-1 and F 6 NYSE, NASDAQ, or AMEX High Yes Private offerings, resales, and trading through automated linkages such as PORTAL Low None

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 Priority claim on income Fixed dividend Known liquidation value

EMBEDDED OPTIONS AND RISK • • •

Higher risk: Callable Nonputable Noncumulative

• • •

Lower risk: Noncallable Putable Cumulative

WHY ISSUE EQUITY?

Raise capital

Finance revenue generating activities Ensure going concern status

Increase liquidity

Mergers and acquisitions Stock-based compensation

GOALS FOR MANAGING EQUITY

Increase book value

• Increase net income • Retain more earnings • Issue shares

Maximize market value

• Manage investors’ expectations

ACCOUNTING RETURN ON EQUITY (ROE)

Pfizer

Net income Total stockholders’ equity

31 Dec 2008 Financial Year Ending 31 Dec 2007 31 Dec 2006

$8,104,000 $57,556,000 $8,144,000 $65,010,000 $19,337,000 $71,358,000 ROE

t

  BVE

t

 NI

t

BVE

t

 1  / 2 ROE 2007  $ 8 , 144 , 000 ($ 65 , 010 , 000  $ 71 , 358 , 000 ) / 2  11 .

9 % ROE 2008  $ 8 , 104 , 000 ($ 57 , 556 , 000  $ 65 , 010 , 000 ) / 2  13 .

2 %

MARKET VALUE, BOOK VALUE, AND PRICE-TO-BOOK RATIO

Market price Total shares outstanding Total shareholders’ equity Total market value of equity Pfizer $16.97 6,750,000 $57,556,000 $114,547,500 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