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Stock Exchange The main function of the Stock Exchange is to ensure that securities (which are acknowledgements for investment or money) have a readily.

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Presentation on theme: "Stock Exchange The main function of the Stock Exchange is to ensure that securities (which are acknowledgements for investment or money) have a readily."— Presentation transcript:

1 Stock Exchange The main function of the Stock Exchange is to ensure that securities (which are acknowledgements for investment or money) have a readily accessible market This introduces liquidity to the market Without the Stock Exchange there would be very difficult to recover one’s investment in a company except by winding up the company and selling its assets.

2 Stock Exchange - cont The Stock Exchange provides facilities both for the sale of existing securities (and this is where the greatest business is done) and for the sale or issue of new ones.. It provides the mechanism whereby the general public brings forward the necessary finance for government, industry and commerce by bringing together those people who have savings to invest and those who need capital

3 Stock Exchange - Cont Exchange, makes new sources of long term capital available by the issue of shares, enabling the considerable expansion of companies The Stock Exchange also provides an alternative control mechanism over the management of a company If there were no Stock Exchange so that shares of the could not be sold, the only control a shareholder would have over the management of the company would be at the annual general meeting.

4 Stock Exchange - cont As the Stock Exchange requires quoted companies to publish their accounts, this enables individuals and companies to assess more accurately the risk of lending funs to a particular organization The market price of a security depends upon the supply and demand for that security, and these are determined not simply by the performance of the particular company but also by the general conditions prevailing the economy and that future prospects.

5 Why is market value of shares important a listed company's shares may be sold or purchased on the market at prices determined by supply and demand as shown by the particular jobbers' dealing prices. Should the company consider raising additional funds by this method, then the market value of the share is important

6 If stock is convertible during a period when the share price is falling, then the holders will redeem. This will necessitate the company raising funds which it probably does not have in order to redeem the stock. Should the company become a target for a takeover, then a high share price will help to deter the bidder as the acquisition

7 A high share price is in most instances indicative of a profitable company It is very important to ensure that growth is maintained. An absence of satisfactory profitability would be reflected in a low share price and the consequent ability to maintain growth would be restricted as most probably there will be a lack of internal funds for investment, and raising fresh funds by means of, say a right issue may not be a feasible proposition.

8 2. SHARE CAPITAL

9 What is share capital Funds raised by issuing shares in return for cash or other considerations. The amount of share capital a company has can change over time because each time a business sells new shares to the public in exchange for cash, the amount of share capital will increase. Share capital can be composed of both common and preferred shares.

10 What is rights issue of a company A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called "rights", which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price

11 Theoretical rights issues. The theoretical ex-rights price is based on the company's market capitalization and the number of shares outstanding. For example, if a new rights offering gives buyers the right to purchase 25% more shares than there are currently outstanding, the market price of the stock will theoretically be 25% less in the future than it is today (assuming 100% of the new rights will be exercised by the holders)

12 Computation of theoretical ex rights The equity of the business as at 31 December Year 2012 is as follows: Profit for the year 42 £m £0.50 ordinary shares 120 Share premium account 80 Retained profit P E Ratio 24 The company decided to give 1 for 5 rights issue.

13 Calculate the theoretical ex rights price Share capital = £120 Nominal value per share = £0.50 No of shares issued = £120/ £0.50 = 240 shares Share price = earnings per share × price/earnings ratio = [£42m/240 ] × 24 = £4.20 For every 5 shares you get 1 share

14 Calculation –cont Cost of 5 Original shares = 5 × £4.20 = Cost of 1 right issue = 60% of the share price = 4.20 X 0.60% Rights share 1 × (£4.20 × 0.6) = 2.52 (cost of 1 right issue) Cost of 6 shares = ( ) Value of a share following the rights issue £23.52/6 = £ 3.92 (Cost of 1 share after rights issue)

15 Value of the rights. Value of share after rights issue - £ 3.92 Cost of acquiring a rights share - £ 2.52 Value of rights - £ 1.40

16 What are the options available Take up rights offer Value of shares following rights issue [(1, ) × £3.92] = £4,704 4,704 Less: Cost of purchasing rights shares (200 × £2.52) (504) Value of the shares = £4,200

17 Sell the rights Value of the shares after rights (1,000 × £3.92) = 3, Add: Sale of rights = (200 × £1.40) = = 4,200.00

18 Lets the rights to lapse Let the rights to lapse Value of shares after rights issue (1,000 × £3.92) = £ 3,920

19 Evaluate the three options We can see that the wealth of the investor will be unaffected whether a decision is made to take up the rights offer or to sell the rights. If the investor allows the rights offer to lapse, there will be a loss of wealth of £280. (Original price of 1,000 shares was 4,200, after the rights it became £ 3,920.)

20 It can be argued that the rights given to existing shareholders will prevent greater competition for new shares in the business. This is because the offer is to a small section of the potential market for the shares. This may, in turn, increase the costs of raising finance as other forms of share issue could raise the necessary finance more cheaply.

21 3 - Efficient Market- Hypothesis An efficient market is a market where the prices of whatever is traded fully reflect all relevant information. Prices also react in an instantaneous an unbiased way upon the release of any new information. There are many examples of markets which may or may not be efficient. eg the foreign exchange markets, the interest rate markets or commodity markets. The Stock Exchange, the market for the issue and trading in corporate securities. The adjustment of share prices to new information is achieved through the supply and demand pressure of traders’ actions based upon their revised expectations of the worth of a share. Market efficiency does not depend upon all trades having the same views on the meaning of new information or the worth of a share, the market is merely in equilibrium.

22 Weak Form - Market Share prices fully reflect all information contained in past share prices and trading volumes. Investors cannot make an abnormal profit by trading in shares using this information alone. Share prices tend to follow a random walk where future prices cannot be predicted from past prices. If the weak form of the efficient market hypotheses is were true a chartist could not persistently make abnormal profits.

23 Semi – Strong Form Share prices fully reflect all publicly available information concerning a company. The information set includes that available under the weak form plus other information such as available in the annual accounts, press releases etc. A trader cannot make excess profits if the market is efficient in the semi-strong form even if he reacts (however quickly) to newly published information.

24 Strong Form Share prices fully reflect all information concerning a company, whether publicly available or not. This means that no investor (even an insider trader) can make excess profits, whatever information he might have. Market efficiency in the semi-strong form but not in the strong form means that all publicly available information is reflected in share pris, but no inside information ie that which has not yet been released by the company.

25 Efficiency of an organization Lines of authority must not be too vague. An organization chart should be construed in which the divisions of functional responsibility among executives are clearly established. Authority should be commensurate with responsibility in each case. Each person should be responsible to one superior only and should be in doubt as to the identity of that executive. Efficiency is measured to improve management control, but this can only happen if it is known who is responsible (and to whom) for any particular efficiency standard.

26 Motivation. Employees must be motivated to work efficiency. Motivation may take the form of financial incentives related to productivity or, less directly, by prospects of promotion enhanced by recognition of merit. It may even spring from natural desire to meet a challenge successfully or it may be fear of losing one’s job.

27 Standard of Performance Efficiency can be measured if there is an established standard with which it can be compared. In the case of manufacturing operations, work study engineers should be employed to study existing methods of work and should recommend improvements aimed at achieving the most effective use of materials, equipment and human effort. Having established the most efficient methods, they should measure the times required for the performance of specific tasks to provide a basis for the formulation of sound incentive schemes or to provide reliable standard times for planning and control.

28 Management information Management at all levels should be held responsible for the efficiency of their divisions, departments or sections. Information as to the results achieved measured against pre-set standards. Statements presented to higher levels should be broader in scope and less detailed than those provided to subordinate levels.

29 Co-ordination of functions A long term should be formulated and a strategy worked out for its achievement. A current budget consistent with the company’s long term objectives, should be prepared.

30 Variance accounting The planned activities should be expressed in budgets, standards costs, standard selling prices and standard profit margins, and the differences between these and the comparable actual results should be accounted for. The manager of each production department should periodically be presented with an operating statement in which actual results are compared with standards whilst higher management should be presented with an analysis of differences by causes and responsibility centres, such analysis of differences by causes and responsibility centres, such analysis usually commencing with the operating profit variances.


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