lecture_7_-_long_term_finance_equity (1)

lecture_7_-_long_term_finance_equity (1) - MA826 7 Sources...

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MA826 7 – Sources of Long term Finance - Equity Share Capital We need to consider: Shareholders’ voting rights Majority, cumulative and super majority voting. “par” value of a share, market value of a share
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Nominal value of issued share capital Authorised share capital Issued share capital Ordinary Shares Equal right to residual profits One vote per share Fully paid Other minor rights
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Variations of Ordinary Shares We consider: “deferred” shares Redeemable ordinary shares Non-voting shares Shares with multiple voting rights “ Golden” shares
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Risk and Expected Return Rational investor’s expected return on a security depends on the income received from the security and the future capital value of the security. Risk of loss or uncertainty about the future income would discourage the investor. Risky securities trade at lower prices and higher expected return.
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Return on Ordinary Shares Two factors: 1. Income yield i.e. dividend yield defined as Net dividend per share Market price per share 2. Expected capital growth i.e. increase in share’s market price. A share is evaluated as the present value of the future dividend stream.
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So capital growth is determined by dividend growth. Expected (1) + (2) > return on loan capital (1) usually < GRY on loan capital.
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Risk – Ordinary Shares In event of winding-up ordinary shareholders rank below the other creditors and usually have lower ranking than preference shares. So are risky since: (1) Uncertainty and volatility of future income stream (2) Uncertainty of capital return in case of winding-up.
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Return – Ordinary shares Offer high potential return for high risk. Low initial running yield
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This note was uploaded on 06/07/2011 for the course MA 826 taught by Professor Loba,millet during the Spring '11 term at Kent Uni..

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lecture_7_-_long_term_finance_equity (1) - MA826 7 Sources...

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