Finance_wks4-6 - Summary of Finance Chapters 4-6 The Share...

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Summary of Finance Chapters 4-6 The Share Market and the Corporation The nature of a Corporation Share Market: a formal exchange facilitating the issue, buying and selling of equity securities. Publicly listed Corporations: a company whose shares are quoted and traded n a formal stock exchange (SX). Corporations are publicly listed to seek extra funding for resources and maximize the company’s wealth. Ordinary Share: The principal form of equity issued by a corporation, bestows a claim to residual cash flows and ownership and voting rights. Difference between corporation and other business forms: - ownership claims are widespread and easily transferable - owners do not affect the day to day affairs of a company - Shareholder’s liability is limited to the issue price of shares of a limited liability company, any partly paid portion of share of a no liability company. Advantages of a corporate form: - can obtain large amounts of finance for a relatively cheap cost - the liquidity of securities facilitates investor diversification and encourages investment in corporate securities - separation of ownership and control facilitates; appointment of specialized management, greater effectiveness in the planning and implementation of strategic decisions. - ‘Perpetual succession’ – the corporate form is unaffected by changes in management or ownership - the corporate form is suited to large scale operations Disadvantages of a corporate form: - Conflict of interest between owners and managers known as the “agency problem” - Management may try to run business for their own benefit rather than that of shareholders - Factors moderating conflict of interest between owners and managers: investor’s ability of sell shares in a corporation causing the share price to fall, dismissal from the board by shareholders, threat of takeover and loss of employment, use of performance incentives such as share options, more rigorous corporate governance Primary Market Role: - The SX facilitates the efficient and orderly sale of new financial securities o New floats/initial public offerings (IPO’s) o Rights issue; issue of additional shares to existing shareholders on a pro rate basis o Placements; issue of new shares to selected institutional investors o Dividend reinvestment plans; reinvestment of dividends into corporation for additional shares. The overall objective of a market exchange is to attract liquidity, execute with reasonable speed and minimal cost, and find appropriate prices for customers.
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Secondary Market - The SX facilitates trading in existing shares o No new funds are raised by the issuing company o An active, liquid, well-organised secondary market increases the appeal of buying new shares in the primary market o Market liquidity; ratio of share turnover to market capitalization o Market turnover; number of shares on issue x current share price Derivative Market Role - The SX provides a market for trading equity related derivate products o A derivative is a financial security that derives its price from an
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This note was uploaded on 04/04/2012 for the course FINS 1612 taught by Professor Nice during the Three '10 term at University of New South Wales.

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Finance_wks4-6 - Summary of Finance Chapters 4-6 The Share...

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