L2 - Intnl Capital Markets & Securities(1) (1)

7/23/2019 L2 - Intnl Capital Markets & Securities(1) (1)

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International Corporate

Finance

International Capital Markets &

Securities

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Financial Markets (1)

• A financial market can be defined as “theparticipants, commentators and facilitators whichcontribute to setting the price of a financial asset”

• Participants• Investors

• Traders

• Commentators• !uit" anal"sts and credit rating agencies

• #acilitators• $tock e%changes and investment banks




Financial Markets (2)

• Capital markets

• &ong'term securities () * "ear from issue to maturit"+

• one" markets• $hort'term securities (- * "ear from issue to maturit"+

• .erivative markets

• #utures and options

• #oreign e%change markets

• Currencies and forwards




Longterm !ecurities

• &ong'term securities are issued to investors forcash in the primar" capital market b"/• Companies 0 issue e!uities and bonds to finance growth

• 1overnments 0 issue bonds to make up ta% shortfall

• The investor has legal rights to receive future cashflows from the issuer/

• !uities 0 dividends and li!uidation proceeds• 2onds 0 interest and redemption proceeds

• Previousl" issued securities trade (are bought andsold+ in the secondar" capital market



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#lobal Companies

&isted companies ranked b" e!uit" market capitalisation/

# Company Country Sector Market

capitalisation

* Apple 3$A Technolog" 4567bn

6 %%on obil 3$A 8il 9 1as 4:7;bn

; Petrochina China 8il 9 1as 4::<bn

*< =ovartis $wit>erland Pharmaceuticals 46;?bn

*@ o"al .utch 3B 8il 9 1as 4*6bn

Source: Financial Times Global 500 at 31st March 2015



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Importance o% !ecurit& 'rices

• Compan" directors are concerned about securit"prices in the secondar" market/

• #inancial efficienc" 0 share price and bond price• $hareholder wealth creation 0 share price

• emuneration 0 share price


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!ecurit& 'ricing

• The secondar" market price of a securit" is set b"the interaction of participants when the" trade/• Price rises when more bu"ers than sellers

• Price falls when more sellers than bu"ers

• Participants trade a securit" because the" havedifferent opinions on its intrinsic value

• The intrinsic value of a securit" is/• .etermined b" the amount, timing and certaint" of its

e%pected future cash flows

• $ubDective and not (necessaril"+ the same as its price


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Intrinsic *alue +,uities

• %pected future e!uit" cash flows depend uponthe performance of the issuer/

•.ividend pa"ments 0 amount and timing uncertain butt"picall" rise over time

• .isposal proceeds 0 amount uncertain as will dependupon market price when shareholder sells

• &i!uidation proceeds 0 amount and timing uncertainalthough t"picall" >ero if issuer fails

• !uit" anal"sts advise on future corporateperformance


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Intrinsic *alue on/s

• %pected future bond cash flows depend uponthe survival of the issuer/

• Interest pa"ments 0 amount and timing known withcertaint" and fi%ed unless issuer fails

• edemption proceeds 0 amount and timing knownwith certaint" and fi%ed unless issuer fails

• .isposal proceeds 0 uncertain as will depend uponmarket price when bondholder sells

• Credit rating agencies advise on likelihood offuture failure of issuer


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!hare 'rices (1)

• 8pinions on the intrinsic value of a compan" (andits share price+ are likel" to change when newinformation is made public b"/

• The issuing compan"• #inancial results and trading updates

• anagement changes

• ergers and ac!uisitions

• Third parties• Close competitors

• conomic data

• !uit" anal"sts forecast upgrades E downgrades



!hare 'rices (2)

$hare price performance can be stated in absolute termsandEor in relative terms to iFeF an e!uit" inde%

Share

price

Index

value

elative performance of share price/ '*7G H 6G '13%

Index change !%

"solute change 1$%



!hare 'rices (3)

easons for relative underperformance of the share price

Share price

Index value




+,uit& In/ices

Indices reflect share prices of constituent companies

CountryMain stockexchange

Main index Constituentcompanies

1! monthperformance

3B &ondon #T$ *<< *<< H*G

3$A =ew Jork$tandard 9PoorKs 7<<

7<< H;G

Lapan Tok"o =ikkei 667 H*G

1erman" #rankfurt Metra .a% :< H*7G




Market +cienc&

• In an efficient market, securit" prices are fair andcan be trusted to/

• eflect the marketKs consensus opinion on its intrinsicvalue at a point in time

• eact full", rapidl" and rationall" to an" newinformation which is relevant to its intrinsic value

• Nence, directors can be confident that actionswhich create or destro" shareholder wealth willbe reflected in the share price



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+cient Market &pothesis (1)

#ama (*5<+ distinguished three levels ofinformational efficienc" in the e!uit" market/

1eak efficiency'• Prices full", rapidl" and rationall" reflect all information contained

in past prices

• =ot possible to make consistent abnormal returns b" predictingfuture price movements based on past price movements

• Possible to make consistent abnormal returns b" using publicl"available andEor privatel" available (inside+ information

• Strongly supported y tests of empirical evidence



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! Semistrong efficiency'

• Prices full", rapidl" and rationall" reflect all information containedin past prices and all relevant publicl" available information

• =ot possible to make consistent abnormal returns b" using pastprices or publicl" available information

• Possible to make consistent abnormal returns b" using insideinformation

• (airly )ell supported y tests of empirical evidence despiteanomalies ie'

• %istence of star investors

• arnings announcement effect





3 Strong efficiency'

• Prices full", rapidl" and rationall" reflect all information containedin past prices and all relevant publicl" available information and

all relevant inside information• =ot possible to make consistent abnormal returns with an"

information

• *ot )ell supported y tests of empirical evidence ie'

• Abnormal returns b" directors dealing in their compan"Ksshares

• Abnormal returns made b" (prosecuted+ insider dealers





• Ohat would be the immediate impact on theshare price of a compan" which trades in amarket which is weak to semi'strong efficient if it/

• Announces financial results which are in line withe%pectations

• Announces better than e%pected financial results

• Issues a profits warning• Oins a maDor new contract

• Announces that the chief e%ecutive officer hasresigned



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+,uit& *aluation

• The academic theor"/• The intrinsic value of a compan" is the present value of its

e%pected future cash flows discounted at an appropriate,

risk'adDusted, rate• The realit"/

• #uture compan" cash flows are inherentl" uncertain

• an" and var"ing factors affect the discount rate

• =on cash flow methodologies to estimate e!uit" value areused in practice/

• Price arnings atio (P+

• .ividend Jield (.J+




'rice +arnings atio (1)

• #ormula• P share price Q prospective annual earnings per

share

• Calculation guidance• Prospective annual earnings per share is the

consensus e!uit" anal"st forecast (aFkFaF brokerestimate+ for the ne%t financial "ear end which can be

found in financial databases• The earnings per share forecast should be on an

“underl"ing and full" diluted” basis

• P is a multiple iFeF *?F7%





• Considerations• Cannot use if compan" is loss'making

• #orward looking but inherent uncertaint" in forecasts

• arnings per share is partl" subDective (accountingprofits+

• easure of relative (not absolute+ value

• Current 3B Inde% Ps• #T$ *<< ' *5F?%

• #T$ 67< ' *?F%

(source: www.ft.com)





• Inferences

• P market average HE' 6 (+ suggests shares arefairl" valued but is this Dustified

• P - market average ' 6 suggests shares areundervalued but this ma" be Dustified b" iFeF poorprofit growth outlook

• P ) market average H 6 suggests shares areovervalued but this ma" be Dustified b" iFeF strongprofit growth outlook




i5i/en/ 6iel/ (1)

• #ormula

• .J prospective annual dividend per share Q shareprice

• Calculation guidance

• Prospective annual dividend per share is theconsensus e!uit" anal"st forecast (aFkFaF broker

estimates+ for the ne%t financial "ear end which canbe found in financial databases

• .J is a percentage iFeF :F7G




i5i/en/ 6iel/ (2)

• Considerations• Cannot use if compan" has a >ero dividend polic"

• #orward looking

• .ividends per share are obDective

• easure of relative and absolute value

• Current 3B Inde% .JKs

• #T$ *<< ' :F?G• #T$ 67< ' 6F7G

(source: www.ft.com)



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i5i/en/ 6iel/ (3)

• Inferences

• .J market average HE' *G (+ suggests shares arefairl" valued

• .J ) market average H*G suggests shares areundervalued but this ma" be Dustified b" iFeF poordividend growth prospects or possible dividend cut

• .J - market average '*G suggests shares areovervalued but this ma" be Dustified b" iFeF fastdividend growth prospects



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7e& 'oints

• The main corporate securities are shares 9 bonds

• Companies issue securities in primar" capital

markets to raise finance for growth• aDor secondar" capital markets are semi'strong

efficient

• The price of a securit" is not necessaril" the sameas its value

• !uit" valuation methodologies can onl" provideestimates of value



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e5iew 8 'reparation

• +evie)'

• ead chapter 6 of the ke" te%t (Oatson 9 Nead ;th edF+

• $elf'test !uestions 6 9 : (answers provided+

• ,reparation'

• $eminar !uestions• !uit" indices

• !uit" valuation

• fficient market h"pothesis

• =e%t lecture• International Trade and #oreign %change

• ead chapter *6 of the ke" te%t

Documents

L2 - Intnl Capital Markets & Securities(1) (1)