公司理财：原理与实践（第8版）课件全套 第1-12章 公司理财的功能- 风险管理

CorporatefinanceEighthEditionChapter1ThefinancefunctionTwokeyconceptsRelationshipbetweenriskandreturnTimevalueofmoneyRiskandreturnRiskreferstothepossibilitythatactualreturnmaybedifferentfromexpectedreturn.Riskcanbemeasuredbystandarddeviation.Investorsrequireincreasingcompensation(return)fortakingonincreasingrisk.Returnonaninvestmentcanbemeasuredoverastandardperiodsuchas1year.Riskandreturn(continued)Shareholderreturnisannualdividend(D1)plussharepriceincrease(P1

–

P0).Relativereturninpercentagetermsis100×[(P1

–

P0)+D1]/P0.Thisiscalledtotalshareholderreturn.Futurevalues:compoundingInvest£100nowat5%interestperyear: After1year:£105.00(100×1.05). After2years:£110.25(105×1.05).Thesearefuturevaluesof£100after1and2years.Futurevaluesarefoundbycompoundinginterestforwardthroughtime.Presentvalues:discountingWhatsumofmoneyinvestednowat5%willgive£120in2-years’time?Thiswillbe£120/1.052=£108.84.Thisisthepresentvalueof£120receivedin2years,ifyourrequiredrateofreturnis5%.Dividingby1.052tofindapresentvalueiscalleddiscounting.Presentvalues:discounting(continued)Arationalinvestorwillprefer£108.84to£100atthecurrenttime.Discountingallowsustocompare£120in

2-years’timewith£100now.Notethat1/1.052=0.907.0.907isthepresentvaluefactorordiscountfactorof5%over2years(seetables).Hence£120×0.907=£108.84.Decision-makingareasAfinancialmanager’staskscanbedivided

intothreeareas: Financingdecisions Dividenddecisions InvestmentdecisionsKeypoint:understandtheinterrelationship

ofthesethreedecisionareasThefinancialmanagerWhoisthefinancialmanagerinreality?FinanceDirector(strategicdecision-making)CorporateTreasurer(day-to-daycashmanagement)PossiblecorporateobjectivesShareholderwealthmaximisation(SHWM)MaximisationofprofitMaximisationofsalesSurvivalSocialresponsibility Whichoneshouldacompanyfollow?ShareholderwealthmaximisationShareholderswantbothdividendsand

capitalgains.Capitalgainsreflectfuturedividends.Currentandfuturedividendsdependonfuturecashflows:TheirmagnitudeorsizeTheirtimingTheirassociatedriskLinkingNPVtoSHWMTheagencyproblemWhydoesitarise?DivergenceofownershipandcontrolManagers’goalsdifferfromshareholders’AsymmetryofinformationWhataretheconsequences?ShareholderwealthisnolongermaximisedAgencyproblemconsequencesManagerswillfollowtheirownobjectives,

i.e.increasingtheir:power;jobsecurity;payandrewards.Shareholdersneedtoensurethattheirownwealthismaximised.SignsofanagencyproblemManagersmainlyfinancecompanywithequityfinance.Managersacceptlowrisk,short-paybackinvestmentprojects.Managersdiversifybusinessoperations.Managersfollow‘petprojects’.Managersarerewardedforperformancethatis‘belowaverage’.OptimalcontractsandagencyBestsolutiontotheagencyproblemistodesignmanagerialcontractsthatminimisethesumofthefollowingcosts:FinancialcontractingcostsMonitoringcostsDivergentbehaviourcostsOption1:donothingLeavingmanagerstotheirowndevicesisproblematic:Givenhumannature,managerswillengageinsuboptimalbehaviour.Shareholdersaresatisficed

ratherthansatisfied.Doingnothingisnotreallyanoption.Option2:monitoringProblemsassociatedwithmonitoring:Costlyintermsofbothtimeandmoney.Whowillpay?Largeshareholders?Whatabout‘free-riding’smallerinvestors?Somemanagerialactionsarehardtofollow.Maydrive‘badmanagers’underground.Option3:rewardgoodbehaviourWhatdowelinkmanagerialrewardsto?Mostcommonlylinkedto:profits;shareprice(e.g.viashareoptions).Rewardingismorecommonthanmonitoring.But…tyingrewardstoprofitsmayencourageshort-termismandcreativeaccounting.Option3:rewardgoodbehaviour(continued)Therearealsoproblemsusingshareoptions:Howmanyoptionsshouldmanagersbeawarded?Atwhatsharepriceshouldmanagersbeabletoexercisetheiroptions?Managerscangetrewardedforpoorperformanceifthereisa‘bull’stockmarket.OtherareasofagencyCompaniesaremadeupofaseriesofagencyrelationships:N.B.Arrowsgofrom‘principal’to‘agent’andshowcapitalflows.Otherareasofagency(continued)Debtholders(principals)andshareholders(agents)Solutions:security,restrictivecovenantsManagers(principles)andemployees(agents)Solutions:executiveshareoptionplans(ESOPs),monitoring,performance-relatedpay(PRP)CorporategovernanceCorporategovernanceisaboutpromotingcorporatefairness,transparencyandaccountability.Itcanbeseenasanattempttosolveagencyproblemusingexternallyimposedregulation.IntheUK,goodcorporategovernanceisencouragedthroughaself-regulatorycodeofbestpractice.CadburyCommittee(1992)Recommended:Avoluntarycodeofpractice:Threenon-executivedirectorsatboardlevelMaximum3-yeardurationcontractsPostsofChairmanandCEOshouldbeseparateImprovedinformationflowtoshareholdersIncreasingindependenceofauditorsGreenburyReport(1995)Recommended:One-yearrollingcontractsMoresensitivitybyremunerationcommitteesPRPandshareoptionstobephasedoutandreplacedby‘challenging’long-termincentiveplans(LTIPs)PIRCreport(1996)indicatedwidespreadabuseoftheaboveHampelReport(1998)andtheCombinedCodeStressedimportanceofa‘balancedboard’,non-executivedirectorsandtheroleofinstitutionalshareholdersCombinedCodeoverseenbytheLondonStockExchangeIntegratesHampel,CadburyandGreenburyrecommendationsComplianceisanLSElistingrequirementTurnbull,HiggsandSmithTurnbull(1999):detailedhowboardscouldmaintainsoundsystemsofinternalcontrol

(significantrisk/systemsrequired).Higgs(2003):reportdesignedtoenhancetheindependence,andhenceeffectiveness,ofnon-executivedirectors.Smith(2003):gaveauthoritativeguidanceonhowauditcommitteesshouldoperateandbestructured.CorporateGovernanceintheUSATheUSA’sapproachtocorporategovernancefocusesonlegislationcomparedtotheUK’s‘complyorexplain’philosophy.Sarbanes-OxleyAct(2002):thisisthekeylegislationthatdetailsthestatue-backedrulesthatcompaniesmustcomplywith.Criticsarguethatitbroughtsignificantcompliancecostswhilesupportersaiditrestoredmuchneeded

confidenceintheUS.IsthereanagencyorcorporategovernanceprobleminUKtoday?AgencystillremainsaproblemintheUK:legislationisonlyvoluntaryhumannaturehasnotchangedDirectorsstillreceive‘excessive’rewardsThefuture:USstyleshareholderscoalitions?e.g.CalPersstatutorylegislation?CorporatefinanceEighthEditionChapter2Capitalmarkets,market

efficiencyandratioanalysisInternalandexternalfinanceInternalfinance:RetainedearningsEfficiencysavingsExternalfinance:EquityDebtLeasingInternalandexternalfinance(continued)Balancebetweensourcesisinfluencedby:companyattitudetoriskandreturn;availabilityandamountofretainedearnings;accesstocapitalmarkets;costsofdifferentsourcesoffinance;dividendpolicy;investmentopportunities;historicalposition.FinancialassetsGiltsTreasurybillsPreferencesharesOrdinaryEquityBondsLoanstockanddebenturesConvertiblesWarrantsPrimaryandsecondarymarketsPrimarymarket:fornewissuesofsharesSecondarymarket:‘second-handmarket’IncreasesliquidityofsharesGeneratespricinginformationBarometerofcorporateperformanceLondonStockExchangemarkets:FullmarketAlternativeinvestmentmarket(AIM)Whatismarketefficiency?Operationalefficiency(lowtransactioncosts)Informationalefficiency(lowcost,access)Pricingefficiency(pricesofsharesreflectallrelevantavailableinformation)Allocationalefficiency(fundsgotomostefficient/profitablecompanies)MarketefficiencyconcernedwithpricingefficiencyPerfectcapitalmarketNotaxesortransactioncostsFreeentryandexitManybuyersandsellersParticipantsareutilitymaximisersInformationiscostlessandfreelyavailablePerfectversusefficientmarketMarketdoesnothavetobeperfecttobeefficient.Requirementsforefficientmarket:Lowtransactioncosts/taxesInformationalefficiency,i.e.informationavailableatlowcostNooneparticipantdominatesthemarket‘Beating’themarketTwoapproachesforinvestorsattemptingtobeatthemarket:Chartism/technicalanalysis:drawingchartsandusingregressionanalysistopredictpricesbasedonpasttrends.Fundamentalanalysis:usingfinancialdatatopredict‘fair’priceofshare–usingaccounts,sharepricingmodelsandsoon.Efficientmarkethypothesis‘Thepriceofasecurityfullyandfairlyreflectsallavailableandrelevantinformation’–

Fama,1970.Academicsdefinethree‘strengths’ofmarketefficiencyandtestthemarketusingempiricaldata.WeakformefficiencyDefinition:Securitypricesreflectspastinformationonly.Implication:Makingabnormalreturnsusingtradingrulesbasedonstudyingpastsharepricesisnotpossible.Empiricalevidence:Randomwalkhypothesis.Serialcorrelationtests,runtestsandfiltertests.Semi-strongformefficiencyDefinition:Securitypricesreflectpastinformationandallpubliclyavailableinformation.Implication:Itisnotpossibletomakeabnormalreturnsbystudyingcompanyaccounts,andsoon.Empiricalevidence:Stocksplits.Anticipationofannualreportsandmergers.StrongformefficiencyDefinition:Securitypricesreflectall

availableinformation,publiclyavailableornot.Implication:Itisnotpossibletomake

anyabnormalreturns.Empiricalevidence:Whyisinsiderdealingillegal?Doprofessionalanalystsbeatthemarket?ImplicationsofEMHPointlesspayingforexpensiveresearch.Nopointstudyingfinancialstatements.Nobargainsonthestockmarket.Buyandholdstrategyisbest.Manipulationofaccountsispointless.Timingofnewissuesisnotcritical.Managersjustneedtofocusonmakingthebestinvestmentdecisions,sincemarketcapitalisationwillincreasebyNPVofproject.Marketefficiency?Empiricalevidencesupportssemi-strongformofefficientmarkethypothesis.Cansophisticatedinvestorsusingexpertadvisorsanddealingsoftwareexploitmarketimperfectionstomakeabnormalreturns?Efficiencyisgeneratedbytheactivitiesofanalystswhodisbelievethehypothesis.Whatare‘normal’or‘expected’returns?Marketefficiency?(continued)Anomaliesinsharepricebehaviour:CalendareffectsSizeanomaliesValueeffectsSpeculativebubblesBehaviouralfinance:Investorscanmakeirrationaldecisionswhichmayhavepersistingeffects.ScopeofratioanalysisRatioanalysiscanbeappliedtofinancialstatementsandsimilardatainorderto:assessperformanceofacompany;determinewhethercompanyissolventandfinanciallyhealthy;assessriskduetoitsfinancialstructure;analysereturnsgeneratedforshareholdersandotherinterestedparties.UsersofratioanalysisInvestors(financialinstitutionsandordinaryinvestors)needtomakedecisionsaboutbuyingandsellingcompanysecurities.Companymanagersneedtoassessdivisionalandcompanyperformanceagainstpreviousyears’andcompetitors’performance.Financialinstitutionsneedtomakedecisionsaboutwhethertheyshouldprovidefinancetoacompany.ImportanceofbenchmarksRatiosmustbecomparedwithbenchmarksPre-determinedtargetsforratiossetbythecompany,i.e.ROCE>16%.Ratiosofcompaniesofsimilarsizewhoareengagedinsimilarbusinessactivities.Averageratiosforbusinesssectorinwhichacompanyoperates,i.e.industrialnorms.Ratiosforthecompanyfrompreviousyears,withdataadjustedforinflationifnecessary.

RatioanalysisFivebroadratiocategories:ProfitabilityratiosActivityratiosLiquidityratiosGearingratiosInvestorratiosProfitabilityratiosReturnoncapitalemployed(ROCE)(%):

profitbeforeinterestandtax×100capitalemployedNetprofitmargin(%):

profitbeforeinterestandtax×100 revenueorturnoverProfitabilityratios(continued)Netassetturnover(times):

revenueorturnover capitalemployedGrossprofitmargin(%):

grossprofit×100 revenueorturnoverActivityratiosReceivables’ratioorreceivablesdays:

tradereceivables×365 creditsalesPayables’ratioorpayablesdays:

tradepayables×365 costofsalesActivityratios(continued)Inventorydays:

inventoryorstock×365 costofsalesCashconversioncycle(days): Inventorydays+receivablesdays –payablesdays.Activityratios(continued)Non-currentassetturnover(times):

revenueorturnover non-currentassetsSales/networkingcapital(times):

revenueorturnover netcurrentassetsLiquidityratiosCurrentratio(times):currentassetscurrentliabilitiesQuickratio(times):currentassetslessinventorycurrentliabilitiesGearingratiosCapitalgearingratio(%):

long-termdebtcapital×100capitalemployedDebt/equityratio(%):

long-termdebtcapital×100sharecapitalandreservesGearingratios(continued)Interestcoverageratio(times):profitbeforeinterestandtaxinterestchargesInvestorratiosReturnonequity(ROE)(%):earningsaftertaxandpreferencedividendsshareholders’fundsDividendpershare(pence):totaldividendpaidtoordinaryshareholdersnumberofissuedordinarysharesInvestorratios(continued)Earningspershare(EPS)(pence):earningsaftertaxandpreferencedividendsnumberofissuedordinarysharesDividendcover(times):earningspersharedividendpershareInvestorratios(continued)Price/earningsratio(P/Eratio)(times):marketpriceofshareearningspersharePayoutratio(%):

totaldividendpaidtoordinaryshareholders

×100earningsaftertaxandpreferencedividendsInvestorratios(continued)Dividendyield(%):dividendpershare×100marketpriceofshareEarningsyield(%):earningspershare×100marketpriceofshareProblemswithratioanalysisFinancialpositionstatementisasnapshotofacompany’spositionononedayoftheyear.Itcanbedifficulttofindasimilarcompanyinordertomakeintercompanycomparisons.Maybecreativeaccounting,e.g.off-balance-sheetfinancing,complexfinanceinstruments.Ratioanalysisshouldbeseenasthestartoffinancialanalysis,servingmainlytoraisequestionswhichrequiredeeperinvestigation.EconomicprofitandEVAEconomicprofitissimilartoresidualincomeandequalsoperatingprofitaftertaxminuscostofcapitalchargeoncapitalemployed.Economicvalueadded(EVA)issimilartoeconomicprofit,butseekstofindafairvalueforinvestedcapitalbyamendingpublishedfinancialstatements.EVAdirectsattentiontothedriverscreatingwealthforshareholder.EconomicprofitandEVA(continued)EVAsuggestsshareholdervaluecreatedby:seekingwaystoincreasenetoperatingprofitaftertaxwithoutincreasingcapitalinvested;investinginprojectsgivingreturnsgreaterthancompany’scostofcapital;reducingcapitalchargebyreducingcostofcapitalorreducinginvestedcapital.CorporatefinanceEighthEditionChapter3Short-termfinanceandworkingcapitalmanagementWorkingcapitalmanagementWorkingcapitalconcernedwithshort-termresourcesandshort-termfunding.Networkingcapital=CurrentAssetslessCurrentLiabilities. (inventoryplusreceivableslesstrade

payables)Needforliquiditymustbebalancedagainstneedforprofitability.WorkingcapitalpoliciesWorkingcapitalinvestmentpolicycoverslevelofinvestmentinworkingcapitalanditscomponentsWorkingcapitalfinancingpolicycoversmixofshort-termandlong-termfinancingofworkingcapital.Policiesshouldtakeaccountofnatureofbusiness,creditpolicy,seasonalfactorsandmanufacturingperiod.LevelofinvestmentAggressiveworkingcapitalinvestmentpolicywillhavelowerlevelsofinvestmentthanaconservativepolicy.Aggressivepolicywillhavehigherriskandhigherprofitability.Conservativepolicywillhavelowerriskandlowerprofitability.Levelofinvestment(continued)Short-termfinanceOverdraftShort-termloanTradecreditShort-termfinanceischeaperthanlong-termfinance(yieldcurve).Short-termfinanceisriskierthanlong-termfinance.AnalysisofassetsNon-currentassetsPermanentcurrentassetsFluctuatingcurrentassetsMatchingprinciple:long-termfinanceusedforlong-termassets,short-termfinanceusedforshort-termassetsMethodoffinancing

ModeratepolicyShort-termfinanceusedforfluctuatingcurrentassets.Long-termfinanceusedforpermanentcurrentassetsandnon-currentassets.Matchingprincipleisappliedwiththisapproachtofinancingworkingcapital.Methodoffinancing(continued)

ConservativepolicyLong-termfundsusedforpermanentandsomefluctuatingcurrentassets.Short-termfundsusedforpartoffluctuatingcurrentassets.Short-termcashsurplusesmayarise.Increaseduseoflong-termfinancelowersriskbutdecreasesprofitability.

AggressivepolicyShort-termfundsusedforfluctuatingandsomepermanentcurrentassets.Long-termfundsfornon-currentassetsandsomepermanentcurrentassets.Usingmoreshort-termfundsgiveshigherriskbuthigherprofitability.Choiceofpolicyrestsonattitudeofcompanytoriskandreturn.Methodoffinancing(continued)CumulativeassetsTypeoffundingNon-currentassetsPermanentcurrentassetsFluctuatingcurrentassetsLong-

termfundsMATCHINGPOLICYMethodoffinancing(continued)CumulativeassetsTypeoffundingNon-currentassetsPermanentcurrentassetsFluctuatingcurrentassetsLong-termfundsCONSERVATIVEPOLICYMethodoffinancing(continued)CumulativeassetsTypeoffundingNon-currentassetsPermanentcurrentassetsFluctuatingcurrentassetsLong-termfundsCONSERVATIVEPOLICYShort-termcashsurplusMethodoffinancing(continued)CumulativeassetsTypeoffundingNon-currentassetsPermanentcurrentassetsFluctuatingcurrentassetsLong-termfundsAGGRESSIVEPOLICYMethodoffinancing(continued)CashconversioncycleInventoryconversionperiodplusreceivablesconversionperiodlesspayablesdeferralperiod.Cashconversioncycleistheaveragetimebetweenpayingforinputsandreceivingcashfromsales.Lengthofcashconversioncyclehelpsdeterminethelevelofworkingcapital.OvertradingOvertradingoccurswhencapitalbaseistoosmalltosupportvolumeoftrade.Maybecausedbyrapidgrowthinturnoverorerosionofcapitalbase.Overtradingcanbeindicatedby:deteriorationinkeyfinancialratios.decreasingliquidresources.increasingrelianceonshort-termfinance.Solutionsseektobringcapitalbaseandtradevolumebackintobalance:IntroducenewcapitalConsolidatebusinessactivityBetterworkingcapitalmanagementNote:overtradingcanresultfromaggressiveworkingcapitalpolicies.Overtrading(continued)InventorymanagementSeekstominimisecostofholdinginventoryforproductionorresale.EOQmodelcalculatesoptimumordersizeifannualdemand,holdingcostandorderingcostareknown.EOQisadeterministicmodel,basedoncertaintyofdemandandcosts.Advantages:EOQissimpletounderstandandapply.Disadvantages:Assumescertaininventoryneeds,zeroleadtime,constantuse,constantcosts.Ignoresbufferinventory.Alternativeapproachisusingjust-in-time(JIT)methods.Inventorymanagement(continued)CashmanagementHoldingcashforshort-termneedswillincuropportunitycostoflostprofit.Causesofcashflowproblems:MakinglossesonacontinuingbasisInflationGrowthSeasonalfactorsSignificantexpenditureCashflowshortagescanbeeasedbypostponingexpenditure,acceleratingincomeandfindingnewcashresources.Optimumcashlevelsreflectliquidityneedsfuturecashneedsandborrowingcapability;efficiencyofcashmanagement;toleranceofrisk.Cashmanagement(continued)Investshort-termcashsurplusesinappropriateshort-terminstruments.Mustbenoriskofcapitalloss.Choiceofinvestmentdependson:sizeofthecashsurplus;maturityoftheshort-termasset;yieldrequired;anypenaltiesforearlyencashment.Cashmanagement(continued)Appropriateshort-terminstruments:TermdepositsTreasurybillsandshort-datedgiltsBankcertificatesofdepositLocalauthoritybondsCashmanagement(continued)ReceivablesmanagementReceivableslevelsdependontermsofsale,abilityofcompanytofinancereceivables,pricingpolicyandreceivablescollectionprocedures.Benefitsofadditionalcontributionmustbesetagainstadministrativeandfinancialcostsofofferingcredit.Administrativecostsincluderecording,monitoringandcollectingdebts:baddebtcollectioncostsandcreditinsurance.Receivablesmanagement(continued)Financecostsincludeinvestmentinreceivablesandlossesduetobaddebts.Creditanalysisbasedoncompany’sownexperience,analysisofcreditreportsandanalysisofpublishedinformation.Creditofferedshouldreflectassessmentofcreditworthinessofprospectiveclient.Receivablesmanagement(continued)Creditassessmentshouldconsiderpreviousexperienceofsimilarfirms,creditreports,analysisofpublishedinformation.Companycanensureagreedtermsofsalearemetthroughperiodicreviewofcreditlimits,agedtradereceivablesanalysis,efficientadministration,agreedoverdueaccountprocedures.Receivablesmanagement(continued)Earlysettlementdiscountmayencourageearlypayment.Costofdiscountmustbecomparedwithbenefitoflowerfinancingchargesandanydecreaseinriskofbaddebts.Benefitsshouldexceedcosts.Receivablesmanagement(continued)Example:MBplchas£15mperyearcreditsalesandgives90days’credit.Proposal:give3%discountifpaidin15days,lowercreditperiodto60days.Sixtypercentofcustomerswilltakediscount.Saleswillnotbeaffected.Short-termborrowingisat7%.Receivablesmanagement(continued)Receivablesnow:£15m×(90/365)=£3.7mProposedreceivables:£15m×60%×(15/365)=£0.4m£15m×40%×(60/365)=£1.0m

£1.4mDecreaseinreceivables:£2.3mReceivablesmanagement(continued)Financesaving=£2.3m×0.07= £0.16mDiscountcost =£15m×3%×60%= (£0.27m)Netcostofnewpolicy= (£0.11m)Proposalisnotworthimplementing.FactoringForanannualfee,factoradministerssalesledgerandcollectamountsduefromtradereceivables.Factormayadvance80%offacevalueofinvoicesbutwillchargeinterest.Companybenefitsfromefficiencyoffactorandfromearliercashfromsales.Invoicediscounting.Factoring(continued)Example:MBplchascreditsalesof£15m,averagecredittakenbyclientsis90days.Proposal:employfactorwhowillloweraverageperiodto30days,chargefeeof2.5%ofannualsales,advance80%ofinvoicesat15%interestandcutbaddebtsby£0.2m.Short-termborrowingcostis10%.Factoring(continued)Receivablesnow:15m×(90/365)=£3.70mNewreceivables:15m×(30/365)=£1.23mDecreaseinreceivables: £2.47mInterestsaving=2.47m×0.1=£0.25mFactoring(continued)Interestsaving £0.25mDecreaseinbaddebts £0.20mFactorfee=15m×0.025=(£0.375m)Interestonadvance=1.23m×(15%–10%)×0.8=(£0.05m)Netbenefitoffactoring= £0.025mWorkingcapitalmanagementCanoveralllevelofWCbeoptimisedbyminimisingcashconversioncycle?byadoptingaggressivepolicies?optimalcomparedtowhat?orjusttheindividualcomponents?Howcaneachcomponentbeoptimised?just-in-timeinventorymanagement?offeringdiscountsforcashpayments?CorporatefinanceEighthEditionChapter4Long-termfinance:equityfinanceWhatisequityfinance?NominalvalueversusmarketvalueOrdinaryshareaccountandsharepremiumaccountAuthorisedversusissuedsharecapitalRiskandthecreditorhierarchyShareholderreturnsnotguaranteedCostofequityishigherthancostofdebtorcostofpreferencesharesShareholderrightsAshareholderhastherightto:attendgeneralmeetingsofthecompany.voteonappointmentofdirectors.voteonappointment,remunerationandremovalofauditors.receiveannualaccountsofthecompanyandthereportofitsauditors.receiveashareofanydividendpaid.Shareholderrights(continued)Ashareholderhastherightto:voteonimportantissuessuchasrepurchaseofshares,usingsharesinatakeoverbid,orachangeinauthorisedsharecapital;receiveashareofassetsremainingafterthecompanyhasbeenliquidated;participateinanewissueofsharesofcompany(thepre-emptiveright).ThestockexchangeMainmarketandAIMMarketsforordinaryshares,preferenceshares,bondsanddepositaryreceiptsRegulatedbyFinancialServicesAuthority(FSA)actingasUKListingAuthority(UKLA)KeyrolesofsponsorandbrokerinnewissuesmarketNewissuemethodsPlacing:largeblocksofsharesare‘placed’withinstitutionalinvestorsCheaperthanpublicofferNarrowerspreadofpublicownershipPublicoffer:sharesofferedtopubliceither

atfixedpriceorbytenderMoreexpensivethanplacingGiveswidespreadofpublicownershipUsedforverylargeissuesNewissuemethods(continued)Introduction:sharesbecomelistedonstockexchangebutnofundsareraisedWhichmethodisuseddependsonissuecosts,desiredownershipspread,aimsandsizeofissuePlacingisthemostpopularnewissuemethodonboththemainmarketandtheAIMListingrequirementsMainMarketAIMminimum25%sharesinpublichandsnormally3-yeartradingrecordrequiredneedpriorshareholderapprovalforsubstantialacquisitionsanddisposalssponsorsneededforcertaintransactionsminimummarketcapitalisationnominimumshares

tobeinpublichandsnotradingrecordrequirementnopriorshareholderapprovalfor

transactionsnominatedadviserrequiredatalltimesnominimummarketcapitalisationThestockexchangeAdvantagesofbeinglisted:Raisingfinancebycomingtomarket AccesstofinanceviacapitalmarketsSharescanbeusedinacquisitionsDisadvantagesofbeinglisted:CostsofgainingandmaintaininglistingHighershareholderexpectationsIncreasedfinancialtransparencyRightsissuesPre-emptiverightmeansnewsharesofferedfirsttoexistingshareholders. Discountedpriceofrightsissueguardsagainstsharepricefall