Chapter 12 Equity Financing and Securities Market Flashcards
Equity Financing
Second major source of Capital for healthcare business
- 1st major source is long-term financing. i.e. Bonds
- Investor owned businesses get equity from owner.
- Not-for-profit businesses get equity (fund capital) from community at large
- Contributions
- Grants
- Earnings retentions (indirect investment by owners)
Stockholders / owners
- Have a claim on the net income
- Paid out as dividends
- Exercise control of the firm (preemptive right)
- Classified Stock
- Founders share (super voting rights)
- Privately held by founders and managers
- Regular shares (larger dividends)
- Founders share (super voting rights)
Primary Market: Used when new (additional) shares are sold by publicly owned companies
Secondary Market: Sales between individuals. Company reveives no capital.
Holding stock for long periods is less risky than holding stocks for shorter periods.
Poison pill: Permits stockholders of the firm that is taken oer to buy shares of the firm that instituted the takeover at a greatly reduced price. Maybe to protect managers more than stockholders.
Preemptive Right: to purchase any new shares
- Protect present stockholders’ power of control
- Protects against dilution of value
Common stock
Procedures for selling New Common Stock
Rights Offering: For stockholder’s with preemptive right.
- Option to buy a certain number of the new shares, usually at a price below the existing market price.
Public Offerings
Private Placements
- Securities are sold to one or a few investors
- Lower admin costs and speed
- Must be sold to sophisticated investors
Employee Stock purcahse plan
- Favorable terms to the employee
Dividend reinvestment plan
- Purchase old stock
- Purchase new stock
Direct Purchase plan
- Purchase shares in excess of the dividend amount.
Closely held stock:
- Small companies who’s stock is not traded
- Owned by only a few people (managers)
OTC / NASDAQ:
- Lists shares of common stock that are not listed on any exchange
- Composed of borkers and dealers: National association of securities dealers (NASD)
- Computerized tradeing system: Automated Quotation System NASDAQ
Listed stocks
- Apply for a listing
Listed stocks con’t
- First listed on a regional exchange
- If large enough they make to NYSE
Sale of securities are regulated by:
- Securities and exchange commission
- Federal Reserve Board
- State
Investment banks
- Help businesses sell securities to the public
The investment banking process
Key decisions
- Dollars to be raised
- Type of securities used: Common stock, bonds, etc.
- If common stock, what kind
- Contractual basis of issue
- Banker’s compensation and other expenses (flotation costs)
- Setting the offering price
- Exisitng market price of the stock
- Yield to maturity of existing bonds
- Similar security issues
Expected Dividends as basis for stock valuation
- The value of capital gains is embedded in the dividend stream
- For any individual invsestor, expected cash flow consits of expected dividends plus the expected price of the stock when it is sold.
- Expected dividend at period t / Price at t - 1 = Expected dividend yield
- Dividend yield = annual dividend / current stock price.
- Expected Capital gains yield = Change in price from when you first bought it.
- E(P1 - P0) / P0
Constant grwoth model
- The required rate of return R(Re) must be > E(g) = Expected constant growth rate
How can R(Re) be calculated?
- Use the security market line (CAPM) model
R(Re) = RF + [R(Rm) - RF] x b
- R(Rm) = Required rate of return on the market, also required rate of return on a b = 1.0 stock
Growth in dividends occurs primarily as a result of growth in earnings per share
Growth in EPS
- General inflation rate
- amount of earnings retained and reinvested
Conditions for a constant growth stock
- The dividend is expected to grow forever at a constant rate E(g).
- The Stock price is expected to grow at the same rate
- **The expected dividend yield is a constant **
- The expected capital gains yield is also a constant, and = E(g).Total return = dividend yield + capital gains yield
