FIN111 Lecture Notes - Ordinary Income, Steady-State Economy, Cash Flow
• Future and present values of multiple cash flows
• Valuing level cash flows: annuities and perpetuities
• Comparing rates: the effect of compounding periods
• Loan amortisation (ordinary annuity)
1. Describe the four types of secondary markets
2. Features of ordinary and preference shares
3. Describe how the general dividend valuation model values a share
4. Discuss the assumptions that are necessary to make the general dividend valuation model easier
to use, and be able to use the model to calculate the value of a company's ordinary shares
Only cover Parrino Pg. 302-320
Shares:
• Equity instrument giving the holder ownership rights in a firm.
• Shareholders have the right to vote for the managers of the firm and to receive profits the firm
makes.
• There is no guarantee that the shares will increase in value (capital gain) or that dividends will
be paid.
Two basic types of corporations:
• Privately held: typically small and owned by a few people who are closely involved in running
the business. Their shares are not traded publicly. E.g. proprietary limited (PtyLtd)
• Publicly held: firms listed/traded on a stock exchange. Typically owned by a large group of
people who employ management to run the business for them. E.g. limited (Ltd)
Debt vs Equity:
The market for shares:
• Equity securities are a company's certificates of ownership.
• Secondary markets: outstanding shares of a company are bought and sold among investors.
• Provide marketability at a fair price for shares of securities they own.
• ASX
• Active secondary market enables companies to sell their new debt or equity issues at lower
funding costs.
4 types of secondary markets:
• Direct search: difficult and costly to find interested buyers or sellers.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Future and present values of multiple cash flows: valuing level cash flows: annuities and perpetuities, comparing rates: the effect of compounding periods. Two basic types of corporations: privately held: typically small and owned by a few people who are closely involved in running the business. E. g. proprietary limited (ptyltd: publicly held: firms listed/traded on a stock exchange. Typically owned by a large group of people who employ management to run the business for them. Could be debt or equity however, legally, preference shares are equity: like dividends on ordinary shares, preference share dividends are taxable. D1 = next period dividend: the valuation model for constant growth share: The relationship between r and g: constant growth dividend model yields solutions that are invalid whenever dividend growth rate equals or exceeds discount rate. If g > r, the present value of the dividend gets bigger and bigger rather than smaller and smaller as it should.
