The New York Stock Exchange (NYSE) is an important component of the US system of markets for stocks and bonds. The securities traded on the NYSE are corporate stocks. Before the NYSE's reorginization in 2006, only owners of NYSE Seats could trade stocks on the NYSE and a seat, which gave you the right to execute purchases and sales of stocks, was an asset that could be bought or sold. From 2002 to 2005, the market price of an NYSE seat declined by 63%, but then the price increased to an all-time high in December 2005. Do some research on the seats at the New York Stock Exchange in the early and middle part of the 2000's and answer the following questions:

A. Why did the price of an NYSE seat go through such extreme variations in the early and middle part of the 2000's before the restructuring?

B. Why did the price of an NYSE seat recover so rapidly after the restructuring was announced in 2005?

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glorysoft2Lv10

2 Oct 2022

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Casey DurganLv2

17 Feb 2018

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1) In 2003, a seat on the Chicago Board of Trade (CBOT) sold for only $338,000, compared to $2.0 million for on the New York Stock Exchange (NYSE). In January 2005, however, a CBOT seat was sold for $1.25 million, while a NYSE seat sold for $975,000. First, explain why anyone would pay a positive price for a CBOT or NYSE seat and what this price represents. Second, explain why the seat values changed so much.

In 2003, China became the world's largest importer of iron ore. Between 2004 and 2005, China's steel production increased from by 26% from 270 to 340 million metric tons, or about one-third of world production. Fueled by rapid economic growth, production was projected to increase by a further 9% to 370 million tons in 2006. Iron ore is graded as fine and lump according to whether the majority of individual's particles have diameter of less or more than 4.75 millimeters. A third grade-pellets- is fined grained concentrate rolled into balls with diameter of 9.55 to 16.0 millimeters. Lump ore and pellets can be charged directly to a blast furnace, hence are most costly to use. Three companies- Australia's BHP and Rio Tinto, and Brazil's Companhia Vale do Rio Doce (CVRD)- control over 70 percent of worldwide exports of iron ore. By 2005, China purchased over 40% of world iron ore imports. Europe and Japan bought less than 25% and 20% respectively, in 2004, the principal sources of China's iron ore imports were Australia (78 million tons), India (50 million tons), Brazil (46 million tons), and South Africa (11 million tons). China imports a total of 5.7 million from other sources including Canada, Russia, and the USA, in 2005, China's import comprised 71% fine ore, 19% pellets, and 10% lumps. China imports of iron ore from India have been so large that Indian steel manufacturers lobbied their government to limit exports to China. To meet the burgeoning demand from China, BHP Billiton increased production by 45% from 72 million tons to about 105 million tons in just three years, 2002-05. Smaller Australian mining companies have also increased production capacity. These include Atlas Iron Ore, Fortescue Metals Group, Gindalbie Metals, Midwest Iron and Steel, Resource Mining Corporation, Golden West Resource, and Polaris. The big three iron one producer has entered into long-term supply contracts with major steel manufacturers. These contracts might specify minimum quantities that the ore producer must sell and the manufacturer must purchase. Steel manufacturers buy on free-on-board (FOB) basis. FOB buyers pay for freight. These contracts further specify that prices must be negotiated on an annual basis. European steel manufacturers buy relatively more fine ore. Prices for fine ore set the benchmark for prices for lump ore and pellets. The China Iron and Steel Association represent sixteen of China's major steel manufacturers in negotiation with iron ore producers. The association includes Baoshan Iron and Steel, which imports all of its iron ore, Maanshan Iron and Steel, which imports 75% of its iron ore, Chongqing Iron and steel, which imports 60 % and Angang New Steel, which imports relatively little iron ore. In late 2004, Nippon Steel of Japan agreed a substantial price increase with CVRD. Subsequently, CVRD and Rio Tinto negotiated a sharp 71.5% price increase with the China Iron and Steel Association for shipments in 2005-06. BHP Billiton calculated that the freight cost of shipping iron ore from Australia to China was about US $20 per ton less than shipping from Brazil. Accordingly, BHP sought a US$7.50 to $10 per ton surcharge from the China Iron and Steel Association in addition to the 71.5% price increase. The association rejected the surcharge as unreasonable and against international practice. China's Ministry of Foreign Affairs declined to intervene, saying that negotiation between BHP and Chinese steel manufacturer were commercial issue. However, China's Deputy Commerce Minister Ma Xiuhong remarked that BHP's surcharge would damage long-term relations between China and Australia. Meeting with resistance from the China Iron and Steel Association, BHP dropped its demand for the surcharge. However, Mr. Graeme Hunt, President of BHP Billiton Iron Ore, said that would raise the issue in the following year. Subsequently, BHP Billiton announced an 89% jump in profit to $6.4 billion for the year to June 2005, which was a record for an Australian company. China sales accounted for 12.6% of total revenue. BHP agreed to co-sponsor the 2008 Beijing Olympic Games by contributing money as well as golf, silver, and bronze for medals. Mr. Clinton Dines, President of BHP in China, said that the co-sponsorship would not dissuade BHP from re-opening discussions of surcharge. Meanwhile, Rio Tinto's profit increased 58% from $3.3 billion in 2004 to a record $5.2 billion in 2005. China sales accounted for 15% of total revenue.

Discussion question:

1. Why would steel manufacturers and iron ore suppliers agree to minimum purchases/sales in long-term contracts?

2. What advantage(s) would BHP Billiton gain by pricing steel manufacturers on a CIF (cost insurance and freight) rather than FOB basis?

3. What advantage(s) do Chinese steel manufacturers gain by negotiating jointly with iron ore suppliers?

4. How can Chinese steel manufacturers improve their bargaining position relative to BHP Billiton?

blackcoyote927

Minicase: How much is Manchester United's brand worth?

In recent years, the valuation of sports teams has become an increasingly important financial topic. Part of the reason is the astronomical salaries that sports stars command. Additionally, some stars become celebrities outside of the arena also, with lucrative sponsorships, extravagant lifestyles, and an icon of the rich and famous David Beckham, the British soccer player is one prominent example. As a personal brand, Beckham was valued by Forbes at $20 million in 2013 (http://www.forbes.com/pictures/mlm45jemm/4-david-beckham/). Beckham came up with Manchester United, often cited as the world's most valuable soccer club. The Red Devils, as they are called, were bought by the Glazer family from the United States in a leveraged buyout in 2005. To cash in on its brand value and pay down debt, the new owners decided to go public in 2012. The IPO on the New York stock exchange offered shares at $14 apiece, making the capitalized value of the club about $2.3 billion. The shares did poorly at first but soared in 2013. By end of January, the share price stood at just under $17, with Manchester United's stock outperforming the S&P 500. The increase in its stock price pushed up Manchester United's value (equity plus debt) to $3.3 billion, the highest value of any team in the world. But in the ensuing Champions League tournament, Manchester did not perform all that well, and the club was overtaken by competitors. One was Real Madrid, a perennial foe. The Spanish team posted greater returns in its annual report for 2012-2013, with the highest returns of any team in sports ($650 million during the 2011-2012 season), and revenues up 62% over the last 3 years. Signing superstars Cristiano Ronaldo and, more recently, Gareth Bale has led to increasing income from advertising and sponsorships as well as attendance and television. The club has an equipment supply deal with Adidas worth $42 million a year. It has signed a new sponsorship deal with Emirates Airlines to put its name on the team's shirts, a contract worth $39 million annually for 5 years. As a result, the value of Real Madrid increased to $3.4 billion, narrowly beating out Manchester United. Real Madrid did better than Manchester United in the Champions League but was still beaten in the semifinals. In the final, two German teams met. Bayern Munich, a 10-time finalist, defeated Borussia Dortmund by a score of 2-1. As a result, the winning German club vaulted to first place in the soccer team brand ratings, as published by BrandFinance, a brand equity rating firm headquartered in London that covers brand equity sports ratings. BrandFinance calculates the value of the brand equity in terms of an equivalent royalty rate: if a team would license its name to a third party, how much would it be able to charge. This allows the company to focus only on brand equity, expressed in terms of dollar value. The brand equity rankings after the 2013 Champions League final from BrandFinance show the top three teams as follows:

1. Bayern Munich - Brand value: $868 million
2. Manchester United - Brand value: $845 million
3. Real Madrid - Brand value: $627 million.

The estimated value of Bayern Munich using the enterprise value (equity and debt) calculation used for the Manchester United and Real Madrid above is about $1.3-1.5 billion. That is, the enterprise values of the three teams as of late summer 2013 are as follows:

1. Real Madrid - Team value: $3.4 billion
2. Manchester United - Team value: $3.3 billion
3. Bayern Munich - Team value: $1.3-1.5 billion

In fact, Bayern Munich is also beaten by one arch-rival, Barcelona, at $2.6 billion, and is virtually tied by London's Arsenal.

Questions:
1. Why is there a difference between the stock market valuation of a sports team and its brand value?
2. If brand equity represents allegiance to a brand, what would you say determines the brand equity of a soccer team (or any sports team)?
3. What factors would you say determine the value of a soccer team (or any sports team)?
4. Use the difference between your answers in Questions 2 and 3 to explain why Bayern Munich could lead in brand equity but still not be the most valuable team.