Equity

Equity

Capital Structure Companies Raise money by issuing debt or equity securities or in combination .Capital Structure refers to composition of debt and equity capital .

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

Capital Structure Example : A company has total capital of 10000 cr out of which 4000 cr is debt and 6000cr is equity , so capital structure of 40% debt and 60 % equity .

It is called a leverage(or levered) company as debt is part of the capital . 100% equity capital company is called unleveraged (or unlevered) company .

Types of Shares Two main type of equity shares are

Common shares or ordinary shares A common share indicates the ownership of the company The majority of stocks sold are common stocks. Common stock offers the potential for growth through rising share prices and increasing dividends. Preferred shares It is called preferred as owners of preferred stock get dividends before common stock holders. Preferred stock offers regular income through fixed dividends and the potential for growth through rising share prices. The prices of preferred stock tend to be more stable than the prices of common stock. Preferred stock may offer features such as the right to redeem your shares at certain times or to convert your shares to common shares at a certain price known as convertible preferred shares. However, preferred stock doesnt normally come with voting rights.

Types of sharesCommon SharesPreferred Shares.Common shareholders are generally entitled to:dividend payments but theres no guarantee youll receive dividends, and no guaranteed amount if you do.vote at shareholders meetings shareholders typicallyget 1 vote per share, and can vote to elect company directors and on other corporate matters at the annual shareholder meeting, or by completing a shareholder ballot online or by mail. You have the right to vote because you're taking a greater risk with common shares.claim on the companys assets if the company goes bankrupt and is liquidated. But common shareholders get paid last behind tax authorities, employees, creditors and preferred shareholders.

Preferred shareholders are generally entitled to:fixed dividend payments that usually don't change, whether or notthe company does well. Dividends are paid to preferred shareholders before any dividends are paid to common shareholders. If the company can't pay the dividend on preferred shares in a year, it may carry it forward and pay it in future years.claim on company assets preferred shareholdershave priority over common shareholders if the company goes bankrupt and is liquidated.

Common Stock vs Preferred StockCommon Preferred Infinite life No maturity Usually not issued on par value

May or May notAt par value with dividend rate

Cash flow and voting rights

Hybrid between stock and debt

Common Shares Common shares are issued by pvt ltd or public limited companies which are listed on exchanges and liquid .Can issue one class or different classes of shares like class A or Class B

Limited liability-Share holder

Preferred stockCompanies can issue more than single issue like series A , series B , they carry there own stated dividend and may differ in features likeFixed annual dividend Option to convert the preferred stock in to specified number of common shares Redemption ( issuing company can buy back as per pre defined terms )Can be Cumulative : to pay any missed dividend Non cumulative: not require to pay missed dividends for prior years before paying dividend to common share holders.

Preferred stock

Priority of claim: in the event of company is liquidity assets are distributed according to priority of claim.Debt SecurityPreferred ShareCommon Share

Global Depositary Receipts

Global Depositary Reciepts

Global Depositary Receipts

Convertible Bonds

Convertible Bonds

Warrants

Warrants

Debt Equity : Risk and Return

Global Return

Valuation of Equity SharesThree Important types

Discounted Cash Flow analysis

Relative Valuation

Asset Based Valuation

Valuation of Equity SharesDiscounted Cash Flow

It is based on Time Value of Money concept. It is estimation of PV of future cash flows from the company Dividends are regular cash flows other version id dividend cash flow analysis.

Valuation of Equity Shares

Relative Valuation

Relative ValuationCommonly used multiples Price to earnings Ratio

Price to Book Value

Price to Earnings growth

Price to Sales

Relative Valuation

Relative Valuation

Asset Based Valuation

Asset Based Valuation

Some of the actions which effect number of common shares out standing Selling Shares to public for first time is called Initial Public offering Subsequent offers are called secondary equity offeringBuying back shares from existing share holders by company is called as Share buy back or share repurchaseStock split or stock dividend issuing one share for every 2 shares owned Issuing new stock after warrantsNew company creation from existing Spin off

IPOOn issuance of new shares to public , the share holder of the pvt company will dilute owners percentage holding and also the EPS dilation . As his number of shares remain same but total out standing shares increase If existing share holder does not buy shares , his ownership percentage comes down Same holds for secondary issues .Some times rights are given to shareholders to buy new shares.

RepurchaseCompanies may opt to repurchase directly from exchange or give offer to existing share holders.Instead of dividend they may offer the buy back .This effectively reduces the total shares out standingThis increases EPS .

Stock Splits Stock Dividend

Stock Splits Stock Dividend Number of out standing shares increases proportionally based on current holding.

Cum Dividend Ex dividendCum-dividend (CD) comes before Ex-dividend (XD). A stock is said to be CD indicates that the company is paying out dividend in the near future which serves like a preempt notice to investors. The company would have announced the amount of dividend to be paid out but has yet to. If the shareholder sells a CD stock, he/she is not entitled to the dividend. There has to be a cut off date that the company has to set, so as to confirm the list of shareholders to receive dividend. When the list is finalized, the stock is said to go XD. Once XD status is declared, the shareholder who sells his/her shares will still be entitled the dividends, while the new owner will not. Usually XD stocks will be accompanied by a drop in stock price, an amount equivalent to the dividend payout. This is consistent and fair by giving out the dividends, the companys asset is said to be decreased and hence, the stock price should fall. It is fair to the new shareholders who get the stocks after XD, they did not receive the dividends and they are buying into a company with a lower asset. Thus, the bottom line is dividend payout is not a concern for buying or selling of shares.