Ordinary shares are the most common class of share and are also known as the "equity capital" of the company. From Inland Revenue (http://www.inlandrevenue.gov.uk/manuals/svmanual/03/SVM03020.htm) ordinary shares have 4 main characters;
The right to all profits remaining after the payment of any preference dividend and to whatever dividend is voted to them by the shareholders on the advice of the Board at a general meeting.
Holders of these shares would hope to share in the prosperity of the company by way of increased dividends
The right on liquidation to all surplus assets after the preference shareholders have been paid off
The right to attend and vote at general meetings.
With these characters the company must valuate the shares to let the shareholders to know what the future holds for their dividends which are know as "the future cash flows that will accrue to ordinary shareholders" (Corrria et al. 2004, p. 6-9).
There are 4 valuation methods to calculate the value of the ordinary shares.
Dividend Discount model
Free Cash Flow Model
Price Multiples (relative valuation)
EVA discount model.
Dividend Discount Models
The dividend discount model (DDM) is a widely accepted stock valuation tool. The model calculates the present value of the future dividends that a company is expected to pay to its shareholders. It is particularly useful because it allows investors to determine an absolute or "intrinsic" value of a particular company that is not influenced by current stock market conditions.
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Book value per share= (Shareholders/ No of ordinary shares)
The Economic Value Added (EVA) Approach
EVA takes all capital sources into account when calculating the return required and therefore determines the value added, i.e. the shareholder value, as the ultimate objective of the company. And the theory behind it: companies need equity to grow. The better they can manage the capital available, the easier it is to obtain new capital for further growth. Firms calculate the EVA approach by using the formula given;
EVA= (Return on Capital- WACC) x Invested Capital
There are three reasons that using the EVA approach can lead to uncertainty;
_ Defining capital costs intentionally wrong (usually too high for some
reason)
_ Using EVA only in the upper management level
_ Investing too little in training of employees
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
Theoretically, it is the foundation of simpleness and reasoning for stock valuation as any cash payoff from company is entirely in form of dividends. However, in practice, this model require further hypothesis on company’ dividend payments, future interest rate and growth pattern. Therefore, it is assumed that the DDM model merely applies to evaluate roughly minor proportion of the value of company’ share price. Specifically, the JB HI-FI value obtained from the DDM is 30.65 higher than their actual currently trading share price 24.1; a different of 6.55, and then the stock is undervalued. Consequently, DMM is not applicable for stock price valuation in case of JB HI-FI since it is not an individual approach of stock
Common stock has no preference in the event of bankruptcy or when receiving dividends, dividend amount varies and in the event of liquidation common shareholders do not have to be paid.
Another terminology is Preferred stock, which varies in comparison to common stock investors are paid dividends consistently.
In mid September 2005, Ashley Swenson, the chief financial officer of this large CAD/CAM equipment manufacturer must decide whether to pay out dividends to the firm¡¦s shareholders or repurchase stock. If Swenson chooses to pay out dividends, she must also decide on the magnitude of the payout. A subsidiary question is whether the firm should embark on a campaign of corporate-image advertising and change its corporate name to reflect its new outlook. The case serves a review of the many practical aspects of the dividend and share buyback decisions, including(1) signaling effects, (2) clientele effects, and (3) finance and investment implications of increasing dividend payout and share repurchase decisions.
Prior to the winding-up of an insolvent company, its creditors may individually enforce any measure available to them in order to obtain payment of the debt owed to them by such company. However, upon the opening of the winding-up proceedings these individual actions are replaced by a collective insolvency regime which attempts to ensure the rateable and equitable distribution of the assets of the insolvent company among its creditors. This distribution is known as pari passu distribution.
Miller, M. H. & Co., Inc. and Modigliani, F., 1961., Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), pp. 113-117. 411-433. The.
It outlines the interconnection of a company’s financial and non-financial elements and aims to combine them and show value creation and maintenance. It identifies resources and their effective and responsible usage. It intends to create a dialogue between the shareholders and other stakeholders and provides them with detailed information.
Common stock ownership has the benefit of allowing its shareholders to vote on the organization's board of members. Usually, one share of common stock equates to one vote. Companies sell common stock through public offerings, and it's traded among investors on the secondary market. Share...
Every action or proposal needs to balance equity and efficiency needs in order to deliver optimal dividends to its targeted audience. Given the fact that resources are relatively scarce compared to the innumerable needs, businessmen, economists, administrators among other leaders reckon that every proposals needs the equity-efficiency balance in order for set goals and objectives to be achieved. This paper seeks to describe the role of equity and efficiency trade off in proposals.
In effect Salomon's principle as confirmed by Macaura v Northern Assurance Co. and Lee v Lee's Air Farming Ltd. helps form an image of a corporation as a 'depersonalised conception'[5], an object that is 'cleansed and emptied of its shareholders. '[6] Yet the concept of an incorporated company as a separate legal person causes some difficulties, for surely all 'legal personality is in a sense fiction'.[7] Questions soon arise ... ... middle of paper ... ...
The basic earnings per ordinary share in 2016 is RM19.14 and RM14.30 in 2015. This shows that the ordinary share had been increased RM4.84 compare to 2016 based on 2015. In the other hand, this company had declared a first interim single-tier dividend of 10 sen per ordinary share amounting to RM22.88 million in respect of the financial year ended 31 December 2016. They sold their ordinary shares of RM400,000,000 units of RM0.50 per each in 2016 and RM200,000,000 units of RM0.50 per each in 2015 to their shareholders. It is increased from 2015 to 2016 with 200,000,000 units. The other investments that available for sale is RM1000 same as in 2015 and 2016.
= According to Indian Companies Act 1956, “ A preference share is a share which carries preferential right as to the payment of dividend at a fixed rate either free or subject to income tax and as to the payment of capital at the time of liquidation prior to the equity shareholders. 38
[7] Cavendish Lawcards Series (2002) Company Law (3rd edn), p.15 [8] [1976] 3 All ER 462, CA. [9] Griffin, S. (1996) Company Law Fundamental Principles (2nd edn), p.19 [10] [1990] Ch 433. [11] Lecture notes [12] Lecture notes [13] [1939] 4 All ER 116.
According to Corporation Act 2001 s124(1), it illustrates that ‘’A company has the legal capacity and powers of an individual both in and outside the jurisdiction” . As it were, company as a legal individual must be freely with all its capital contribution shall embrace liability for its legal actions and obligations of the company’s shareholders is limited to its investment to the company. This ‘separate legal entity’ principle was established in the case of Salomon v Salomon & Co Ltd [1987] as company was held to have conducted the business as a legal person and separate from its members. It demonstrated that the debt of company is belonged to the company but not to the shareholders. Shareholders have only right to participate in managing but not in sharing the company property. Besides ,the Macaura v Northern Assurance Co Ltd [1925] demonstrates that the distinction between the shareholders and company assets. It means that even Mr Macaura owned almost all the shares in the company, he had no insurable interest in the company’s asset. The other recent case is the Lee v Lee’s Air Farming Ltd [1961] which illustrates that the distinct legal entities between employee ad director allows Mr.Lee function in dual capacities. It resulted that the corporation can contract with the controlling member of the corporation.