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Equity Instuments (Risk of Residual Claim (Reasons why no dividend/no…

- - - - Little if no residual cash flow available to shareholders
    - - Rather than pay a dividend, residual cash flow is reinvested by purchasing productive assets
    - - Management is unwilling to commit to a fixed, high dividend payment now
- - - - To the public in a share placement
- - - - Used as discount rate for share valuation
      - Total yield the share buyer desires to earn
  - - - Estimate of the share yield
        
        Allows the price paid to be determined from future dividends earning that yield
  - - - That affect the entire share
    - - Do not affect all companies
    - - β =1
        
        The share has the same volatility as the market
      - β >1
        
        The share has a greater volatility than the market
      - β < 1
        
        The share has the less volatility than the market
- - - - Limited Liability
      - Voting Rights
        
        Shareholders can vote in Annual General Meeting for Members in the Board of Directors
      - Residual Claim
        
        Creditors and other obligations must be paid first
        
        Shareholders entitles to any residual cash flow
    - - Fixed dividend paid before ordinary shares
      - No voting rights
      - Residual claim before ordinary shares
        
        In the event of liquidation
- - - - Indication of overall share market performance
      - Market Benchmark
    - - The overall share market
      - Sectors of the share market
  - - - Short-term investment
    - - Medium-long term investment
      - Absolute valuation using dividends
      - Relative valuation using PE ratios
    - - Value> Price
        
        Stock underpriced
        
        Attractive to buyers
        
        Unattractive to sellers
      - Value< Price
        
        Stock over-priced
        
        Unattractive to buyers
        
        Attractive to sellers
    - - Demand and supply
      - Market Price
    - - used to decipher whether shares are cheap or expensive, when compared with each other or when compared to an index.
    - - As a potential future cash flow is dividends, the perpetuity valuations; Dividend Discount Model (DDM) and Constant Growth Model (CGM) can be used
    - - ^ PE ratio, the more expensive the share
      - v PE ratio, the cheaper the share