- In case of bankruptcy, creditors can
compel the partners to pay up to the
Equity – refers to the difference between the assets
and liabilities of a company. It represents
ownership of a firm.
Equity Instrument – type of financial instrument
wherein the issuer agrees to pay an amount to the
investor in the future based on the future earnings
of the company, if any.
Shares – represents ownership in a company.
Shareholder or Stockholder – individual or a party
who owns a share.
Stock Certificates – legal document which certifies
the ownership of specific number of shares of a
corporation, is given to shareholders.
Authorized Capital Stock – total maximum amount
stated in the Articles of Incorporation that can be
subscribed to or paid by investors of a corporation
if the shares have a par value.
Par Value – nominal value of the share that is
indicated in the face of the stock certificate.
Outstanding Share – total shares of stock issued
under binding subscription agreements to
subscribers or stockholders, whether partially or fully
paid.
Treasury Shares – shares that are repurchased or
bought back by the company from its stockholders.
Issued Shares – all shares that were issued by the
company, whether outstanding or treasury shares.
3 Major Forms of Business Organizations:
1. Sole Proprietorship
- An individual personally owns a
business.
- No distinct personality from the owner.
- Unlimited Liability
- Owner has full control regarding
decision making of the business.
2. Partnership
- Formed when 2 or more persons bind
themselves to contribute money,
property, or industry to a common fund
with the intention of dividing profits
among themselves.
- Still personally obliged to pay for the
debts of the partnership.
Equity Securities Market: Barrios, Dela Cruz, Lorenzo, Ordoña
extent of their personal assets.
3. Corporation
- Legal entity has a personality separate
and distinct from the
owners/shareholders.
- Limited liability
- Ownership in corporations is evidenced
through shares.
Why Invest in Equity Instruments?
1. Capital Appreciation
- Rise in the value of an asset in relation
to the increase in its market price.
- The price at which they can trade is
based on the interaction of different
market factors.
2. Dividends
- Payments made by corporations to
shareholders representing excess
earnings of the company.
- It is distributed to shareholders based on
discretion and approval of the board of
directors.
- Cash is the most common type of
dividend.
- It is only paid out once all claims from
debt such as maturing interest and
principal repayments are settled.
There are 2 types of shares that corporations can
issue:
1. Preference (or preferred) Shares
2. Ordinary (or common) Shares
Preference Shares
- Gives its holders distinct rights that
enable them to be prioritized over
ordinary shares.
- Normally, preference shareholders do
not have voting rights, but corporations
can opt to give them voting rights
explicitly in the Articles of Incorporation.
Other features that may be included with
preference shares are the following:
a. Cumulative - all dividends in arrears
together with the current dividend, should
1
 be paid prior to paying dividends to
ordinary shareholders.
b. Callable - Allows the issuing corporation to
retire or repurchase outstanding shares
within a predetermined period of a time at
specified price.
c. Convertible – allows shareholders to
convert the preference shares to a stated
number of ordinary shares after a certain
date.
Ordinary Shares
- Represents the true owners of a
corporation.
- They are also called residual owners.
- Dividends are also not guaranteed for
ordinary shareholders unlike preference
shareholders.
- Limited Liability
- Granted Preemptive Right
Ordinary shares can be:
a. Privately Owned – owned by private
investors and shares are generally, not
publicly traded.
b. Closely Owned – owned by an individual
investor or a small group of private investors
like a family.
c. Publicly Owned or Publicly Traded – owned
by a mix of public and private investors and
shares are actively traded in stock market.
d. Widely Owned – owned by many unrelated
individual or institutional parties.
In recent years, other types of ordinary shares were
offered to shareholders to suit different objectives.
a. Supervoting shares – Shares that have
multiple votes associated with one share.
b. Nonvoting ordinary shares – Shares that
have no voting rights.
- composed of exchanges and over the
counters where shares are issued and
traded publicly.
- The actual stock market is both physical
and virtual.
- It can be considered both a primary and
secondary market.
Stock Exchange – physical site where shares are
purchased and sold face to face on trading floor.
Equity Securities Market: Barrios, Dela Cruz, Lorenzo, Ordoña
Over-the-counter market – the market wherein
shares can be traded by dealers that are
connected electronically by computers.
Electronic Communications Network (ECN) – a
network which directly links major brokerage firms
and traders and removes the need for a
middleman.
ECN has been gaining ground lately because of
the following reasons:
a. Transparency
b. Cost Reduction
c. Faster Execution
d. After hours Trading
Exchange-Traded Funds (ETF) – happens when a
portfolio containing various securities is purchased
and shares is created based on this specific
portfolio which can be traded in the exchange.
- national and sole stock exchange of the
Philippines
- oldest stock exchanges Asia
- composed of 15-man Board of Directors
with Jose T. Prado as chairman
- created through the merging of Manila
Stock Exchange and Makati Stock
Exchange in 1992
- Self-Regulatory Organization
- formerly an on-profit, non-stock, member-
governed organization, transformed into a
shareholder-based, revenue-earning
corporation
• PSE through Philippine Central Depository (PCD)
- computerized book-entry system
- scripless trading
✓ Investors may still request for a physical
certificate
• PSE tradings through Capital Markets Integrity
Corporation (CMIC)
- monitor and penalize trading participants
that violates:
✓ the securities regulation code and it's rules
and regulations
✓ anti-money laundering law and it's rules
and regulations
✓ code of conduct and professional ethics
for traders and salesmen
✓ CMIC rules
2
Total Market Surveillance (TMS)
- developed by Korea Exchange
- equipped with critical elements
- provides a robust monitoring and warning
mechanism
- design as SAFEGUARD
- conducts unusual price and volume
movement
✓ CMIC shall have power to restrict, halt, or
suspend the trading of a listed security
Safeguard Interests
1. Enforcement of static and dynamic
thresholds to protect against unusual share
price fluctuations.
2. Disclosure requirement for publicly listed
companies.
3. Securities Investors Protection Fund, Inc. Or
SIPF
Corporate Compliance
Companies who plant to list publicly in the
Philippine Stock Exchange should:
a. Comply with the laws, regulations and full
disclosure rules and policies of the
Philippine government.
b. Have standards of quality, operations, and
size under efficient and effective
management;
c. Conduct issuance, offering and marketing
of securities in a fair and orderly manner
and ensure that securities are widely and
equitably distributed to the public
d. Give adequate, fair, and accurate
information about the company and its
securities to the general public enable
them to make informed investment
decisions
e. Ensure that directors and officers act in
interest of all security holders as a whole,
particularly where the public represents
only a minority of the security holders or
where a director or security holder owning
a substantial amount of shares has a
material interest in a transaction entered
into by the company.
General Criteria for Admission to the Listing in the
PSE
a. Track Record of Profitable Operations
Equity Securities Market: Barrios, Dela Cruz, Lorenzo, Ordoña
b. Exception to the 3-year Track Record
Requirement
c. Positive Stockholders’ Equity
d. Market Capitalization
e. Operating History
f. Minimum Capital Requirement
g. Minimum Offering to the Public
h. Minimum Number of Stockholders
i. Valuation of Assets
j. Full Payment of Issued and Outstanding
Shares
k. Investor Relation Program
Disclosure Rules
Classifies into two:
1. Structured Corporate Disclosures
Structured reports refer to standard reporting
requirements needed to be submitted within
specific time frames
- Annual report, to be filed within 105
days of the end of the fiscal year.
- Quarterly reports, to be filed within 45
days from the end of the respective first
three quarters of the fiscal year.
- Other periodic reports, which may be
prescribed by the regulatory bodies.
2. Unstructured Corporate Disclosures
Unstructured continuing disclosure requirements
refer to the requirement for a listed company to
update the investing public with any material fact
or event that occurs, which would reasonably be
expected to affect investors' decisions in relation to
the trading of its securities.
Material information should be reported within 10
minutes from the receipt of such information or the
happening or occurrence of said act,
development, or event. Disclosure should first be
made to the PSE prior to release to the media.
There are certain events, the occurrence of which
mandate prompt disclosure to the PSE. These
events include, among others:
- Change in control of the Issuer of
securities.
3
 - Any declaration of cash dividend, One Period or Multiple Period Valuation Model
share dividend, and pre-emptive rights
- For investors that only needs to consider the
of the Board of Directors.
dividend he/she expects to receive during
- Any change in the Issuer's fiscal year
the time he/she holds the share
and the reason(s) thereof.
- No intention to gain control
- Filing of any legal proceeding by or
- Only for investment purposes (dividends)
against the issuer and/or its subsidiaries
involving a claim amounting to 10% or
more of the issuer's total current assets
or any legal proceeding against its
President and or member of the Board
of Directors in their capacity as such.
- Merger, consolidation, or spin-off of the
Issuer.
- A new product or discovery.
- Purchase or sale of significant assets
amounting to 10% or more of the Issuer's
total assets, which is not in the ordinary
course of business.
Dividend-based Valuation Techniques
- Loss or potential losses, the aggregate
of which amounts to at least 10% of the - Most common valuation technique
consolidated total assets of the Issuer. - Dividends are most relevant input for share
- Default of financing or sale agreements. valuation
- Borrowing of significant amount of
funds not in the ordinary course of a. Zero Growth Model
business. - For valuing preferred shares
- Any delay in the payment of
debentures, negotiable obligations,
bonds, or other publicly traded security.

✓ Conventional Brokerage
✓ Online Trading
✓ Mutual Funds

b. Constant Growth Model

- Grodon Growth Model

- Dividends are expected to grow at a
constant rate forever

Share Valuation

Purpose: to be able for investors to know

reasonableness of the price being offered to them.
“How much cash flow can be received in the
future if the investor purchases the share now?”

Equity Securities Market: Barrios, Dela Cruz, Lorenzo, Ordoña 4


c. Variable Growth Model
- Allows flexibility in terms of growth rate
expectations.
- Uses Non constant growth rate and
constant growth rate
Other Approaches to Share Valuation
Free Cash Flow
- Refers to the cash flow that is available for
debt creditors and shareholders after
satisfying all other operating obligations.
- For computation of PV, free cash flow uses
the weighted average cost of capital
(WACC) of the company.
Book Value per share
𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
−𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠
= behavior of a perfect market. States that:
𝑇𝑜𝑡𝑎𝑙 𝑁𝑜. 𝑜𝑓 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠
- Refers to the amount per share that will be
received if all the company’s assets are
sold based on its book or accounting
values and whose proceeds will go to
Equity Securities Market: Barrios, Dela Cruz, Lorenzo, Ordoña
ordinary shareholders after satisfying claims
from creditors and preference shareholders.
Liquidation Value per Share
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
−𝐵𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑠ℎ𝑎𝑟𝑒𝑠
=
𝑇𝑜𝑡𝑎𝑙 𝑁𝑜. 𝑜𝑓 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠
- Actual amount per share that will be
received if all assets are sold based on their
current market value and all liabilities
(including preferred shares) are fully paid
and the proceeds are divided between
remaining shareholders
Price Earnings (P/E) Multiples
𝑃
= 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝐸𝑃𝑆 × 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜
𝐸
- uses price-earnings ratio to compute for the
share price.
- Helpful in valuing non-publicly traded
companies; can still be used in valuation of
publicly traded companies.
- Valuation models often measure share
value at a specific point in time according
to the projected return and risk at that
moment.
- Changes in Expected Dividends
- Changes in Risks/Required Return
- Problems with Growth Estimations
- Problems with Risk Estimations
- Problems with Dividend Forecasting
Market Efficiency
- Phenomena wherein the flow of
information is constant which leads to
fluctuations in share prices to reflect impact
of the new information received
Efficient Market Hypothesis (EMH) Theory
- Developed by John Muth – describes the
o Securities are typically in equilibrium,
which means that they are fairly
priced and that their expected
returns equal their required returns.
5
 o At any point in time, security prices
fully reflect all information available
about the firm and its securities, and - Securities that are not debt nor equity but
these prices react swiftly to new derives its value on an underlying asset
information. which is another security. Most popular
o Because stocks are fully and fairly type of derivative securities are options.
priced, investors need not waste
Options
their time trying to find misplaced
(undervalued or overvalued) - Financial instruments that grant the holder
SECURITIES. a chance to sell or buy a specific asset at a
set price on or before an expiration date.
- Two types of options:
o Call option – option to buy a
- Financial instruments that carry
specified number of shares on or
characteristics of both debt and equity
before a specific date at a stated
instruments. Examples are:
strike price.
o Stock purchase warrants
o Put option – option to sell a
▪ Instruments that grant their
specified number of shares on or
holders right to buy a
before a specific date at a stated
specific number of shares of
strike price.
the issuer at a specific price
- Options can be traded through two
for a given period. Warrants
channels: via stockbrokers and through
are detachable, meaning
organized option exchanges.
they can be sold by
- Options are not for fund raising of
bondholders without selling
companies but are commonly used by
the security or bond it is
investors and option exchanges.
attached to.
- Options play well as part of employee
compensation packages.
o Convertible securities
▪ Convertible bonds are
bonds that can be
converted into specific
number of ordinary shares.
▪ Most of the time, these are
unsecured bonds that have
a call feature [redeemable
before maturity date].

Warrants vs. Stock Rights

- Warrants are exercisable for

several years; rights can only be
used within a few months
- Warrants are issued at an exercise
price higher than the prevailing
market price; rights are issued
below the prevailing market price

Equity Securities Market: Barrios, Dela Cruz, Lorenzo, Ordoña 6