Piotr Staszkiewcz is a Polish economist interested in auditing and financial markets. He is a public auditor registered at KIBR (Polish Audit Association). He earned his Ph.D. in macroeconomics from Wroclaw Economic University in 2003. From 2003 to 2005 he served as a member of the Management Board of Low Silesia Chamber of Auditors. In 2009 he was appointed to the Polish Auditor Examination Commission by the Polish Ministry of Finance. He is also a fellow of the Polish Economic Association.
Chapter 10 Residual Rights Market
A typical residual right instrument is a common share. The most commonly-used techniques for stock valuation are discounted cash flows and relative valuation.
shares relative valuation DCF time series P/E 10.1. Share types
The equity market is the residual rights market. A typical instrument on this market is a share. The term "equity" comes from accounting where it refers to the total assets less total liabilities (and provisions). "Residual right" is a term with its roots in law. It means that the holder of such a right may claim the remaining assets of an entity after all of the creditors have been paid off. Both terms therefore have the same meaning in substance but different roots. Another word for ordinary (equity) shares is stock. The term stock is also used in the context of finished goods (production) in-house; thus, sometimes the context can play a significant role. Below is a visual classification of residual instruments: Types of shares: - Ordinary (equity) shares are standard shares with no special rights or restrictions. - Preference shares typically carry a right that gives the holder preferential treatment when annual dividends are distributed to shareholders. - Participating preference shares. The fixed rate of dividends is guaranteed as well as participation in surplus profit. - Convertible preference shares. They can be converted into equity shares within a certain period. - Partly paid shares are issued without the company requiring payment of the full issue price. At a specified future date or dates, the company is entitled to call for all or part of the outstanding issue price, and the shareholder at the time of the call is legally obliged to pay the call. - Cumulative preference shares give holders the right that, if a dividend cannot be paid in a certain year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has any distributable profits. - Noncumulative preference shares. A fixed rate of dividends is payable, but only if there is sufficient profit. - Redeemable shares - the company can buy the shares back at a future date - this can be at a fixed date or another date at the discretion of the company. - Employee shares. Shares issued to employees or management at discounted rates. Usually subject to specific requirements (time, price, number, etc.). - Nonvoting shares carry no rights to vote and usually no right to attend general meetings either but they give return in the form of dividend. - Deferred ordinary shares. Shares on which no dividend is paid until other classes of shares have received a minimum dividend. Thereafter, they will usually be fully participating. In some companies, different classes of shares with the same rights are issued to different people, and the deeds provide that the managers may change the dividends between the different classes. Such shares are often described by a letter of the alphabet (so-called "alphabet shares"). Nonvoting shares are often issued to employees so that some of their remuneration can be paid as dividends. Such form of payment can be more tax-efficient for the company and the employees in some jurisdictions. The same is sometimes done for members of the main shareholders' families or silent partners in the business. Voting shares, dividend shares, and capital shares (representing other