Lesson 5 Equity Securities

Introduction :
Companies finance their operations by issuing either debt or equity securities( capitaux propre).
When the company issues equity securities (actif d’action), it is not contractually obligated to make
periodic payments to shareholders for the use of their funds.
Instead, shareholders have a claim (droit) on the company’s assets after all liabilities have been paid.
(créancier rembouser)
Equity investors expect the company’s management to act in their best interest by making operating
decisions that will maximize the market price of their shares.

The study of equity securities is important for several reasons.

First, the decision on how much of a client’s portfolio to allocate to equities affects the risk and
return characteristics of the entire portfolio.  Une idée du la nature du risqué et rendement.
Second, different types of equity securities have different ownership claims on a company’s net
assets, which affect their risk and return characteristics in different ways.

Facts and figures:

Capitalisation du marché Mondial

Trillion de dollar échelle en log croissance
exponentiel, depuis 15 année le marché de
l’action à beaucoup augmenter et impact
majeur en 2008 capitalisation mondial divisé
par deux. Sur le marché de l’action vision LT
recommandé le marché a fini par se rétablir
assez vite rattraper en 2014.
Être près a patienter longtemps pour avoir
un rendement intéressant sur ce marché.

Capitaliation de marché par zone

géographique :
Prédominance des Etats-Unis. (52%) car
grand pays de PIB/HAB et pays puissant et
les USA à donner une part pour soutenir les
pays. AU Etat-unis il faut épargner sur les
actions pour la retraite. Il y a la suisse (3%) =
FR car la suisse a de très grand groupe de
capitalisation, Tout les pays qui finance les
retraite par des plan d’action on des gros part ( Canada, Japan, Suède)

On a des rendements moyens

sur des grande période et
détaillé par pays (rendement
réel qui corriger de l’inflation)
Les actions on surperformer les
bonds à court terme car les
actions sont plus risquées que
le revenu à taux fixe dons les
détenteur vont accepter de
prendre des actions avec un
rendement plus élevé que les
titres a rendement fixe. On a des rendements a taux négative pays qui ont était touché par des
guerres, et dans ces pays on a eu des épisodes de grande inflation et grand problème quand on a un
titre a rendement fixe (pas indexé par l’inflation).
4,3% en moyenne quelque soit les pays et les périodes on peut espérer obtenir 4% de rendement sur
les actions que sur les titres. Si on investit 20ans cela vas se capitalisé. (1,04^20= rendement des
actions)

Types of equities

Companies may issue two types of equity securities:

• common shares (or ordinary shares, or common stock)
• preference shares (or preferred stock)
Common shares represent an ownership interest in a company and are the predominant type of
equity security.

Common Shares
Investors share in the operating performance of the company, participate in the governance
process through voting rights, and have a claim on the company’s net assets in the case of
liquidation.
Voting rights provide shareholders with the opportunity to participate in major corporate
governance decisions, including the election of its board of directors, the decision to merge with or
take over (OPA, Offre public d’achat) another company, and the selection of outside auditors.
Shareholder voting generally takes place during a company’s annual meeting (example of Renault).
https://www.youtube.com/watch?v=N8YRgRKi0fQ
As a result of geographic limitations and the large number of shareholders, it is often not feasible
for shareholders to attend the annual meeting in person.
For this reason, shareholders may vote by proxy, which allows a designated party (such as another
shareholder, a shareholder representative, or management) to vote on the shareholders’ behalf.

Common shares may also be callable or putable.

 Callable common shares (fait reference au mécanisme de call) give the issuing company the
option, but not the obligation, to buy back shares from investors at a call price that is
specified when the shares are originally issued. donner à la société émettrice l’option, mais
non l’obligation, de racheter des actions auprès des investisseurs à un prix d’appel spécified
lorsque les actions sont initialement émises.
It is most common for companies to call (or redeem, rembourser) their common shares when the
market price is above the pre-specified call price. C’est l’entreprise qui détient le droit pas
l’actionnaire. Si le prix monte l’actionnaire actionne le call pour racheter l’action
The company benefits because it can buy back its shares below the current market price and later
resell them at a higher market price.
L’intérêt pour les investisseurs c’est que ces actions vont être émise avec un escompte.

 Putable common shares give investors the option to sell their shares (i.e., ”put” them) back
to the issuing company at a price that is specified when the shares are originally issued.
Investors will generally sell their shares back to the issuing company when the market price is below
the pre-specified put price. L’investisseur qui déclenche le rachat d’action.
Thus, the put option feature limits the potential loss for investors. From the issuing company’s
perspective, the put option facilitates raising capital because the shares are more appealing to
investors.
C’est action émise au prix supérieur du marché ( système d’assurance)

Preference Shares
Preference shares (or preferred stock) rank above common shares with respect to the payment of
dividends and the distribution of the company’s net assets upon liquidation.
However, preference shareholders do not share in the operating performance of the company and
generally do not have any voting rights, unless explicitly allowed for at issuance.

Preference shares have characteristics of both debt securities and common shares.
Similar to the interest payments on debt securities (titre de creance), the dividends on preference
shares are fixed and are generally higher than the dividends on common shares.
However, unlike interest payments, preference dividends are not contractual obligations of the
company. , preference dividends are not contractual obligations of the company.

Dividends on cumulative preference shares accrue so that if the company decides not to pay a
dividend in one or more periods, the unpaid dividends accrue and must be paid in full before
dividends on common shares can be paid.
In contrast, noncumulative preference shares have no such provision. This means that any dividends
that are not paid in the current period are forfeited permanently. (sont perdu)

Participating preference shares( les actions preferer participatif) entitle the shareholders to receive
the standard preferred dividend plus the opportunity to receive an additional dividend if the
company’s profits exceed a pre-specified level. (//prime)
In addition, participating preference shares can also contain provisions that entitle shareholders to
an additional distribution of the company’s assets upon liquidation.
The use of participating preference shares is much more common for smaller, riskier companies
where the possibility of future liquidation is more of a concern to investors.

Private equities
Private vs public equity securities
Equity securities presented so far are issued and traded in public markets and on exchanges.
Equity securities can also be issued and traded in private equity markets.
Private equity securities are issued primarily to institutional investors via non-public offerings, such
as private placements
Peu de chance qu’on en entende parler et que l’on puisse investir dedans appartient a des
investisseur spécialisé

Because they are not listed (inscrit auprès d’une bourse de manière a qu’elle soit négociable sur la
bourse) on public exchanges, there is no active secondary market for these securities.

As a result, private equity securities do not have” market determined” quoted prices, are highly
illiquid, and require negotiations between investors in order to be traded.

In addition, financial statements and other important information needed to determine the fair value
of private equity securities may be difficult to obtain because the issuing companies are typically not
required by regulatory authorities to publish this information.

There are three primary types of private equity investments:

• venture capital (VC) (capitale risque)
• leveraged buyouts (LBO)
• private investment in public equity (investissement privé dans les action publique)

Venture capital
Venture capital ( capital risqué ) is a form of private equity and a type financing that investors
provide to startup (demarrage) companies in the early stages of development that are believed to
have long-term growth potential.

Venture capitalists range from family and friends to wealthy individuals, investment banks and
private equity funds.

VC can also be provided in the form of technical or managerial expertise.

Recommended: listen to a podcast with VC Isai
https://www.gdiy.fr/148-jean-david-chamboredon-isai-tout-comprendre-sur-les-fonds-
dinvestissements/
History
VC developed as an industry after the Second World War. Harvard Business School professor
Georges Doriot is generally considered the ”Father of Venture Capital”.

He started the American Research and Development Corporation (ARDC) in 1946 and raised a $3.5
million fund to invest in companies that commercialized technologies developed during WWII.
ARDC’s first investment was in a company that had ambitions to use x-ray technology for cancer
treatment. The $200,000 that Doriot invested turned into $1.8 million when the company went
public in 1955.
 FFF (Family Friend, Funder)
L’entreprise reçoit des series de fond
La startup vend des actions sur la
bourse et c’est à ce moment que les
1er investisseurs embauchent leur
bénéfice.
Rachat par un grand groupe, rachat
de la majorité d’achat des actionnaire
( 1et investisseur angel FFF ou Funder
même) et c’est là ou les VC font un
profit

Seed funding (financement d’amoçage)

Seed funding is the first official equity funding stage. It typically represents the first official money
that a business venture or enterprise raises.
Seed funding helps a company to finance its first steps, including things like market research and
product development.
There are many potential investors in a seed funding situation: founders, friends, family, incubators,
venture capital companies and angel investors*.

Angel Investors
Angel investors high net worth individuals who have amassed their wealth through a variety of
sources. They tend to be entrepreneurs themselves, or executives recently retired from the business
empires they’ve built.
Example : As an angel investor, Bezos has invested in many companies like Airbnb, Uber or Twitter.
Exemple en France : Xavier Niel: 25M d’euros investis depuis septembre 2017 dans +120 startups
(sources)
 Etape de SEED (Etape 1)
 Etape de Série (Etape 2) quand la première étape c’est bien passé.

Series A Funding
Once a business has developed a track record (an established user base, consistent revenue figures,
or some other key performance indicator), that company may opt for Series A funding.
Opportunities may be taken to scale the product across different markets. The average ( le
financement estimé) Series A funding as of 2020 is $15.6 million.
The investors involved in the Series A round come from more traditional venture capital firms.
Well-known venture capital firms that participate in Series A funding include Sequoia Capital,
Benchmark Capital, Greylock and Accel Partners.

Series B Funding
In Series B rounds, investors help startups expanding market reach. Companies that have gone
through seed and Series A funding rounds have already developed substantial user bases and have
proven to investors that they are prepared for success on a larger scale.
The average estimated capital raised in a Series B round is $33 million. Companies undergoing a
Series B funding round are well-established. Most Series B companies have valuations between
around $30 million and $60 million.
Because the equity securities issued ( titre de participation émise) to venture capitalists are not
publicly traded, they generally require a commitment ( engagement de fond)of funds for a
relatively long period of
The exit return earned by these private equity investors is based on the price that the securities can
be sold for if and when the start-up company first goes public, either via an initial public offering
(IPO) on the stock market or by being sold to other investors.
Around 90% of startup companies funded will not make it to initial public offering (IPO).

Leveraged buyout (LBO – Acheter pour retirer)

A leveraged buyout (LBO) occurs when a group of investors (such as the company’s management or
a private equity partnership) uses a large amount of debt to purchase all of the outstanding
common shares of a publicly traded company.
Une start-up ne va jamais se financer par le crédit au début car ce n’est pas un outil pour un début,
elle est faite quand il a très peu de risque.
Si échec elle perd de l’argent si cela se passe bien elle bénéfiera pas du bien elle se limitera au
remboursement et intérêt. Finalement dans les 1ères étapes on aura de l’actionnariat mais sera privé
car moins couteux que de faire appel à la bourse.

After the shares are purchased, they cease to trade on an exchange and the investor group takes full
control of the company. In other words, the company is taken” private” or has been privatized.
On peut avoir des entreprises publiques qui repasse dans le privé/ Ou privatisé ( pls d’action sur le
marché publique 100% des part passe dans le privé. (DELL, Ilyad) Pour vouloir sortir de la supervision
des actionnaires qui ont une vision différente une la vision de fondateur.

Fonds d’investissement avec le management de

l’entreprises (haut cadre) acheter une holdCO
Détenue a 100% par eux

 Pour détenir une valeur de 823 le FI (50%) et

Manager vas détenir 100% des FP 484 (CP Capitaux
propre) Le reste c’est de la dette

 En apportant 50% de l valeur de l’entreprises

l’actionnaire privé détienne 100ù de l’entreprises

 Existe des structure plus complexe (ici

modèle simplifier)

 Chaîne d’hôtel (société cible)

  Moins de capital et pour
acheter le capital d’action publique
utilisation de technique pour rachat
d’action

 Remplacement des action

public par de la dette.

 Apres les LBO le levier est rsè

très fort on peux atteindre 80%de dette
par exemple

 Allègement du bilan ( levier) en

vendant par exemple une partie des actifs
de l’entreprise
 La mode en 80’ au USA

Companies’ candidates for LBO:

• have large amounts of undervalued assets (which can be sold to reduce debt) Important
montant d’actif sous évaluer
• generate high levels of cash flows (which are used to make interest and principal payments
on the debt) (pour le service de la dette)

A primary objective of a buyout is to restructure the acquired company and later take it ”public”
again by issuing new shares to the public in the primary market.
En France les LBO très utilisé quand l’entreprise ne trouve pas d’investisseur capable de reprendre
l’intégralité de ses fonds. Rachat d’entreprise quand on n’a pas assez de part se fait lors de la
transmission d’entreprise. (Niveau PME entreprise pas dans le marché au départ)

Private investment in public equity (PIPE) (investissement privé dans les entreprises qui ont émis
des action publique)

Private investment in public equity is generally sought (utiliser) by a public company that needs
additional capital quickly and is willing (pret) to sell a sizeable ownership position to a private
investor or investor group.
For example, a company may require a large investment of new equity funds (fond d’action) in a
short period of time because:
• it has significant expansion opportunities
• is facing high levels of indebtedness (endettement)
• or is experiencing a rapid deterioration in its operations

Depending on how urgent the need is and the size of the capital requirement, the private investor
may be able to purchase shares in the company at a significant discount (escompte / Réduction du
prix significative) to the publicly-quoted market price

Risk and return of equities

Past return on equity: (rendement historique dividente connue)

Expected return on equity: ( rendement espéré) connais ni le prix et le dividende que l’on va toucher
dans un ans

E(Rt+1) = E((Pt+1 + divt+1 −Pt) Pt )

Investors that only consider price appreciation overlook an important source of return: the
compounding that results from reinvested dividends.
The risk of an equity security can be defined as the uncertainty of its expected (or future) total
return. (Dividend total et plus-value)
The greater the uncertainty of its future cash flows, the greater the risk and the more variable or
volatile the security’s price.
Risk is most often measured by calculating the standard deviation ( l’écart-type) of the equity’s
expected total return.

 Diagram de stat de LT on voit

que les actions au Etat unis on eux
un rendement significatif.
 Quand on investit sur des
obligation maturité longue si on
revend ont est exposé au risque.
 Puisque es billet de trésorerie
moins risquer ( à droite 4,7 ) les
investisseur vont accepté une
rendement inférieur il vont
accepter de les détenir
 Action et obligation : comme
action plus risquer ( 17 ?7 -10,4 )
c’est l’inflation qui vas apporter ce risque, les investisseurs vont accepter de les détenir en
échange d’un rendement supérieur.
 Plus classe d’actif élever plus rendement élever.
 Les actions sont vraiment risquées sur des rendements annuels
 Ecart-type = écart moyen es deux coté de 5-4
 Faut avoir une conviction si on investie sur des actions car sur LG trop de volatilité.
  On a le rendement réel aux
USA des action et es billet de
trésorerie US et on voit bien cet effet
de volatilité
 Des années ou on a plus 30%
d’autre -20%/ -40%
 Billet de trésorerie stable il
n’y à pas eu au USA des pic
d’inflation.
 Rendement en moyenne
positif


 En Europe. Indice Europ2en

d’action en Bleu entre 2012 -2019
pas représentatif historiquement.
 Volatilité de l’actif
 Bloomberg : indice pour es
billet de trésorerie

Accounting Return on Equity rendement sur action)

Return on equity (ROE) is the primary measure that equity investors use to determine whether the
management of a company is effectively and efficiently using the capital they have provided to
generate profits.
It measures the total amount of net income (NI) available to common shareholders (i.e., after
preferred dividends have been deducted) generated by the total equity capital (E) invested in the
company.
It is computed as net income divided by the average total book value of equity (BVE):
BE ( fond propre à partir de la valeur
comptable laisser au actionnaire si
l’entreprise rembourse ses obligation
financière avec ses actif

BVE is assets minus liabilities on a firm’s balance sheet. It is the accounting value that is left for
shareholders should a company settle its liabilities with its reported assets.
ROE assumes that the net income produced in the current year is generated by the equity existing at
the beginning of the year and any new equity that was invested during the year.

Some formulas only use shareholders’ equity at the end of year t-1:

ROEt = Nit / BVEt−1

This assumes that only the equity existing at the beginning of the year was used to generate the
company’s net income during the year

Caveats when using ROE

Net income and the book value of equity are directly affected by management’s choice (choix de
l’équipe de gestion) of accounting methods, such as those relating to depreciation (amortisation)
(straight line versus accelerated methods) or inventories (first in, first out versus weighted average
cost).
An increasing ROE is not always good. ROE can increase if the company issues debt and then uses the
proceeds to repurchase some of its outstanding shares. (Acheter en partie des actions sur le marché
boursier)  Augmenter sa dette pour diminuer la dette qui circule
En rachetant des actions cela augmente le BV donc réduit le ratio mais autre effet qui est qu’au
même moment si on n’augmente NI (la dette) on va faire un effet levier c’est-à-dire on aura pour un
bénéfice donné comme on a moins d’actionnaire on va pouvoir gagner plus d’argent augmente le
rendement pour les entrepris en Plus de toute grande partie diriger par les intérêts prêts. S’il y a du
levier cela augmente le rendement pour les actionnaires.
It is therefore important to examine the source of changes in the company’s net income and
shareholders’ equity over time.
The book value of a company’s equity reflects the historical operating and financing decisions of its
management.
The market value of the company’s equity reflects these decisions as well as investors’ collective
assessment and expectations about the company’s future dividends generated by its positive net
present value investment opportunities
  Valeur de l’entreprise : fond de dividende future

If investors believe that the company has many these future cash flow-generating investment
opportunities, the market value of the company’s equity will exceed its book value.  Groth stock,
on attend beaucoup plus à l’avenir de l’entreprise qu’au présent (Facebook au début)

Return on invested capital (ROIC)

Return on invested capital (ROIC) is net operating profit after tax divided by invested capital (or the
sum of common and preferred equity and long-term debt). (Somme de tous les actions ou Dette de
LT)
Formule
Measures how well a company is using its mpnet to generate….
Profit après impôt avec les intérêt (Contrairement au ROE) au numérateur / Dette Bilan complet.
Measures how well a company is using its money to generate returns. Ce n’est pas les revenues
nettes des intérêts par rapport ai fp c’est les revenu tout cours par rapport au bilan comptable
L’intérêt de cette mesure c’est qu’elle est indépendante du ratio de levier (rapport avec fp et dette)
car ne prend tout c’est bien la performance globale de l’entreprise et non seulement celle de l’action
Mesure plus économique moins tourner vers les actionnaires.

Investors’ Required Rates of Return (rendement declarer/ Exige/ requis par les actionnaires)
When companies issue debt or equity securities, there is a cost associated with the capital that is
raised.
In order to maximize profitability and shareholder wealth, companies attempt to raise capital
efficiently so as to minimize these costs. (connu d’avance)
The cost of debt is relatively easy to estimate because it reflects the periodic interest (or coupon)
rate that the company is contractually obligated to pay to its bondholders (lenders).

The cost of equity is more difficult to estimate.

The return investors require on the funds they provide to the company is called the investor’s
minimum required rate of return.
When investors purchase the company’s equity securities, their minimum required rate of return is
based on the future cash flows they expect to receive.
Because these future cash flows are both uncertain and unknown, the investors’ minimum required
rate of return must be estimated.

The cost of equity can be thought of as the minimum expected rate of return that a company must
offer its investors to purchase its shares in the primary market and to maintain its share price in the
secondary market.
  Si une entreprise arrive a maintenir sont pris stable sur le marché boursier les investisseur
sont content. Si le cours de l’action baisse on est au-dessus du rendement requis.

If this expected rate of return is not maintained, then the share price Pt will adjust so that it meets
the minimum required rate of return E(Rt+1)
(anticipation des advertisers) demanded by investors:

For example, if investors require a higher rate of return on equity E(Rt+1) than the company’s cost of
equity, they would sell their shares and invest their funds elsewhere resulting in a decline in the
company’s share price Pt.
Les nouvelles font bouger le prix mais pas le rendement attendu
Prix dividende en haut monte les prix en as vas bouger pour qu’au final le rendement ne bouge pas
Si je rachète le prix a un nouveau prix j’au le rendement attendu  Equilibrage en permanence.
As the share price declined, the cost of equity would increase to reach the higher rate of return
that investors require.
S’ils vendent c’est le prix de l’action qui baisse prix du rendement qui ne change pas

Weighted average cost of capital (WACC)

The weighted average cost of capital (WACC) ( coût moyen ponderer du capital FP et Dette) is a
calculation of a firm’s cost of capital (common stock, preferred stock, bonds, and any other long-term
debt) in which each category of capital is proportionately weighted ( pondéré proportionality à son
capital) :

Re: cost of equity; Rd: cost of debt; E: market value of the firm’s equity; market value of the firm’s
debt; Tc: corporate tax rate (impôt sur les bénéfice)
(1-TC)
Comparing a company’s ROIC with its WACC reveals whether invested capital is being used
effectively.

Why income tax must be deducted from debt cost (example):

A firm earns $100 in profits. With Tc = 0.3; it would have to pay $30 in corporate tax rate. The $100
of profits turned into $70 of investor income.
Si passif 100% détenu par les actionnaires (aucune dette)
If, instead the firm finances with debt, then, assuming the firm owes $50 of interest to investors, its
profit before taxes is now $50.  L’impôt sur le bénéfice sur le profit une fois déduit des intérêts.

Economie d’impôt. The firm only pays 0.3×50 = $15 of taxes.

The debt cost is 50−15 = 50(1−0.3) = $35.  Le vrai coup de la dette
It is cheaper for firms to finance with debt than with equity.
Grace a la dette les actionnaires économise des impôts sur le bénéfice
On va les retrancher sur coup de la dette.
Il est moins couteux à une entreprise de se financer avec de la dette qu’avec des actions. (economies
sur les impôt et on touche un bénéfice)

Financial leverage
Financial leverage refers to the use of debt to amplify returns from an investment or project.
Companies use leverage in an attempt to increase shareholder value:

ROIC Independent de la structure du capital (dette/FP) ROE dépend du capital car si on augmente la
dette et moins de FP on va payer plus d’intérêt mais comme el rendement que paye les créanciers et
plus faible que les actionnaires cela vas faire que l’entreprise vas économiser du revenu pour les
actionnaires qui reste

Formule
A ROIC donné le ROE vas changer avec la structure financière, à chaque dette échanger contre de
l’equities il vas gagner du rendement supplémentaire il vas gagner ROIC-i  Au passif quand on a
deux bloc avec différent rendement payer à la ROIC (actif) Les actionnaire gagne plus que le ROIC et
les créancier moins (les actionnaire demande plus d’argent pour les risque donné). On substitue des
FP contre de la dette on paye moins que le ROIC car on paye moins de ROE
Plus elle fait appelle à la dette (levier financier) plus les actionnaires vont gagner beaucoup plus que
le roic ON utilise la dette pour maximiser le rendement pour les actionnaire
Summary
Common shares represent an ownership interest in a company and give investors a claim on its
operating performance, the opportunity to participate in the corporate decision-making process, and
a claim on the company’s net assets in the case of liquidation.

Callable common shares give the issuer the right to buy back the shares from shareholders at a price
determined when the shares are originally issued.

Putable common shares give shareholders the right to sell the shares back to the issuer at a price
specified when the shares are originally issued.

Preference shares are a form of equity in which payments made to preference shareholders take
precedence over any payments made to common stockholders.
Cumulative preference shares are preference shares on which dividend payments are accrued so that
any payments omitted by the company must be paid before another dividend can be paid to
common shareholders.
Non-cumulative preference shares have no such provisions, implying that the dividend payments are
at the company’s discretion and are thus similar to payments made to common shareholders.

Participating preference shares allow investors to receive the standard preferred dividend plus the
opportunity to receive a share of corporate profits above a pre-specified amount.

Callable and putable preference shares provide issuers and investors with the same rights and
obligations as their common share counterparts.
Private equity securities are issued primarily ( au benefice) to institutional investors in private
placements and do not trade in secondary equity markets.
There are three types of private equity investments: venture capital, leveraged buyouts, and private
investments in public equity (PIPEs).
The objective of private equity investing is to increase the ability of the company’s management to
focus on its operating activities for long-term value creation. The strategy is to take the ”private”
company ”public” after certain profit and other benchmarks have been met.
A company’s accounting return on equity is the total return that it earns on shareholders’ book
equity.
A company’s cost of equity is the minimum rate of return that stockholders require the company to
pay them for investing in its equity