Equity (finance)

In accounting, equity (or owner's equity) is the difference between the value of the assets and the value of the liabilities of something owned. It is governed by the following equation:

For example, if someone owns a car worth $15,000 (an asset), but owes $5,000 on a loan against that car (a liability), the car represents $10,000 of equity. Equity can be negative if liabilities exceed assets. Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) represents the equity of a company as divided among shareholders of common or preferred stock. Negative shareholders' equity is often referred to as a shareholders' deficit.

Alternatively, equity can also refer to a corporation's share capital (capital stock in American English). The value of the share capital depends on the corporation's future economic prospects. For a company in liquidation proceedings, the equity is that which remains after all liabilities have been paid.

Owner's equity

When starting a business, the owners fund the business to finance various operations. Under the model of a private limited company, the business and its owners are separate entities, so the business is considered to owe these funds to its owners as a liability in the form of share capital. Throughout the business's existence, the equity of the business will be the difference between its assets and debt liabilities; this is the accounting equation.

When a business liquidates during bankruptcy, the proceeds from the assets are used to reimburse creditors. The creditors are ranked by priority, with secured creditors being paid first, other creditors being paid next, and owners being paid last. Owner's equity (also known as risk capital or liable capital) is this remaining or residual claim against assets, which is paid only after all other creditors are paid. In such cases where even creditors could not get enough money to pay their bills, the owner's equity is reduced to zero because nothing is left to reimburse it.

Accounting

In financial accounting, owner's equity consists of the net assets of an entity. Net assets is the difference between the total assets and total liabilities.[1] Equity appears on the balance sheet (also known as the statement of financial position), one of the four primary financial statements.

The assets of an entity can be both tangible and intangible items. Intangible assets include items such as brand names, copyrights or goodwill. Tangible assets include land, equipment, and cash. The types of accounts and their description that comprise the owner's equity depend on the nature of the entity and may include:

Book value

The book value of equity will change in the case of the following events:

  • Changes in assets relative to liabilities. For example, a profitable firm receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit, increases its retained earnings, therefore its shareholders' equity.
  • Issue of new equity in which the firm obtains new capital increases the total shareholders' equity.
  • Share repurchases, in which a firm returns money to investors, reducing on the asset side its financial assets, and on the liability side the shareholders' equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares outstanding.
  • Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income(from the point of view of the common share owners).
  • Other reasons - Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.

Shareholders' equity

When the owners are shareholders, the interest can be called shareholders' equity; the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. However, shareholders may allow different priority ranking among themselves by the use of share classes and options. This complicates analysis for both stock valuation and accounting.

Shareholders' equity is obtained by subtracting total liabilities from the total assets of the shareholders.[3] These assets and liabilities can be:

  • Equity (beginning of year)
  • + net income
  • − dividends
  • +/− gain/loss from changes to the number of shares outstanding.
  • = Equity (end of year) if one gets more money during the year or less or not anything

Equity stock

Equity investments

An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains. Typically, equity holders receive voting rights, meaning that they can vote on candidates for the board of directors (shown on a diversification of the fund(s) and to obtain the skill of the professional fund managers in charge of the fund(s)). An alternative, which is usually employed by large private investors and pension funds, is to hold shares directly; in the institutional environment many clients who own portfolios have what are called segregated funds, as opposed to or in addition to the pooled mutual fund alternatives.

A calculation can be made to assess whether an equity is over or underpriced, compared with a long-term government bond. This is called the yield gap or Yield Ratio. It is the ratio of the dividend yield of an equity and that of the long-term bond.

Market value of equity stock

In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Equity stock valuations, which are often much higher, are based on other considerations related to the business' operating cash flow, profits and future prospects; some factors are derived from the accounting statement. See Valuation (finance) and specifically #Valuation overview; also Intrinsic value (finance) #Equity.

While accounting equity can potentially be negative, market price per share is never negative since equity shares represent ownership in limited liability companies. The principle of limited liability guarantees that a shareholder's losses may never exceed his investment.

Merton model

Under the "Merton model",[4] the value of stock equity is modeled as a call option on the value of the whole company (including the liabilities), struck at the nominal value of the liabilities; and the equity market value thus depends on the volatility of the market value of the company assets. The idea here is that, in general, equity may be viewed as a call option on the firm: since the principle of limited liability protects equity investors, shareholders would choose not to repay the firm's debt where the value of the firm is less than the value of the outstanding debt; where firm value is greater than debt value, the shareholders would choose to repay - i.e. exercise their option - and not to liquidate. See Business valuation #Option pricing approaches.

This is the first example of a "structural model", where bankruptcy is modeled using a microeconomic model of the firm's capital structure - it treats bankruptcy as a continuous probability of default, where, on the random occurrence of default, the stock price of the defaulting company is assumed to go to zero. [5] This microeconomic approach, to some extent, allows us to answer the question "what are the economic causes of default?".[6] (Structural models are distinct from "reduced form models" - such as Jarrow–Turnbull - where bankruptcy is modeled as a statistical process.)

Equity in real estate

The notion of equity as it relates to real estate derives from the concept called equity of redemption. This equity is a property right valued at the difference between the market value of the property and the amount of any mortgage or other encumbrance.

See also

References

  1. ^ IFRS Framework quotation: International Accounting Standards Board F.49(c)
  2. ^ Example of Balance Sheet
  3. ^ Hervé Stolowy; Michel Lebas (January 2006). Financial Accounting and Reporting: A Global Perspective. Cengage Learning EMEA. p. 42. ISBN 1-84480-250-7.
  4. ^ Merton, Robert C. (1974). "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates". Journal of Finance. 29 (2): 449–470. doi:10.1111/j.1540-6261.1974.tb03058.x.
  5. ^ Robert Merton, “Option Pricing When Underlying Stock Returns are Discontinuous” Journal of Financial Economics, 3, January–March, 1976, pp. 125–44.
  6. ^ Nonlinear valuation and XVA under credit risk, collateral margins and Funding Costs. Prof. Damiano Brigo, UCLouvain
Abu Dhabi Media Summit

The Abu Dhabi Media Summit is an annual three-day international news media summit held in Abu Dhabi, United Arab Emirates, dealing with the transition to digital technology in the Middle East, the Indian Subcontinent, East Asia, and China. It was first held from 18 to 20 March 2010. The summit is held under the Patronage of Sheikh Mohammed Bin Zayed Al Nahyan Crown Prince of Abu Dhabi and Deputy Supreme Commander of the United Arab Emirates Armed Forces.

The Media Summit deals with globalization and with creativity and disruption. Speakers have included the inventor of the World Wide Web, Sir Tim Berners-Lee, Chairman of Walt Disney International Andy Bird, President and CEO of Discovery Networks International Mark Hollinger, Bill Gates, Rupert Murdoch, James Cameron and Eric Schmidt.Summits include public sessions, closed-door discussions and private conversations, bringing together industry leaders from developed and emerging areas. Industry sectors discussed include mobile, broadband, television, print, entertainment, news, music, advertising and marketing, venture capital and equity finance.

During the inaugural summit in March 10,2010 Eric Schmidt and Rupert Murdoch gave speeches on the theme of “The evolution of media and content platforms”. In 2011 film director James Cameron spoke about story-telling under the theme of “content and creativity”. The third meeting took place in October 2012 under the theme “redefining the digital frontier”, where Bill Gates gave the opening speech. The 2013 summit from October 22 to 24 had the theme “Leveraging the digital age”, with sponsors including Du, Sky News Arabia, the Telecommunications Regulatory Authority, Etihad Airways and Mercedes-Benz.

The 2014 Abu Dhabi Media Summit will take place from 18–20 November 2014 at Rosewood Hotel, Al Maryah Island in Abu Dhabi. The theme of the summit will be 'Driving & Sustaining Future Media in MENA and Beyond'

Association for Corporate Growth

The Association for Corporate Growth (ACG) is an organization providing a global "community" for mergers and acquisitions and corporate growth professionals. Founded in 1954, ACG has grown to more than 14,500 members from corporations, private equity, finance, and professional service firms representing Fortune 1000, FTSE 100, and mid-market companies. There are 57 chapters in North America and Europe. These chapters meet regularly, support events and provide a forum for senior-level M&A professionals to network, share best practices and source deals.

Australian Small Scale Offerings Board

The Australian Small Scale Offerings Board (ASSOB) is a crowdfunding facility for small businesses in Australia (often referred to as the SME sector) to raise equity finance. It differs from the Australian Stock Exchange (ASX) and the National Stock Exchange in a few key ways:

Most capital raisings on ASSOB occur under the provisions of section 708 of the Corporations Act (explained below)

While ASSOB has a secondary market, it is not an exchange with active market-makers constantly buying and selling shares

Listing costs and compliance costs are substantially reducedCapital raising in Australia is strictly regulated under the federal Corporations Act. The intention is to protect investors, and for this reason, most approaches to investors require expensive and comprehensive prospectuses registered with the Australian Securities and Investments Commission (ASIC), the government regulator. Company directors assume significant legal responsibilities when make investment offers to the public.

Section 708 of the Corporations Act allows small fund raising without the need to register a prospectus. Funds raised are limited to $2m and the offer can not be marketed. Further, only a small number of investors can participate.

ASSOB operates in this area of the law, but has permission to raise up to $5m, and to allow registered brokers to assume some legal responsibilities associated with the offer, and the Section 708 restrictions on advertising a small-scale offer are relaxed. ASIC provides this via Class Order 02/273 applicable to section 708In the spectrum of financing opportunities available to small business, ASSOB offers a marketing channel to inform potential investors of the offer, and a secondary market.

Because of the risky nature of equity finance, and because most ASSOB listings sell only a minority share, investors are looking for opportunities with high upside. ASSOB is therefore usually considered most appropriate for businesses with convincing high-growth potential.

CircleUp

CircleUp is a financial technology company based in San Francisco that focuses on consumer goods startups. Since its official launch in April 2012, CircleUp has helped several consumer companies raise equity including Back to the Roots, Halo Top Creamery Little Duck Organics, Rhythm Superfoods and others. General Mills has an investment fund that is partnered with CircleUp to invest in companies listed on the platform.

Common stock

Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently in other parts of the world; "common stock" being primarily used in the United States. They are known as Equity shares or Ordinary shares in the UK and other Commonwealth realms. This type of share gives the stockholder the right to share in the profits of the company, and to vote on matters of corporate policy and the composition of the members of the board of directors.

It is called "common" to distinguish it from preferred stock. If both types of stock exist, common/equity stockholders usually cannot be paid dividends until all preferred/preference stock dividends are paid in full; it is possible to have common stock that has dividends that are paid alongside the preferred stock.

In the event of bankruptcy, common stock investors receive any remaining funds after bondholders, creditors (including employees), and preferred stockholders are paid. As such, common stock investors often receive nothing after a liquidation bankruptcy Chapter 7.

Common stockholders can also earn money through capital appreciation. Common shares may perform better than preferred shares or bonds over time, in part to accommodate the increased risk.

Enterprise Capital Fund

Enterprise Capital Funds are financial schemes established by the Department for Business, Innovation and Skills (BIS) in the United Kingdom to address a market weakness in the provision of equity finance to UK small and medium enterprises (SMEs). Government funding is used alongside private sector funds to establish funds that operate within the "equity gap"; targeting investments of up to £2 million that have the potential to provide a good commercial return. The first five funds supported under the scheme were launched in 2006-7 following a pathfinder competition. A further three funds were awarded ECF status in 2007. As of March 2017, 23 ECFs have been launched.

Equistone Partners Europe

Equistone Partners Europe Limited was established in 2011 as an independent investment firm following the buyout of Barclays Private Equity (BPE) by its staff.BPE, founded in 1979, was the private equity division of Barclays Capital, the investment banking arm of Barclays plc.

HFF (commercial real estate)

HFF, Inc. is a provider of capital markets and brokerage services to owners of commercial real estate.

Negative equity

Negative equity occurs when the value of an asset used to secure a loan is less than the outstanding balance on the loan. In the United States, assets (particularly real estate, whose loans are mortgages) with negative equity are often referred to as being "underwater", and loans and borrowers with negative equity are said to be "upside down".

People and companies alike may have negative equity, as reflected on their balance sheets.

Outline of finance

The following outline is provided as an overview of and topical guide to finance:

Finance – addresses the ways in which individuals and organizations raise and allocate monetary resources over time, taking into account the risks entailed in their projects.

PostFinance

PostFinance was founded in 1906 and is the financial services unit of Swiss Post. It is the fifth largest retail financial institution in Switzerland. Its main area of activity is in the national and international payments and a smaller but growing part in the areas of savings, pensions and real estate.

Private equity

Private equity typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded.

Private equity is, strictly speaking, a type of equity and one of the asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange. However, the term has come to be used to describe the business of taking a company into private ownership in order to restructure it before selling it again at a hoped-for profit.

A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor. Each of these categories of investors has its own set of goals, preferences and investment strategies; however, all provide working capital to a target company to nurture expansion, new-product development, or restructuring of the company’s operations, management, or ownership.Bloomberg Businessweek has called "private equity" a rebranding of leveraged-buyout firms after the 1980s. Common investment strategies in private equity include leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In a typical leveraged-buyout transaction, a private-equity firm buys majority control of an existing or mature firm. This is distinct from a venture-capital or growth-capital investment, in which the investors (typically venture-capital firms or angel investors) invest in young, growing or emerging companies, and rarely obtain majority control.

Private equity is also often grouped into a broader category called private capital, generally used to describe capital supporting any long-term, illiquid investment strategy.

The key features of private equity operations are generally as follows.

A private equity manager uses other people's money to fund its acquisitions – the money of investors such as hedge funds, pension funds, university endowments or wealthy individuals – hence the earlier name for private equity operations: leveraged buy-outs.

It restructures the acquired firm (or firms) and attempts to resell at a higher value, aiming for a high return on equity. The restructuring often involves cutting costs, which produces higher profits in the short term, but can do long-term damage to customer relationships and workforce morale.

Private equity makes extensive use of debt financing to purchase companies. Debt financing reduces corporate taxation burdens and is one of the principal ways in which profits are made for investors. A small increase in firm value – say a growth of asset price by 20% – can lead to 100% return on equity, since the amount the private equity fund put down to buy the company in the first place was only 20% down and 80% debt. However, if the private equity firm fails to make the target grow in value, losses will be large. Debt financing also reduces corporate taxation burdens and is one of the critical reasons private equity deals come out profitable for investors.

Because innovations tend to be produced by outsiders and founders in startups, rather than existing organizations, private equity targets startups to create value by overcoming agency costs and better aligning the incentives of corporate managers with those of their shareholders. This means a greater share of firm retained earnings is taken out of the firm to distribute to shareholders than is reinvested in the firm's workforce or equipment. When private equity purchases a very small startup it can behave like venture capital and help the small firm reach a wider market. However, when private equity purchases a larger firm, the experience of being managed by private equity may lead to loss of product quality and low morale among the employees.

Private equity investors often syndicate their transactions to other buyers to achieve benefits that include diversification of different types of target risk, the combination of complementary investor information and skillsets, and an increase in future deal flow.

Quadriserv

Quadriserv is a US-based electronic trading platform that helps clients lend and borrow stock for settlement of short sales and other purposes. It is headquartered in New York and is the holding company for its subsidiary, Automated Equity Finance Markets (AQS).

Shawbrook Bank

Shawbrook Bank Limited is a retail and commercial bank in the United Kingdom. It is an operating entity of Shawbrook Group plc which was listed on the London Stock Exchange until it was acquired by a consortium led by BC Partners and Pollen Street Capital in July 2017.

Trade-off theory of capital structure

The trade-off theory of capital structure is the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits. The classical version of the hypothesis goes back to Kraus and Litzenberger who considered a balance between the dead-weight costs of bankruptcy and the tax saving benefits of debt. Often agency costs are also included in the balance. This theory is often set up as a competitor theory to the pecking order theory of capital structure. A review of the literature is provided by Frank and Goyal.An important purpose of the theory is to explain the fact that corporations usually are financed partly with debt and partly with equity. It states that there is an advantage to financing with debt, the tax benefits of debt and there is a cost of financing with debt, the costs of financial distress including bankruptcy costs of debt and non-bankruptcy costs (e.g. staff leaving, suppliers demanding disadvantageous payment terms, bondholder/stockholder infighting, etc.). The marginal benefit of further increases in debt declines as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing.

United Kingdom company law

The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution, public companies now employ more people and generate more of wealth in the United Kingdom economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency, and where management was delegated to a centralised board of directors. An influential model within Europe, the Commonwealth and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.

Company law, or corporate law, can be broken down into two main fields. Corporate governance in the UK mediates the rights and duties among shareholders, employees, creditors and directors. Since the board of directors habitually possesses the power to manage the business under a company constitution, a central theme is what mechanisms exist to ensure directors' accountability. UK law is "shareholder friendly" in that shareholders, to the exclusion of employees, typically exercise sole voting rights in the general meeting. The general meeting holds a series of minimum rights to change the company constitution, issue resolutions and remove members of the board. In turn, directors owe a set of duties to their companies. Directors must carry out their responsibilities with competence, in good faith and undivided loyalty to the enterprise. If the mechanisms of voting do not prove enough, particularly for minority shareholders, directors' duties and other member rights may be vindicated in court. Of central importance in public and listed companies is the securities market, typified by the London Stock Exchange. Through the Takeover Code the UK strongly protects the right of shareholders to be treated equally and freely trade their shares.

Corporate finance concerns the two money raising options for limited companies. Equity finance involves the traditional method of issuing shares to build up a company's capital. Shares can contain any rights the company and purchaser wish to contract for, but generally grant the right to participate in dividends after a company earns profits and the right to vote in company affairs. A purchaser of shares is helped to make an informed decision directly by prospectus requirements of full disclosure, and indirectly through restrictions on financial assistance by companies for purchase of their own shares. Debt finance means getting loans, usually for the price of a fixed annual interest repayment. Sophisticated lenders, such as banks typically contract for a security interest over the assets of a company, so that in the event of default on loan repayments they may seize the company's property directly to satisfy debts. Creditors are also, to some extent, protected by courts' power to set aside unfair transactions before a company goes under, or recoup money from negligent directors engaged in wrongful trading. If a company is unable to pay its debts as they fall due, UK insolvency law requires an administrator to attempt a rescue of the company (if the company itself has the assets to pay for this). If rescue proves impossible, a company's life ends when its assets are liquidated, distributed to creditors and the company is struck off the register. If a company becomes insolvent with no assets it can be wound up by a creditor, for a fee (not that common), or more commonly by the tax creditor (HMRC).

Venture capital trust

A venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies, and income (in the form of dividend distributions) and/or capital gains for investors. VCTs are a form of publicly traded private equity, comparable to investment trusts in the UK or business development companies in the United States.

VCTs are companies listed on the London Stock Exchange, which invest in other companies which are not themselves listed. First introduced by the Conservative government in the Finance Act 1995 to encourage investment into new UK businesses, they have proved to be much less risky than originally anticipated.

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