VALUING SHARES
5-1 The essential features of preferred and ordinary shares
5-2 Valuing preferred and ordinary shares
5-3 The free cash flow approach to ordinary share valuation
5-4 Other approaches to ordinary share valuation
5-5 Primary and secondary markets for equity securities
Bring your learning to life with interactive learning, study, and exam preparation tools that support the printed
textbook. CourseMate includes an integrated eBook, videos and quizzes, flashcards and more.what companies doQANTAS SHARES RISE ON NEWS OF LOWER OIL PRICES
The forces influencing share prices for companies are
many and varied. Airlines are particularly vulnerable
to changing moods of the customers who fly with
them, as well as being affected by small changes in
high-cost items such as fuel. The following item about
Qantas provides a good example of the challenges of
foreseeing the future of share prices.
In 2012, Qantas faced its first loss since it had
been privatised in 1995. As a result, it adopted an
aggressive cost-cutting program. The company
was then able to report an underlying profit of
A$367 million for the six months to December- This was driven by a small increase in net
passenger revenue about 2.6% and some decrease
in operating expenses other than fuel; but the major
cost reduction generating the profits was a saving of
A$91 million on the airline’s fuel bill. The concerning
issue for Qantas related to this gain was that the
fuel price was outside its control. It seemed that its
profitability was going to be very difficult to manage,
and would continue to be subject to significant
fluctuations.
This volatility in the share market illustrates how
sensitive the value of shares of an organisation,
especially one with a public listing on a national share
exchange such as the Australian Securities Exchange
(ASX), may be to forecasts of events that may affect
the organisation. Good news, such as an anticipated
decline in costs, may encourage more buying of
shares. Bad news, such as the report of an unusual
loss, may make the holders of shares particularly
concerned that there will be a decline in the value of
their shareholdings and cause many of them to try to
sell their shares quickly, driving the price down further.
Valuing an entire company, or assessing whether
its ordinary shares are correctly valued, is a difficult task,
and there are many methods available to professionals
conducting this type of analysis. Some methods rely on
the discounted cash flow methods, which are covered
in chapters 3 and 4. Other approaches rely on ‘market
multiples’ such as EBITDA multiples. This chapter
introduces you to these methods.
Source: ‘Should investors take a seat on Qantas Airways’? Alpha Now.
http://alphanow.thomsonreuters.com/2015/03/idea-of-the-week-should-
investors-take-a-seat-on-qantas-airways/. Accessed 7 April 2015.Express