Introduction to Corporate Finance

PARt 2: VALUAtIoN, RISk ANd REtURN

Regardless of where a share trade takes place, someone has to facilitate that trade, and the

compensation he or she earns for doing so is known as the bid–ask spread. The bid price and ask price

represent, respectively, the price at which a market maker offers to buy or sell a security. In effect, an

investor pays the ask price when buying securities and receives the bid price when selling them. For

example, an investor who buys 100 shares of Google shares may pay $600 per share, and another investor

who sells 100 Google shares at the same time may receive just $599. The bid–ask spread (here, $1)

represents the market maker’s compensation.

CONCEPT REVIEW QUESTIONS 5-1

8 What is the difference between a primary market and a secondary market?

9 How are underwriters compensated?

10 What do companies and their investment bankers hope to learn on the road show?

11 When you buy a share in the secondary market, does the company that issued the share receive

cash?

finance in practice

BUYING THE ASX?

In October 2010, the operator of Australia’s stock

exchange, ASX, proposed an agreement to

merge with the Singapore Stock Exchange (SGX)

to create the second largest exchange in the Asia–

Pacific region. The purchase price for the SGX was

$A8.4 billion, with which the SGX would buy all

the shares in the ASX (since ASX itself is a listed

company). The deal valued the ASX at $A48 per

share.

Each exchange was to retain its own brand

and legal existence. The board of directors of

the holding company that would run the two

exchanges, ASX-SGX, was to have directors from

both Singapore and Australia. The boards of both

stock exchanges approved the merger.

The proposal encountered strong resistance

from several groups, including, finally, the Australian

government’s Treasurer, whose approval was

required for the sale to be finalised.

By April 2011, it became clear that the

Australian Treasurer was going to reject the

proposed merger, on the basis of concerns about

financial market control for Australia and the

difficulties that small companies might encounter

when trying to list on the new exchange. The

Australian government’s Foreign Investment

Review Board, which considers the levels of foreign

investment in Australia, unanimously rejected the

proposal; and the Australian government finally did

reject it.

Sources: Adapted from ‘ASX and Singapore Stock Exchange in $8.4 billion merger’, News Limited, October 26, 2010, http://www.news.com.au/business/

asx-and-singapore-stock-exchange-in-84-billion-merger/story-e6frfm1i-1225943210962#ixzz1y1tbRzvP; and ‘Wayne Swan sinks $8.bn ASX takeover by

Singapore’, The Australian, by David Uren, Economics Correspondent, April 06, 2011, http://www.theaustralian.com.au/business/wayne-swan-sinks-84bn-asx-

takeover-by-singapore/ story-e6frg8zx-1226034348911.

Jay Ritter, University of

Florida

‘Lots of buyers were

willing to give things

to the underwriters in

terms of, for instance,

generating extra

commissions business.’

See the entire interview on

the CourseMate website.

CoURSEMAtE
SMARt VIdEo

bid price

The price at which a market

maker offers to purchase a

security; the price at which an

investor can sell a security

ask price

The price at which a market

maker offers to sell a security;

the price at which an investor

can purchase a security