Ordinary (equity) capitalYoung and Co’s Brewery plc, the London-based regional brewer and public house
operator, had a four-for-one share split in February 2008. The objective was to increase
the marketability of the shares.Investors’ ratios
Several ratios are used by, or at least made available to, investors that give measures
of some aspects of the ordinary shares’ performance. For leading businesses, these
are published daily, together with the daily share price, by most of the more serious
national newspapers. The three principal ratios (which were introduced in Chapter 3)
are described below.Price/earnings ratio (P/E)
Here the current price per share is expressed as a multiple of the earnings per share
(profit for the year divided by the number of ordinary shares that the business has
issued). The profit figure used in the calculation of the ratio is that for the most
recently reported year.
Shares with large P/Es are those that are highly priced for their historical earnings
level, indicating the market’s faith in the future of the business and its ability to
grow.Dividend yield (DY)
The dividend yield expresses the gross equivalent of dividends per share paid in
the most recent year as a percentage of the current market price. It gives some idea
of the rate of return that the dividend represents. This may be compared with returns
from other investments to try to assess the particular share. To the extent that, over
a period, capital gains and losses may be as important in amount per share as divi-
dends, DY is (to say the least) an incomplete measure of the benefits of ownership of
the share.Dividend cover (DC)
Dividend cover expresses the earnings per share, after prior claims have been
satisfied, as a multiple of the actual dividend per share paid from those earnings.
It gives some indication of the extent to which the business’s profits are paid out as
dividends and to what extent they are ploughed back into the business.Much of what we have already discussed in this book, on such matters as the import-
ance of risk, calls into question the value of relying on the above ratios. It must be
said, however, that such ratios are widely available to investors and, therefore, are
probably used by them. We shall discuss the issues relating to the choice of dividend
levels in Chapter 12.Factors for the business to consider on equity financing
Issue costs
Issue costs vary considerably according to the method used to raise the new equity
and the amount raised, ranging from virtually nothing up to about 11 per cent of the
new finance raised (London Stock Exchange 2006). We shall consider this in more
detail when dealing with the various methods in the following section.