QUESTION

1.         The following table provides information on turnover, liquidity and market capitalisation in the ASX over the last 6 years.

Source: Data sourced from www.asxgroup.com.au/media/PDFs/ASX_Limited_Annual_Report_2011.pdf Accessed 12th April, 2012.

(a)       How is market capitalisation calculated?

(b)       There was a very big increase in market capitalisation from $1.2t in 2006 to $1.6t in 2007. Give three possible reasons for this increase in market capitalisation?

(c)       In 2010, turnover was $1,359b but dropped to $1,339b in 2011. How would this figure of $1,339b have been calculated?

(d)       Liquidity was 99% in 2011? How was this liquidity figure calculated? What does it mean if the liquidity figure is less than 100%?

2.         The following table contains information on the market capitalisation of the top 10 stock exchanges in the world as at the end of 2011.

Source:            www.world-exchanges.org/files/file/stats%20and%

20charts/2011%20WFE%20Market%20Highlights.pdf

Accessed 11^th April, 2012.

From 2010 to 2011, there was a drop in the market capitalisation of all stock exchanges mentioned in the table above. Why do you think there was such a drop across so many different stock exchanges around the world?

3.         The following questions relate to the MSCI World Index,

(a)       How many countries are included in the MSCI World Index? You may need to search online for this information.

(b)       How many companies are included in the MSCI World Index? Refer to Appendix 3 for more information. Typically, where are these companies listed?

(c)       Given the information contained in Appendix 3 and also in Appendix 6, which of the Top 20 listed companies in Australia will be included in the MSCI World Index?

(d)       According to Appendix 5, Australia is currently ranked number 8 and has an MSCI World Index Country weighting of approximately 3.5%. How do you think this figure is calculated?

(e)       Australia’s position in the MSCI World Index Weightings was covered in the Week 7 lecture over the period 30 June 2001 to 30 June 2008 (See Appendices 1 & 2). More recent information on the weightings as at February 2^nd 2012 is contained in Appendix 5. Has Australia’s percentage weighting changed much in these most recent figures?

(f)        There are many managed funds which invest in international shares. One example is the “Ord Minnett Global Dynamic Fund” (https://client.ords.com.au/documents/GDF_FactSheet.pdf). The benchmark used for returns in that fund is the MSCI World Index. Given that Australia’s ranking in that index has increased in the last decade, how will that impact on investment by this fund in the ASX?

(g)       Why do you think the ASX has grown its percentage weighting over the 11 year period from June 2001 to June 2012?

4.         The following is some information on the ASX and the NZX. If you were a company looking to list, which exchange would you choose? Clearly explain your reasoning.

5.         The following graph was sourced from the ASX website. The graph refers to initial capital (also referred to as IPO capital) and secondary capital raised by companies on the ASX in each year shown. Note that the word “secondary” is being used in a different sense here than the way that it is used in “secondary transfer market”. What do you think the word “secondary” means in this situation?

Explain how you would interpret this graph. In the Financial Year 2009, almost all the capital raised was secondary capital. How do you explain this? In Financial Year 2011, the amount of IPO capital was about equal to the amount of secondary capital raised. How would you interpret this?

Source:www.asxgroup.com.au/media/PDFs/ASX_Limited_Annual_Report_2011.pdf  Accessed 12^th April, 2012,

Appendix 1:    MSCI World Index Weighting 30 June 2001

MSCI World Index Weightings 30 June 2001

(NOTE: Australia’s weighting is approximately 1.5%)

Appendix 2:    MSCI World Index Weightings 30 June 2008

Source:  www.asx.com.au/smalltomidcaps/london/2009/download_presentations.htm

Appendix 3:    Information On Companies Included The MSCI World Index (As At March 2012)

Appendix 4:    The Top 10 Companies Included In The MSCI World Index (As At March 2012)

Source:            www.msci.com/resources/factsheets/index_fact_sheet/msci-world-index.pdf

Accessed 11^th April, 2012.

Appendix 5:    Country Weights And Number Of Companies In The MSCI World Index

NOTE:            According to the ASX, Australia is ranked 8. Its weighting in the MSCI World Index appears to be around 3.5%. It is just behind Germany (6) and Switzerland (7) at 3.6%.

Source:            www.msci.com/resources/factsheets/index_fact_sheet/msci-world-index.pdf

Accessed 11^th April, 2012.

Appendix 6:    Market Capitalisation Of The Top 20 Australian Listed Companies.

Source:            www.asx.com.au Accessed 11^th April, 2012

SOLUTION

Question 1: (a). The calculation of Market Capitalization is an important and major part of any formula for the valuation of stock. Market Capitalization, which is sometimes also called as market cap, is the total market value of all the shares of the company that are outstanding. This shows the value that has been placed by the market on the value of equity of the company.

The formula for the calculation of market capitalization is:

Market Capitalization = Number of outstanding shares x the stock price

Basically, Market Capitalization is the complied dollar value of all the outstanding shares of a company. The figure of market capitalization is utilized by the community of investment to find the size, of a company, as opposed to sales of total assets figures.

Example:

Suppose a company has 10 million shares outstanding, each with a market value of $50. Hence the market capitalization of the company is $500 million ($10,000,000 x $50 per share) .

(b). Market Capitalization of any company is a product of its existing market price multiplied by the total number of shares outstanding of a company. The outstanding shares are those issued and fully paid up out in the company’s total authorized shares, although the present market price is the price at which unit of a company is offloaded on an exchange.

On a exchange, the market capitalization is the product of all companies listed on the exchange multiplied by their respective present market price. The increase in the market capitalization shows that either new shares have been added and/or prices of shares of the companies are on the hike or that there has been a debt that is converted to equity and/or prices of companies have been raised. Increase in market capitalization is a good sign of a capital market.

Following are the factors that can lead the increase market capitalization of ASX Limited:

• Extra offer of shares in the main market
• Hike in the value of the market price of ASX Limited, or
• Conversion of debt into equities.

(c). Annual turnover of a company is its annual or yearly sales. So, annual turnover includes the total of all the sales made by the company during the year.

Therefore, the annual turnover of a company is calculated from the following formula:

Turnover = (number of agents or staff existing in the job during the time frame) x (number of months included in that time frame)

(d). The liquidity of company is a metrics that is used to know the quality of a company to pay-off its short-term debt responsibilities. The term liquidity includes many rations, such as current ratio, quick ration and operating cash flow ratio. With the calculation of all these ratios, the liquidity of the company is computed.

Liquidity less than 100% states that the company is not a condition to pay-off its short debt obligation completely.

Question 2: Market Capitalization of any company is a product of its existing market price multiplied by the total number of shares outstanding of a company. The outstanding shares are those issued and fully paid up out in the company’s total authorized shares, although the present market price is the price at which unit of a company is offloaded on an exchange.

On a exchange, the market capitalization is the product of all companies listed on the exchange multiplied by their respective present market price. Following are the factors that show drop in the market capitalization:

• Drop in the value of a company’s market place, or
• Delisting of companies, in case of total market value on the exchange

Question 3: (a). MSCI is a global stock market index of nearly 1600 stock across the world. It is overseen by MSCI Inc, which was formerly known as Morgan Stanley Capital International, ad is mainly used as a common standard for world or global stock funds.

In this index, Denmark, France, Finland,  Australia,Germany, Austria, Canada,  Belgium, Hong Kong, Greece, Israel, Ireland, Japan, Italy, New Zealand, Netherlands, Portugal, Norway, Spain, Singapore, Switzerland, Sweden, United States and United Kingdom are the companies included.

(b). In MSCI index, a total of 1611 companies are included.

(c). BHP Billiton Limited, Westpac Banking Corporation, Australian & New Zealand Bank Group, Commonwealth Bank of Americ, National Australia Bank, Telstra Corporation, Wesfarmers, Woolworths, Woodside Petroleum, Rio Tinto, Newcrest Mining, Westfield, CSL Ltd, QBE Insurance Group, Origin Energy, Santos Ltd, AMP Ltd, Brambles Ltd, Suncorp Group, Macquire Group will be top twenty companies to be included in the MSCI World Index.

(d). The MSCI World Index Country weighting is calculated with the help of the following formula:

Initial Security Weights = [{(Number of shares * price per share * inclusion factor) / FX rate}/ {(number of shares * price per share * Inclusion factor)/fx rate)}] * 100

And on the basis of this the ranking of any country is decided.

(e) The position of Australia in the MSCI World Index Weightings was captured in the Week 7 address over the period between 30 June 2001 and 30 June 2008. On the basis of the data provided in the Appendices, it can clearly be said that no there has not been much changes in the Australia’s percentage weighting, in these most recent figures.

(f) The increase in the ranking of Australia gives a chance to its companies to hold a place in the global market. With this, the stock value of the companies also increases, and these companies become capable enough to invite investments from many new individuals or group. This add to the funds of these companies, which is a positive sign.

(g) With the increase in the ranking of Australia, the company  ASX Ltd has also been benefited from this. And due to this, the percentage weighting of the company has grown over the 11 year period from June 2001 to June 2012.

Question 4: From the given data, I would have chosen ASXexchange, as it has higher market capitalization and has more number of shares, which increase the chances for a company to see growths in the future. Market Capitalization of any company is a product of its existing market price multiplied by the total number of shares outstanding of a company. The outstanding shares are those issued and fully paid up out in the company’s total authorized shares, although the present market price is the price at which unit of a company is offloaded on an exchange. On a exchange, the market capitalization is the product of all companies listed on the exchange multiplied by their respective present market price. The increase in the market capitalization shows that either new shares have been added and/or prices of shares of the companies are on the hike or that there has been a debt that is converted to equity and/or prices of companies have been raised. Increase in market capitalization is a good sign of a capital market.

The calculation of Market Capitalization is an important and major part of any formula for the valuation of stock. Market Capitalization, which is commonly also called as market cap, is the complete market value of the whole outstanding stock of the company. This shows the value that has been placed by the market on the value of equity of the company.

The formula for the calculation of market capitalization is:

Market Capitalization = Number of shares outstanding x the price of the stock

Basically, Market Capitalization is the total dollar value of all the outstanding shares of a company. The figure of market capitalization is used by investment community to find the size, of a company, as opposed to sales of total assets figures.

Question 5: The calculation of Market Capitalization is an important and major part of any formula for the valuation of stock. Market Capitalization, which is sometimes also known as market cap, is the total market value of all the outstanding shares of the company. This shows the value that has been placed by the market on the value of equity of the company.

The formula for the calculation of market capitalization is:

Market Capitalization = Number of shares outstanding x the price of the stock

Basically, Market Capitalization is the total dollar value of all the outstanding shares of a company. The figure of market capitalization is used by investment community to find the size, of a company, as opposed to sales of total assets figures.

Example: Suppose a company has 10 million shares outstanding, each with a market value of $50. Hence the market capitalization of the company is $500 million ($10,000,000 x $50 per share) .

Market Capitalization of any company is a product of its existing market price multiplied by the total number of shares outstanding of a company. The outstanding shares are those issued and fully paid up out in the company’s total authorized shares, although the present market price is the price at which unit of a company is offloaded on an exchange.

On a exchange, the market capitalization is the product of all companies listed on the exchange multiplied by their respective present market price. The increase in the market capitalization shows that either new shares have been added and/or prices of shares of the companies are on the hike or that there has been a debt that is converted to equity and/or prices of companies have been raised. Increase in market capitalization is a good sign of a capital market.

REFERENCES:

“R v London County Council”; Ex parte Entertainments Protection Assn Ltd , 1931 2 KB 215

Baldwin, R & M Cave, 1999, “Understanding Regulation, Theory, Strategy and Practice, Oxford”, Oxford University Press

Baker, C .R., 2005, “What is the meaning of ‘the public interest’ Examining the ideology of the American accounting profession”, Accounting, Auditing and Accountability Journal, v 18, pp 690-703

Majone, G., 1996, “Regulating Europe, London, Routledge”

Peltzman, S., 1979, “Toward a More General Theory of Regulation”, Journal of Law and Economics, v 19, pp 211-240

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