2.1 Equity: Types and Features

Question 1

Share capital formula

Answer 1

Number of shares * NV

Question 2

Market cap formula

Answer 2

Number of shares in issue * market price of share

Question 3

Partly paid share meaning

Answer 3

Not all of nominal value was paid at issue

Question 4

Cumulative preference shares

Answer 4

Right to receive dividend that is rolled over into next period

Question 5

Redeemable preference shares

Answer 5

Right for issuer to buy back shares for agreed price in future

Question 6

Dividend for preference and ordinary

Answer 6

Pref- fixed
ord- variable

Question 7

What is an ADRs

Answer 7

Used by non-US companies in order to encourage US dollar investors to buy equity stake

Question 8

ADR form, settlement time, currency

Answer 8

Bearer
T+2
$ denominated and $ dividend

Question 9

ADR rights issue options

Answer 9

Cant take part, can only receive cash

Question 10

What is a warrant

Answer 10

Right to subscribe for new shares from a company at a fixed price on a future date

Not part of ordinary share capital

Question 11

Difference between covered warrant and normal warrant

Answer 11

Warrants issue new shares with maturity more than a year

Covered warrants sold by IB using existing shares

Question 12

Conversion premium for warrant

Answer 12

warrant price+ exercise price- current share price

Question 13

A company has net assets of £1,000. The nominal value of its ordinary shares is £1 and there are 500 in issue. The nominal value of its preference shares is also £1 and there are 300 in issue. If wind-up costs are £90 and, just before the company was delisted and liquidation procedures began the preference shares were trading at 120p, how much will be left to pay-off the ordinary shareholders?

Answer 13

Preference shareholders receive the nominal value of the share on winding-up, so the ordinary shareholders receive £1,000 - £300 - £90 = £610.

Question 14

Which of the following is NOT true of preference shares?

Answer 14

In case of liquidation, holders of preference shares have priority in terms of the payment of dividend arrears over ordinary shareholders

In liquidation, preference shareholders have priority over ordinary shareholders in the repayment of the nominal value. Unless the articles specify otherwise, preference dividends will not usually be paid in liquidation.

Question 15

The authorised share capital sets out:

Answer 15

The maximum number of shares that can be issued to shareholders, valued at nominal value

Question 16

Which of the following is the main purpose of authorised share capital?

Answer 16

To place a limit on the amount of share capital that can be issued to existing and new shareholders

Question 17

Which of the following would give rise to a capital gain only?

Answer 17

Commercial paper

Commercial paper is short-term unsecured debt financing issued by a company. It is similar to Treasury bills. Generally they do not pay any interest and therefore are issued at a discount (like Treasury bills).
All the rest of the financial instruments listed are likely to pay interest, or be dividends which will be subject to income tax or corporation tax.

Question 18

Which of the following is true of preference shares?

Answer 18

They do not carry pre-emption rights
Explanation

Question 19

With regards to depositary receipts, what is the longest time period permitted for grey market trading?

Answer 19

3 months

Question 20

Do ADR carry right to vote

Answer 20

sometimes

Question 21

How much would be recorded by holders of preference shares in 2013 for dividends under the following scenario?
A company has a 6% non-cumulative preference share in issue. In 2010, 2011, and 2012 no dividends are paid. In 2013 5p is paid for each ordinary share.

Answer 21

These preference shares are not cumulative. Since the company paid ordinary shareholders in 2013, preference share must be paid their fixed dividend of 6%.