2a Equities

Question 1

Why does a company issue shares?

Answer 1

To raise capital

Question 2

Who manages a company?

Answer 2

The board of directors

Question 3

Share capital - what is this?

Answer 3

Number of shares * nominal value of those shares

Question 4

What is the nominal value of shares?

Answer 4

Fixed legal value of shares

Question 5

What is authorised share capital vs issued share capital?

Answer 5

The maximum amount of share capital that can be raised by company.
Whereas issued share capital is how much has actually been issued.

Question 6

Calculation of market capitalisation

Answer 6

No. shares in issue * share price

Question 7

What is the free float?

Answer 7

Looks at not just the number of shares not in issue but the actual availability of stock for public investment.
Excl holdings by directors or pension funds - basically excludes anything not held to investing public)

Question 8

What are the 3 characteristics of ordinary shares?

Answer 8

1. Confer rights to vote or appoint a proxy
2. Receive dividends, subject to preference SHs claims
3. Receive balance of assets left after all other payouts in the event of a winding up

Question 9

List 3 special types of ordinary shares

Answer 9

A and B shares - have rights attached to them
Redeemable shares - these shares issued on terms that the company will/may buy back in future
Partly paid shares - full par value hasn’t been paid by their holders - issuing firm has to make a ‘call’ collecting the remaining amount

Question 10

Ordinary vs preferred shares: priority?

Answer 10

Ord 2nd
pref 1st

Question 11

Ordinary vs preferred shares: dividends?

Answer 11

ord - variable (based on profits)
pref - fixed (against nom value of share)
Both discretionary

Question 12

Ordinary vs preferred shares: voting rights?

Answer 12

ord - yes
pref - no but can be activated

Question 13

When can pref shares activate their voting rights?

Answer 13

if firm doesn’t pay dividends for a long period of time

Question 14

Ordinary vs preferred shares: special features?

Answer 14

ord - A/B shares, redeemable, partly paid
pref - cumulative, participating, convertible, redeemable

Question 15

What is normal type of preferred share?

Answer 15

Normal pref share is cumulative share - if directors don’t pay you divi this year, it will roll onto next year

Question 16

What is a participating feature for preferred share?

Answer 16

Means a variable dividend
Participate in further divi’s issued by the company

Question 17

What does convertible feature mean in terms of pref shares?

Answer 17

Option to convert to a ord shares at the option of the investor

Question 18

Adv of to company of equity

Answer 18

Raise capital
Servicing varies w performance
Discretionary payments
No redemption

Question 19

Disadv to company of equity?

Answer 19

Sacrifice of control - some SHs are activists
Reputation - scrutinising company
Could affect payout - might be expected to be high

Question 20

Adv of equity to investor?

Answer 20

Return linked to performance
Potential gain as well as income
Ownership rights

Question 21

Disadv of equity to investors?

Answer 21

They have a low ranking -this is called risk capital - last to be paid out
Potential volatility caused by unrelated factors.

Question 22

Premium ?

Answer 22

Excess of issue price over nom value

Question 23

Nom value

Answer 23

The legal face value on the share

Question 24

Market value

Answer 24

Second hand price of a share

Question 25

Issue price

Answer 25

Price at which a share is initially sold by the company

Question 26

ADR - what is this?

Answer 26

Certificate that represents equity in an overseas company

Question 27

Creation process of ADR’s? Assuming British plc and American investor

Answer 27

1. PLC issues sterling shares to a UK branch of an American bank
2. Bank pays PLC in sterling for shares.
3. Bank keeps sterling shares in a safe place by acting as a depository
4. Bank then issues ADRs, denominated in dollars to dollar investors

Question 28

Features of DRs?

Answer 28

One DR may represent several underlying securities - usually one DR may represent 100 shares in x plc.
Anonymous document
It is a bearor document
A lot have voting rights an other similar benefits of shares

Question 29

No central registry/bearer document - how does this effect divi payment of DRs?

Answer 29

Bank doesn’t know who to pay.
Up to investor to claim divi from bank.

Question 30

Benefit of DRs?

Answer 30

Way to get involved with other country plc without actively getting involved in FX mkt

Question 31

ADRs - denominated in what, issued where, traded where?

Answer 31

Denominated in dollars
Issued in US
Traded worldwide

Question 32

GDRs - denominated in what, issued where, traded where?

Answer 32

Denom usually either dollars or euros
Issued outside US
Traded worldwide

Question 33

Adv + disadv of DR for company

Answer 33

+ve - can raise capital internationally
-ve - lack of transparency on beneficial ownership

Question 34

Adv + disadv of DR for investor

Answer 34

Access to overseas companies in domestic currency/mkt
FX risk added to mkt risk
Benefits may differ depending on the terms of the DR

Question 35

Warrants - definition

Answer 35

Right to subscribe for new shares from a company at a fixed price on a future date
Not part of ordinary share capital of company

Question 36

Issuance of warrants - how is this done?

Answer 36

Typically issued as a sweetener with other investments (eg corp debt)
Detachable or non-detachable form

Question 37

What is a conversion premium

Answer 37

Warrant price + exercise price - current share price

Question 38

Who is the warrant issued by?

Answer 38

an organisation, not the company itself