4. Equities

Question 1

What are the Memorandum and Articles of Association?

Answer 1

Memorandum; legal statement signed by shareholders agreeing to form the co.

Articles; rules about running the company agreed by shareholders, director and secretary

Question 2

What are the 4 main methods for IPOs?

Answer 2

Offer for sale:
- Fixed Price; marketed & underwritten, priced below expected market value
- Tender; shares issued to bids above the strike price
- Subscription; bids made above min price but issuer can pull out if not all shares sold

Placing: offered directly to financial institutions

Question 3

What are scrip issues and share splits?

Answer 3

Scrip issue:
New shares issued from reserves; simultaneous increase in shares and decrease in share price - no overall impact

Share split:
Splitting eg £1 share into 4 x 25p shares - no overall impact

Question 4

Key features of ordinary shares (4)

Answer 4

Company must have them
Carry voting rights & right to dividend
Last to be repaid on winding up
Shareholder liability limited to any unpaid call only (if they only part paid for their shares they become a debtor)

Question 5

Key features of preference shares (3)

Answer 5

Rank ahead of ordinary shares for dividends and capital repayment
Entitled to fixed dividends, usually lower than ordinary
No voting rights

Question 6

What are the 3 types of preference shares?

Answer 6

Cumulative; unpaid dividends are carried forward and paid in following year ahead of ordinary divs

Participating; fixed dividend & proportion of ordinary dividend

Convertible; right to convert to ordinary shares at set price & date - lower dividend but higher price

Question 7

What are warrants?

Answer 7

The right for the holder to receive ordinary shares at a set time and price

Question 8

What are the LSE’s 2 main stock markets?

Answer 8

Main market; must have been trading for 3 years and shares are 25% public - strict reporting requirements

AIM; smaller companies with fewer requirements

Question 9

What is the dividend yield calculation?

Answer 9

net dividend
_____________

share price

Question 10

What is the EPS calculation?

Answer 10

net profit
__________

no. shares

Question 11

What is the dividend cover calculation?

Answer 11

EPS
____________

net dividend

Question 12

What is the P/E ratio calculation?

Answer 12

share price
____________
EPS

Question 13

What is the Price Earnings to Growth ratio and what does it mean?

Answer 13

P/E ratio
____________________

annual EPS growth

0-1: higher growth potential (undervalued)
1: fair balance between cost & growth
>1: overvalued

Question 14

What is the net asset value calculation?

Answer 14

net assets
___________

no. shares

Question 15

What is the gearing calculation?

Answer 15

long-term debt*
________________
net assets

• debts >12m, pref. shares, debentures & loan stocks

Question 16

What is the panel of takeovers and mergers levy

Answer 16

Share sales & purchases >£10k subject to £1 charge

Question 17

Key features of SAYE-linked share option schemes? (5)

Answer 17

Employees can save £5-£500 per month for 3-5yrs
Receive tax free interest/bonus during this time
At maturity, employee has option to buy shares or withdraw cash
Strike price cannot be <80% of market price at start
Can transfer shares into ISA or pension within 90 days

Question 18

Describe free shares (share incentive plan) (4)

Answer 18

Employees granted up to £3,600p.a in shares
Held in trust for 3-5yrs
Income tax payable if withdrawn early, unless good leaver or company event
- charged on lower of MV @ award and MV @ exit

Question 19

Describe partnership shares (share incentive plan) (5)

Answer 19

Employees forego up to 10% salary (max £1,800)
Trust acquires partnership shares on their behalf
No income tax / NICs & employer claims deduction if held for 5yrs
Charge if withdrawn:
<3yrs; income tax & NIC @ MV of shares at exit
3-5yrs; lower of amount of salary foregone or MV of shares at exit
No charge if good leaver or company event

Question 20

Describe matching shares (share incentive plan) (2)

Answer 20

Employer matches shares bought by employer
Held in trust for 3-5yrs

Question 21

Define good leavers and company events?

Answer 21

Good leaver:
Death/disability
Redundancy/Retirement

Company event: e.g takeover