5. Equities Flashcards
How do companies raise their initial capital?
Through capital, and through loan stock.
What is important to note about those that hold loan stock?
They are creditors of the company, the company owes them a debt. They have no ownership interest in the company.
Who takes more risk, bond holders or shareholders?
Shareholders - bonds holders rank higher in priory in the event of liquidation. However they will receive the capital lent on maturity, plus interest, but no more even if the company is doing very well
How are shares generally characterised?
As relative insecurity of income and capital over the short term, but a much higher probability of producing real growth over time than cash and bonds
How common are ordinary shares (common stock) in global equity markets?
They are the most common form of share.
Ordinary shares are usually issued in which form; registered form or bearer form?
Registered form - meaning that ownership is recorded in a register.
How do bearer shares differ from registered shares?
No register is maintained - simple possession of the certificate is sufficient proof of ownership.
Shareholder rights are set out in what document?
Articles of Association
Explain how dividends work on ordinary shares?
They are variable, and paid at the discretion of the company. Younger companies may reinvest profits and not pay dividends.
Do ordinary shareholders have voting rights?
Yes. They can vote on resolutions at general meetings.
In the event of liquidation, when are ordinary shareholders paid?
At the very end, after all other parties.
What are A shares, often referred to as?
Non-Voting shares - they exist to raise equity financing without diluting voting control.
Explain what are partly paid shares?
Where investors only pay a portion of the sum due. The issuer will call the additional funds at pre determined future dates.
Do all companies quoted on the LSE need to have preference shares?
No, they must have ordinary shares, but not preference shares.
Preference shares pay what type of dividend?
A fixed dividend. If profits are available to pay dividends they must firstly be paid to preference shareholders.
Do preference shares carry voting rights?
Generally no, however these can be activated for example if dividends are not paid for some time.
Explain the order of repayment in the event of liquidation for a preference shareholder?
They are repaid after bond holders but before ordinary shareholders. The amount repayable is limited to the nominal value of the preference shares.
By default are preference shares usually cumulative, or non-cumulative?
Cumulative
Explain what are cumulative preference shares?
If a dividend hasn’t been declared in a previous year, then than the company must pay this in later years to preference shareholders.
By default are preference shares participating, or non participating?
Non participating
Explain what are participating preference shares?
Usually with preference shares the dividend is a fixed amount, however participating preference shares have the ability to particulate in the surplus profits.
What are fully participating preference shares.
They’re entitled to a share in capital repayment in excess of nominal value.
What are redeemable preference shares?
Shares where the issuer can repay the shareholders at a predetermined price (often more than the nominal value, ie at a premium) on future or specified dates.
What are convertible preference shares?
Preference shares that enable the shareholder the option to convert their shares to ordinary shares on predetermined future dates, at specified prices.
When are convertible preference shares popular?
In company restructuring - the shareholder will be happy with that reassurance of fixed term dividends with the option of converting into ordinary shares if the company recovers.
What is a warrant?
A warrant gives the holder the right to buy a company’s shares over the life of the warrant at a fixed price.
What are warrants usually attached to?
Corporate bonds
How does a corporate bond with a warrant, differ from a convertible bond?
A corporate bond will continue to exist even if the warrant is exercised, whereas the convertible bond will covert into shares and the bond no longer exist.
The attachment is a warrant is seen as what? What does it enable the issuer to do?
The warrant is seen as an inducement and enables the issuer to pay a lower coupon
Explain who issues equity warrants vs equity options?
Warrants - the companies
Options - the writer
What type of shares are delivered with equity warrants vs equity options?
Warrants - new shares
Options - existing shares
Equity warrants vs equity options typically carry what maturities?
Warrants - greater than 1 year
Options - 3 - 12 months
Where are equity warrants and equity options traded?
Equity warrants - on stock exchange
Equity options - on derivatives exchange
Explain the types of warrants?
Right to buy the underlying share only - American or European warrants
How can warrants be settled?
Physical settlement only
How can options be settled?
Cash or physically settled
What three factors are considered when calculation a shares value?
Forecast on company’s cash flow
What is one of the widely used models to calculate share price?
Gordon’s growth model
What is said to be the problem with Gordon’s Growth model?
It assumes that the dividends will grow at a constant growth rate, and the uses a discount rate to calculate the present value of the share.
What are the three key equity valuation methods used by analysts.
- Earnings per share (EPS)
- Price/Earnings Ratio
- Net Asset Value Per Share
What is the formula for Earnings Per Share?
What is the formula for Earnings Yield (%)
What kind of investor will use Earnings Per Share (EPS)?
Investors that are not reliant on dividend streams - instead they’re more interested in a companies overall earnings instead of the element distributed by way of dividend.
What is the Price/Earnings Ratio?
What are the three mains reasons that P/E ratio is a useful tool for investors?
- Relevance - analysing shares performance on the basis of its earnings rather than its divided record.
- Comparisons - can be useful for comparing shares in different companies in similar industries.
- Risk
a. Low P/E can indicate high level of risk, and poor prospects for profit growth)
b. High P/E can indicate low level of risk and good prospects for profit growth).
A company with a P/E lower than average for its sector of industry could have the potential for what?
An upward correction, providing that the market expects profits to improve the future (and shares are regarded as cheap) or it could indicate that a company is in financial difficulties and prospects for recovery are uncertain.
What is the calculation for Net Asset Value
NAV = assets - liabilities
What is the formula for NAV per share?
Where is NAV not a useful calculation?
Where most of a companies value is tied up in the skills of their employees, such as law firms, and architects.
What is an indice?
A measure of the performance of a country’s stock market, or section of that market?
What are the top 5 stock exchanges by market cap?
- NYSE (US)
- NASDAQ (US)
- Shanghai Stock Exchange (China)
- Euronext (Europe)
- Japan Stock Exchange (Japan)
The LSEs regulatory news service enables companies to meet their regulatory requirements how?
By easily making announcements and financial communications.
What is an ADR (or GDR)?
An ADR represents ownership of shares in a foreign company (often in an emerging equity market) traded on a US market. Enables US investors to buy shares in foreign companies without undertaking cross border transactions. They will be priced in USD, pay dividends In USD.
