Asset Classes 3 - Equities(a) Flashcards
What’s the difference between ordinary and common shares?
- Ordinary shares have a nominal value (eg, ABC plc Ord 50p). This style is used in the UK, Australia, Bahrain, China, Singapore and Spain.
- Common shares (also called common stock) have no nominal value. This is the preferred legal form in the US, Dubai, Egypt, Greece and Japan
How are shareholders funds calculated and what do they constitute?
- all the company’s assets less all its liabilities
- share capital, reserves and retained profits.
How often to companies pay dividends in the UK?
Twice a year: an ‘interim dividend’ part way through, and a ‘final dividend’ once final results are announced
What are redeemable shares and how are they issued
- Redeemable shares are issued by a company, with an agreement to buy back these issues from the shareholders after a certain date or at some specified future date.
- These shares cannot be used as a single financing method, and must form part of a package of ordinary shares containing non-redeemables.
What are dual class shares?
Companies offer:
- one share class to the general public with limited voting rights (called ‘non-voting ordinary shares’ or ‘A’ shares)
- another share class for company founders and executives which has more voting rights so that they maintain majority control of the company (called ‘founder shares’).
What are deferred ordinary shares?
- Typically issued to the founder members or executives of a company.
- Holders usually receive little or no dividend until all other classes of shareholder have been paid, or if the ordinary shareholders have been paid a specified minimum dividend (thus, deferred ordinary shares are riskier than other share classes).
- Entitled to a larger share of the company’s profits in the future.
What are deferred dividend shares?
- Holders of these shares have full voting rights, and rank equally with the other ordinary shareholders if the company is liquidated.
- However, the payment of dividends to them is deferred until a condition has been met (for example, a specific amount of time having elapsed since the shares were issued).
- These usually trade at a lower price than the ‘ordinary’ ordinaries; they may also, during the deferral period, suit investors who are more interested in capital growth than income
What are the main features of preference shares?
- Dividends on preference shares are generally fixed and are expressed as a percentage of the nominal value of the shares.
- Preference shareholders get priority in the payment of their dividends over ordinary shareholders. That is, ordinary shareholders will not receive their dividend unless and until preference shareholders have received their dividend. If there is not enough profit to go round, ordinary shareholders may go short.
- Preference shareholders usually also take priority when the company goes into liquidation. However, all they receive will be the nominal value of their shares (not the market value).
What are the five different types of preference share?
- Cumulative – if the company has not made enough profit to pay the preference shareholders’ dividends in one year, then the unpaid dividend is accumulated and will be paid when the company does have sufficient profits.
- Non-cumulative – any unpaid dividend is not accumulated, and preference shareholders must wait until the next dividend declaration to receive anything.
- Participating – preference shareholders receive a fixed dividend (as for traditional preference shares), but they also have the right to participate in surplus profits, along with the ordinary shareholders.
- Redeemable – the company has the right to redeem the preference shares at some point in the future. This may be on a fixed date, or at a time chosen by the company.
- Convertible – the preference shareholders have the right to convert their shares at some point in the future to a specified number of ordinary shares.
What are LBOs?
- Involve a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition.
- To do this, the financial sponsor will raise acquisition debt which ultimately looks to the cash flows of the acquisition target to make interest and principal payments.
- Acquisition debt in an LBO is often non-recourse to the financial sponsor and has no claim on other investment managed by the financial sponsor.
What is Growth Capital and it’s uses?
Equity investments, most often minority investments, in relatively mature companies that are looking for capital
a) to expand or restructure operations,
b) enter new markets
c) finance a major acquisition without a change of control of the business.
What is Mezzanine Capital and what is it used for?
- Mezzanine capital refers to subordinated debt or preferred equity securities that often represent the most junior portion of a company’s capital structure that is senior to the company’s common equity.
- Often used by private equity investors to reduce the amount of equity capital required to finance a leveraged buy-out or major expansion.
What is the effect of a bonus issue on a company’s accounts?
- Some of the company’s reserves (eg, its share premium account, reserves from the revaluation of assets, and retained profits that have not been distributed to shareholders) are converted into share capital, thereby increasing the number of shares in issue.
- The effect can be to simplify the company’s statement of financial position.
What is the difference between a bonus issue and a stock split?
Share splits occur when a company reduces the nominal (par) value per share of its issued share capital, WITHOUT altering the value of its total nominal share capital (contrast this with what we have seen with bonus issues)
What is the order of liquidation for bonds and equities?
- Secured bondholders and debenture holders
- Unsecured bondholders
- Preference shareholders
- finally, ordinary shareholders.
