Capital Raising Events - CH6

Question 1

What is the Structure of a Rights Issue?

Answer 1

• New shares offered in proportion to existing shareholders holdings.
• Offered at a discounted price.
• Right to participate in the issue is shareholders who have cum rights.

Question 2

How is the share quantity and price determined for a rights issue?

Answer 2

By looking at how much capital is to be raised.

Question 3

What is meant by cum-rights?

Answer 3

Who holds the shares before trading is conducted on a without rights basis.

Question 4

When does the cum-rights period begin?

Answer 4

When the announcement is made. Lasts for 10 days. Shareholder makes decision on acceptance day.

Question 5

How are shareholders advised of a rights issue?

Answer 5

By an allotment letter.

Question 6

What does the allotment letter detail?

Answer 6

• Shareholders existing holdings.
• Rights allocated over new shares.
• Acceptance date.

Question 7

When does the ex-rights begin?

Answer 7

Day after the allotment letter is issued.

Question 8

What is the Theoretical Ex-Rights Price?

Answer 8

The new market price of shares which accounts for the dilution of new shares.

Question 9

What is a Rights Issue?

Answer 9

Offering new shares to exisitng shareholders in proportion to existing holdings for cash.

Question 10

Does the shareholder have to participate in the rights issue?

Answer 10

They have the right but not the obligation to purchase shares. They can sell their rights nil-paid. Rights have an expiry date.

Question 11

What is the reason for a rights issue?

Answer 11

To raise equity finance for survival, takeovers of a rival and expansion.

Question 12

What are Pre-emptive Rights?

Answer 12

Giving shareholders the right to subscribe to new shares before offering to the public.

Question 13

What is the reasoning behind pre-emptive rights?

Answer 13

Need to gain consent before diluting a shareholders interests / position. Means no equity, warrants for cash or convertibles can be issued.

Question 14

How do shareholders give consent to pre-emptive rights?

Answer 14

By signing a resolution at a special meeting.

Question 15

On acceptance day, shareholders have 4 options?

Answer 15

• Take up the rights.
• Sell rights nill paid in full.
• Sell part and preserve current stake without dilution.
• Take no action.

Question 16

How do you calculate Nil-paid value?

Answer 16

Theoretical Ex-Rights Price - Rights Issue Price.

Question 17

What is a Bullet Maturity?

Answer 17

Pay the principal at maturity all in one go, not over a series of payments (more risky as you have to make sure you have sufficient funds at maturity date).

Question 18

What is a Sinking Fund?

Answer 18

Issuer sets aside a certain amount of cash towards maturity each year. Either held or spend on other bonds below par value.

Question 19

What is a Callable bond?

Answer 19

Issuer has the right, at specified points in the bonds life, to redeem some, or all, of the bonds at a pre-agreed amount, often at par-value.

Question 20

What is a Puttable bond?

Answer 20

Bond investor has flexibility to require bonds to be redeemed early, after giving the issuer some notice.

Question 21

What is a Bonus Issue?

Answer 21

Company converts capital reserves into shares (no money raised, only restructures).

Question 22

What is the rationale behind a bonus issue?

Answer 22

Lower the price of shares.

Question 23

How does a bonus issue work?

Answer 23

Company converts capital reserves into shares which it offers to it’s shareholders proportionally to their existing holdings.
New shares rank equally with existing shares.
Nominal value of the company remains the same, but EPS and DPS fall as dividends need to be spread across more shares. Thus the market price for shares falls at the same proportion as EPS and DPS. Market cap remains unchanged.

Question 24

What is a Stock Split?

Answer 24

Splitting a share into a number of shares.

Question 25

What is the rationale behind a stock split?

Answer 25

Lower the share price to make shares more liquid for investors.

Question 26

What is the difference between a stock split and a bonus issue?

Answer 26

Bonus issues affect the capital line, as you’re swapping capital for shares. Whereas a stock split does not.

Question 27

What is a Reverse Stock Split (consolidation)?

Answer 27

Combine shares in order to increase their price (makes them more marketable if their price is too low).

Question 28

What is the impact on share capital from a reverse stock split?

Answer 28

Total will remain the same, but the subdivision will be into a smaller number of shares each with a larger nominal value.

Question 29

What are the 2 classes of securities in an income event?

Answer 29

Bonds - coupons.
Equities - dividends.

Question 30

Characteristics of Bonds?

Answer 30

• More predictable income than equities - contractual nature means investors know in advance how much income is expected and when it’s paid.
• Bonds could pay an attractive coupon relative to the prevailing interest rate.
• Issuer of the fixed-coupon benefits on predictability (how much coupons need to be paid and how much needs to be repaid).
• Issuer benefits on locking in interest rate - if rates rise they will have a better deal than if they took the prevailing rate.

Question 31

Where does awkwardness come from for income events on Bonds?

Answer 31

• FRNs - income events are quarterly and coupon is based on a published rate of interest (SOFR) thus variable.
• Issuer may have difficulty meeting contractual payment of bonds due to cash flow constraints.

Question 32

Charactertistics of Equities?

Answer 32

• Less predictable than bonds - divs rely on profitability of the firm.
• Benefits to investor - divs predictable in terms of frequency.
• Benefits to issuer of equity financing.
• Preference shares.

Question 33

What are Preference Shares?

Answer 33

Hybrid instrument - income event is a div but rate of div is specified in advance (increases the predictability).