Ch5-Issue of Securities Flashcards
OBTAINING A STOCK EXCHANGE QUOTATION
quoted securities are called listed securities
What are the reasons for seeking quotations?
obtaining a quotation has costs(accountants’, solicitors’, and brokers’ fees) as does maintaining a quotation(an annual fee paid to the stock exchange). Why do companies incur these costs?
- To raise capital for the company
getting a quotation allows a company to sell its shares on a wide market and raise large sums of money. - To make it easier for the company to raise further capital.
it will be easier to sell new shares in the future. It will be easier to acquire debt because the investors will feel safer that the company meets the stock exchange’s requirements. - To give existing shareholders an exit route
a quotation provides an exit route for venture capital investment. - To make shares more marketable and easy to value.
this helps with the inheritance and capital gains tax calculations. Companies offer share schemes to motivate their staff. this is more attractive when shares are quoted.
The advantages of remaining a private company.
~shares remain with a small group of shareholders.
~a less diverse group of owners mean that principal-agent problems are avoided
~fewer rules and regulations mean less costs incurred
~it can be the desire to continue the family tradition
The disadvantages of remaining a private company
~cannot sell shares to the public
~lenders cannot rely on the company to satisfy the requirements of a stock exchange
~there is a limited market for shares
~shares are not easy to value
What is an Offer for sale at a fixed price?
how is this offer for sale made?
how are shares sold instead of issuing them to the public?
the method of obtaining the stock exchange quotation while also raising new money.
~in an offer for sale at a fixed price, a predetermined number of shares is offered to the public at a specified price.
~the company sells shares to the issuing house.
the issuing house sells the shares to the public. Issuing house underwrites the issue.
issuing house is part of an investment bank.
they are advisers to the company.
what is the structure for the timetable for an offer for sale?
- One year before the offer
Create a positive image for the company. Make the company known to the public(make a public limited company. - Few weeks before the issue
issuing house advice on the price to be set. No final price will be made yet. - Issuing the prospectus
a price is set and a prospectus is made available to the public. The prospectus includes the company’s activities, financial position, reasons for the issue, and the people involved in the issue. - Applications
the application is made available for about a week after the prospectus has been issued. It might occur that the shares are oversubscribed by the time the application close hence the company has to determine which offers to accept. - Letters of acceptance
Letters of acceptance are sent out to successful applicants and refund cheques to those applications were rejected.
What is offer for sale by Tender?
How are the tenders accepted and rejected?
~The issuing house invites members of the public to submit a tender with the number of shares and the price they are willing to pay.
~ the issuing house will determine the strike price after the applications close. The applicants above the strike price are accepted and those that are below the strike price are rejected. All successful applicants will pay the strike price.
What are other methods of obtaining a listing?
- Offer by subscription
similar to offer for sale at a fixed price or by tender.
the company sells shares directly to the public. The company bears the risk of under subscription. - Placing
The issuing house buys shares from the company and sells them to the investors - Introduction
does not involve the sale of any shares. The existing shares will be quoted in future in the stock exchange.
What is the role of underwriting?
~ a form of insurance against the risk of an unsuccessful issue.
What are the processes of underwriting?
~the company sells the shares to the issuing house
~the company will pay the issuing house a fee
~the issuing house arranges the sub-underwriting(they do not want to retain the entire risk)
~the sub-underwriters agree to take a proportion of the shares that are not bought by the public in return for a commission.
~ shares are not overpriced.
~the issuing house and sub-underwriters will make a profit if the shares are fully subscribed.
~they purchase the shares that are not bought(partly undersubscription)
What is rights issue?
what are the main effects of a successful rights issue?
What is the purpose of the rights issue?
timetable for a rights issue.
~ Shares are offered to the existing shareholders in proportion to their holding. The price will be at a discount rate.
~new shares are created
~new money is raised for the company
~the value of the company increases by the money raised
~ the price of the share will fall depending on the extent of the discount rate and the shares issued.
~to raise more money.
~few weeks, there is a discussion of the possibility of an issue with advisers.
Formula for market capitalisation
what is the share price before rights issue?
what is the price per share after rights issue?
what is the estimation of ex-rights share price?
P x Number of shares
P-the share price
~market capitalisation/number of shares
~(original market capitalisation + extra value)/total new number of shares
extra value + new money raised - expenses of the issue +/-change in value based on the market
what are scrip issues?
what is the impact of a scrip issue?
what is the purpose of scrip issues?
what is the new share price?
~ free shares to all ordinary shares
~new shares are created no money is raised value of the company is unchanged price per share should fall value of shareholder's holding is unchanged shareholders' reserve
~marketability something for nothing past profitability Future confidence increased dividends a more reasonable rate of dividend
~old share price x original number of shares/total shares including scrip issues
