Chapter 2.1: Asset Classes - Equities Flashcards
Which of the following is true about preference shares?
AThey always carry the right to vote
BThe dividend can be waived
CThey are paid before debentures in the event of a liquidation
DThey only receive payment if ordinary share dividends have been made
B. Preference shares pay a fixed rate of dividend each year based on the nominal value of the share. The dividend on preference shares can be waived by the board of directors but cannot be varied.
How much would be recorded by holders of preference shares in 2013 for dividends under the following scenario?
A company has a 6% non-cumulative preference share in issue. In 2010, 2011, and 2012 no dividends are paid. In 2013 5p is paid for each ordinary share.
A Nil
B 24%
C 12p
D 6%
D. These preference shares are not cumulative. Since the company paid ordinary shareholders in 2013, preference share must be paid their fixed dividend of 6%.
A company has net assets of £1,000. The nominal value of its ordinary shares is £1 and there are 500 in issue. The nominal value of its preference shares is also £1 and there are 300 in issue. If wind-up costs are £90 and, just before the company was delisted and liquidation procedures began the preference shares were trading at 120p, how much will be left to pay-off the ordinary shareholders?
A £610
B £550
C £500
D £0
A.
Preference shareholders receive the nominal value of the share on winding-up, so the ordinary shareholders receive £1,000 - £300 - £90 = £610.
Which of the following is the main purpose of authorised share capital?
A To place a limit on the amount of dividends that can be declared by the directors
B To place a limit on the amount of share capital that can be issued to existing and new shareholders
C To place a limit on the amount of share capital issued through a rights issue
D To place a limit on the number of shares that can be issued to new shareholders
B.
The authorised share capital is the total number of shares that a company can have in issue without further approval from the shareholders. Therefore this places a limit on the number of shares that can be issued to existing and new shareholders. The authorised share capital can be increased by an ordinary resolution of the shareholders.
An investor has bought ordinary shares in a company that has now become insolvent. What pay-out will the investor’s ordinary shares receive if there are sufficient funds?
A The nominal value of the share
B The fair value of the asset that the share was secured against
C The market price of the share at the point insolvency was declared
D Any surplus after all others have been paid
D - Ordinary shareholders only receive a pay-out after all others have been paid.
Which ONE of the following is the BEST description of the return on a preference share:
A Usually fixed - provided that the dividend is declared by the directors
B Fixed - as the dividend is a fixed percentage of the nominal value
C Variable - as the directors decide the amount of dividend to be paid
D Variable - as the dividend is paid after the ordinary dividend
A
Holders of preference shares generally do not have the right to vote on company affairs, but they are entitled to receive a fixed dividend each year (as long as the company feels they have sufficient profits).
Which of the following is true about preference shares?
A They always carry the right to vote
B They carry the right to vote when the company fails to pay a dividend
C They are paid before debentures in the event of a liquidation
D They rank below ordinary shares in the event of a liquidation
B
Preference shares carry voting rights in the following circumstances:
1. Preference shares which carry a fixed percentage of a notional value but fail to pay a dividend
2. Zero-coupon preference shares
Which of the following would give rise to a capital gain only?
A Shares
B Gilts
C Commercial paper
D Convertible bond
C
Commercial paper is short-term unsecured debt financing issued by a company. It is similar to Treasury bills. Generally they do not pay any interest and therefore are issued at a discount (like Treasury bills).
All the rest of the financial instruments listed are likely to pay interest, or be dividends which will be subject to income tax or corporation tax.
A participating preference share:
A Entitles the holder to additional dividends
B Allows the holder to appoint a receiver should the company not pay a dividend
C Entitles the holder to receive any arrears in dividends should they not be paid at the end of any one year
D Allows the holder the right to convert into a predetermined number of ordinary shares
A
Shareholders, whether ordinary or preference, never have the right to appoint a receiver - so not B.
C describes a cumulative preference share, not a participating one.
D describes convertible preference shares.
What is the best definition of a bearer security?
A An anonymous, freely-transferable security
B They pay quarterly interest
C They are registered securities
D American depository receipt
A
A £5 note and a eurobond are examples of a bearer security. Because no register exists for bearer shares, the owner has complete anonymity. For a bearer document, proof of legal title is achieved by having physical possession of the security. This is in contrast to registered securities, where legal title is proved by the security being registered in the owner’s name
Which of the following is NOT true of preference shares?
A In case of liquidation, holders of preference shares have priority in terms of the payment of nominal value over ordinary shareholders
B In case of liquidation, holders of preference shares have priority in terms of the payment of dividend arrears over ordinary shareholders
C Preference shares usually pay dividends fixed as a percentage of the nominal value
D If cumulative, dividend arrears must be paid before an ordinary dividend can be paid
B
In liquidation, preference shareholders have priority over ordinary shareholders in the repayment of the nominal value. Unless the articles specify otherwise, preference dividends will not usually be paid in liquidation.
With regards to depositary receipts, what is the longest time period permitted for grey market trading?
A 1 month
B 3 months
C 6 months
D 9 months
B
When a depositary receipt is being created, the depository bank receives notification that in the future, the shares will be placed on deposit. If it holds cash collateral, even though the shares are not yet on deposit, the depository bank can create and sell the receipt at this time. Effectively, investors are buying a receipt that entitles them to all the benefits of a share that will, in the future, be held on deposit for them. The depositary receipt can be treated in this way for up to three months before the actual purchase of the underlying shares and this is known as pre-release or grey market trading.
Which two statements are true of cumulative preference shares?
I Dividends are paid from undistributed profits
II Dividends can be ignored if they are not paid in any one year
III They receive priority over unsecured loan stock on a liquidation
IV Directors may withhold the annual dividend
A I and III
B II and IV
C I and IV
D II and III
C
If a company cannot afford to pay a dividend on a cumulative preference share, the dividend will be ‘accumulated’ - the shareholder will be eligible for a ‘double dividend’ in the next year.
An investor has an investment of £4,000 in a company consisting of 1,000 £2 nominal value fully-paid up shares. If the company went into liquidation, what is the most that the investor would be liable for?
A Nothing further, as the shares are fully paid up
B £1,000
C £2,000
D His loss is unlimited
A
The investor’s liability is limited to the nominal value of the shares. If the shares are fully paid up, i.e. the shareholder has paid the nominal value to the company, there would be no further liability.
A company announces an increase in the dividend that it will pay out to shareholders in response to continued profit growth. Assuming all of the following shares are in issue, which of the following is least likely to benefit from this increase?
A Participating preference shareholder
B Ordinary shareholder
C Convertible preference shareholder
D Redeemable preference shareholder
D
The redeemable preference shareholder will not benefit from any increase in dividends paid and will continue to receive the fixed amount.
The ordinary shareholder will clearly benefit (B).
The participating preference shareholder may benefit if the dividend triggers a further payment of dividend. (A)
The convertible preference shareholder may benefit in two ways. Firstly, they may be able to convert the share into ordinary shares and receive the higher dividend. Secondly, as the increase in dividend is likely to increase the price of the ordinary share, it is likely to increase the price of the convertible too, allowing the investor to sell for a higher price. (C)
