Chapter 3 - Equity Flashcards
Which documentations are required to create a company?
Memorandum of Association
Article of Association
What does the Memorandum of Association entail?
Confirms the subscribers intentions to form a company under the companies act 2006. It ensures that they have agreed to become members of the company and have at least one share each.
What does the Article of Association entail?
Its the details of the relationship between the company and the source of finance (owner). It involves details of the running of the company, such as shareholder rights, frequent meetings, and borrowing power.
What are the requirement for a quoted company
they must have a shareholder resolution that needs to be passed that meets the standards of the FCA
What is a private limited company and Public limited company? What does the term limited mean?
Privacy limited company = can just have one shareholder
Public = minimum of two shareholders required
limited = liability of shareholder for the debt
Why do PLC hold AGM? when should they be held?
Annual general meetings are hold as the shareholders are given the right to vote. The AGM must be held within 6 months of the financial year end.
What happens if major importance meetings are required? what is another term for general meetings?
Matters of major importance requires special resolution, and at least 75% must vote. General meetings = extraordinary general meetings
what are preference shares and the characteristics?
Preferences shares have the characteristics of:
- pay fixed dividends - regular income
- priority of liquidation
- limited voting rights
- preference shares can be convertible, change to ordinary shares. they can also be redeemable, redeem the nominal value back
- rank ahead of ordinary shares
What is an ordinary share and the characteristics?
Ordinary shares, also known as common shares, are a form of equity ownership. The characteristics include
- Voting rights
- shared profits in terms of dividends, which is variable
- they are prioritized last in terms of dividends, preference shareholders and creditors will be paid first if bankrupt.
- only part of their nominal value will be paid up.
why could a company have lower than average dividend yield?
Because profits earned by the company are being reinvested back into the company rather than paying dividends.
What is dividends? What is distributable reserves? What is it called if a company uses year before profits.
Dividends is the return an investor gets for providing the risk capital for the business. it is paid out of profits, which form part of their distributable reserves. Distributable reserves are the post-tax profits made over the life of a company. If a company uses undistributed profits, this is called naked or uncovered dividend.
what is dividend yield?
The dividend yield is shows how much a company pays out in dividends each year relative to its stock price.
how to calculate the dividend yield?
Dividend / Market capitalization (total value of company’s shares) x 100 = percentage
why would companies have a higher-than average dividend yield? What does this suggest?
the company is mature and continues to generate healthy levels of cash, but has limited growth, so surplus profits are paid to shareholders. A high number of dividend yield, could be good for the dividend payment, however, it could suggest the company is not reinvesting money back into the company for growth.
what are capital gains?
Capital gains is when the share price increases, but the share must be sold to be a capital gain. If the shares is not sold, then this gain is described as being “unrealised”.
what are rights issues?
a pre-existing shareholder benefit. pre-existing shareholders get access to new shares before they are released to the wider public. this gets rid of the risk of shareholders loosing control.
Righting votes forms.
Righting votes are an ordinary shares shareholder benefits. this can take part in two ways:
- the individual attends the meeting and votes
- the individual appoints someone to attend the meeting and vote on their behalf - known as a proxy
What is the market and price risk involved when owning shares? what influences them.
Market Risk is the risk that share prices in general might fall. This can be caused by many factors, such as economic factors, natural disasters, and political events.
Price Risk refers to fluctuates in the price of an asset. Can be influenced by contract losses, or earning reports.
what is liquidity risk?
risk that shares will not be sold at a reasonable price or traded quickly. This will mean the bid price (price buyer purchases shares) and offer price (price they sell at) will widen.
what is issuer risk?
this is the risk that issuing companies may collapse and the ordinary share becomes worthless.
foreign exchange risk?
Direct foreign exchange risk - investing in shares denominated in foreign countries, example investing in foreign assets
Indirect - investing in a company that has earnings and operations overseas
what is a corporate action and the different types? what are the types in America?
A corporate action is anything that will affect the stakeholder or bondholder. The different types are:
Corporate mandatory action - mandated by the company, doesn’t require intervention by shareholders
Corporate mandatory action with options - the shareholder has the option to opt out, e.g. rights issue
Voluntary mandatory option - the shareholder is required to take action e.g., takeover bid
In the US, there are only two types, such as mandatory action, and voluntary action
how are securities ratios expressed in Asian and European markets?
It is expressed as “X new shares for each Y existing shares”.
In the US, the first number indicates the final holding after the event, and the second number indicates the original number held. e.g. if a company invested 100 and it went up 125, the expression would be 125:100.
how are securities ratios expressed in the US
The first number is the one final holding, the second number is the original amount invested. Such as , if invested 100, and went up to 125, would be expressed as 125:100
what is a “cash call”. What is a rights issue and type of action?
when a company approaches existing shareholders asking if they want to buy some more. Rights issue is asking if existing shareholders want more shares, it is a mandatory action with options
what is a bonus issue? what type of action? why is it used
Also known as a script, or capitalization issue. When a company gives existing shareholders extra shares without needing to subscribe to any further funds. IT IS A MANDATORY ACTION. it is used to increase liquidity and bring lower share prices.
