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Chapter 4 Flashcards

1
Q

Why do debt holders face lower risk than SH

A

Receive interest before SH get dividends, rank higher if the company fails, therefore get lower rate of return

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2
Q

Why do SH face more risk than debt holders

A

Suffer downside of fall in profits, don’t necessarily get returns,

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3
Q

When can preference share holders vote

A

at general meeting when dividend is in arrears or when it is proposed to change legal rights of the shares

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4
Q

Obligation to return capital to preference shareholders

A

If redeemable - fixed amount per share
otherwise no obligation unless liquidated

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5
Q

Issue cost of equity

A

Up to 15% of finance raised

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6
Q

Rights issue

A

issue of new shares for cash to existing shareholders in proportion to their existing holdings

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7
Q

Value of the right to subscribe for a new share =

A

Ex rights price - subscription price

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8
Q

ex rights inc NPV

A

(MV shares * pre rites issue + Rights proceeds + NPV) / number of shares ex rights

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9
Q

Factors to consider when making rights issue

A

issue costs - 4% £2m - lots fixed so % fall as amount increase
Shareholder reactions - shareholder react badly sell shares
Control - shouldn’t change
Unlisted companies - SH not have funds to tae up rights and can’t sell as listed

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10
Q

Two methods of IPO

A
  • Offer for sale (shares sold to issuing house (investment bank) who sell to general public
    Direct offer / offer for subscription - direct sale
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11
Q

Costs of issuing shares

A
  • Advertising
  • Following legal requirements
  • Stock exchange regulations (large volumes of info that must b provided (listing particulars/prospectus)
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12
Q

Underwriting definition

A

The process whereby in exchange for a fixed fee (1-2% of total finance to be raised) an institution will undertake to purchase any securities not subscribed for by the public§

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12
Q

Underwriting definition

A

The process whereby in exchange for a fixed fee (1-2% of total finance to be raised) an institution will undertake to purchase any securities not subscribed for by the public
form of insurance - ensures all securities are sold

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13
Q

Disadvantage of underwriting

A

The cost - depends upon characteristics of the company issuing and the state of the market. Payable even if they do not have to purchase the securities
shares hang over the market - when there is a pick up in demand, underwriter will sell, decreasing share price

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14
Q

Venture capital definition

A

Risk capital - normally provided by a VC firm or individual in return for equity stake

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15
Q

Distinguishing factors of venture capital

A

More participatory (20-49.9% of shares desired)
More long term focus (involvement usually medium term)
Investor advises and influences management, does not run business
Return as capital gains 3-5 years
Usually sold to another company or floated on stockmarket

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16
Q

Equity ratchet definition

A

When targets set by VC are not met, extra shares are transferred to them at no extra cost

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17
Q

Advantages of crowdfunding

A

Available to start ups who may struggle with other types of finance,
Helps attract customers
can be quick

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18
Q

Costs of crowdfunding

A

Fee to the site
legal/advisory
administrative costs dealing with information requests

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19
Q

Initial Coin Offering (ICO_ key differences to IPO

A

Investor receives a token (for share or product/service)
Payment in crypto

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20
Q

Convertible loans

A

Debt with an equity kicker - convert at option of holder into ordinary shares in same company at future date

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21
Q

Issuer of convertible loan benefits by

A

Obtaining finance at lower cost
encouraging possible investors
introducing short term gearing
avoids redemption problems
issue equity cheaply

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22
Q

Loan stock with warrants

A

Cannot themselves be converted to shares, but give holder right to subscribe at fixed future dates for ordinary shares at predetermined price. can detach and sell warrants.
Loan stock is retained as separate investment.

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23
Q

What are representations and warranties

A

Debt holders need to ensure borrower has adequate loan documentation - need representations and warranties about ability to repay laon

24
What are guarantees
If ability of borrower to repay is in doubt, guarantee may be required - e.g. parent company guarantees loan of subsidiary
25
What are covenants
The borrower needs to commit to do/refrain from doing various things. Undertakings by the borrower = covenants
26
Covenant example - providing information
e.g. provide lender financial statements, interim accounts, quarterly/monthly management accounts
27
Covenant example - negative pledge
Borrower pledge not to use assets for security for other loans
28
Covenant example - financial covenants
Set financial limits within which the borrower must trade (maximum earning ratio)
29
Covenant example - restrictive covenants
Limit ability of borrower to take actions that may damage the lender's position (not taking on more debt)
30
Advantages of peer to peer lendign
Usually lower interest rates quicker to arrange than bank loan may be more accessible
31
Eurocurrency market
short term borrowing and lending by banks in currencies other than that of the country in which the bank is based (only available in major currencies where there is an active market)
32
International bond market
Market where bonds are issued by large companies etc and sold to international investors. bonds may be denominated in any freely-convertible currency
33
International syndicated loans market
market for Medium-long term loans. Loans created when syndicate of international banks lend money to a borrower, some of the loan can be marketed, allowing other investors to acquire an interest. Spreads credit risk. banks are lenders
34
Factors to consider between borrowing on international market/domestic system
- eurocurrency loans often require non security - international bonds are attractive to investors as interest paid gross - International bond securities can be sold on secondary market - easier to raise very large sums quickly on international markets rather than domestic
35
Methods of financing green
- Green loans - Sustainability linked loans - Green bonds - Green funds
36
Four components of green loan princpals
- use of proceeds - for green projects - process for project evaluation and selection - communicate to lenders environmental sustainability objectives, process to appraise and select, related eligibility criteria - Management of proceeds - Reporting
37
Weak form efficiency - share prices reflect
information about past price movements they follow a random walk - up with good news down with bad
38
Weak form efficiency - implications
Future price cannot be predicted from past movements analysts incorrect in belief they can predict future price
39
Semi Strong efficiency - share prices reflect
All publicly available information
40
Implications if semi strong efficient
Market cannot be beaten by examining publicly available information, only with inside
41
Strong form efficiency - share price reflect
all available information, in and external
42
Implication if strong from efficient
investors cannot consistently beat the market
43
Lessons of market efficiency - no memory
Past is no guide to the future, managers can time issues by using inside inforamtion
44
Lessons of market efficiency - Trust market prices
in efficient market, prices are fair
45
Lessons of market efficiency - no financial illusions
Firms can't fool the market. The market is concerned with cashflows, manipulating accounting policies won't improve share price
46
Lessons of market efficiency - DIY alternative
In efficient market, investors won't pay companies for what they can do themselves - if one firm takes over another, no increase of share price as investors could have bought shares in the other
47
Lessons of Market efficiency - shares are a close substitute
Shouldn't have to issue at discount as long as returns commensurate with risk undertaken
48
Lessons of Market efficiency - reading the entrails
Share prices are a better guide to performance than published financial statements
49
Lessons of market efficiency - value of investment advise
Technical analysis - predict future on historical - waste of time Fundamental analysis - examine newly published account makes semi-strong as sare prices affected short time after published
50
Behavioural finance - overconfidence
Investors overestimate their trading abilities and make bad investments, also overestimate accuracy of forecasts. Can be linked to self-attribution bias (attribute success to themselves, failures are bad luck)
51
Behavioural finance - representativeness
Judgements are based on representative observation, without taking account of numerous other factors (statistical evidence) Can explain why investors may think past performance can be used to indicate future
52
Behavioural finance - narrow framing
Investors unable to look at broader pictures, look at one share not the whole portfolio, worry about short term performance but looking to fund long term retirement
53
Behavioural finance - miscalculation of probabilities
Investors attach to low a probability to likely outcomes and to high a probability to unlikely outcomes - can explain bubbles
54
Behavioural finance - ambiguity aversion
Investors are afraid of ares they don't have much info and prefer familiar - avoid overseas shares
55
Behavioural finance - positive feedback and extrapolative expectations
Buy shares after prices rise and sell after fall. Build expectations about share prices, expecting to continue rise or fall. Some tend to join in and push rising prices higher and sell at a profit before falls, creating instability in the market
56
Behavioural finance - cognitive dissonance
If investor has long held belief, they will continue to hold it, even if evidence completely contradicts this belief, e.g. carry on holding shares they think will increase in value, when evidence suggests otherwise. Contributes to post earnings announcement drift - reaction to unexpectedly good / bad earnings slower than suggested by EMH
57
Behavioural Finance - availability bias
Par attention to fact/event as it is most fresh/prominent in their mind, ignore bigger picture and be influenced by event.
58
Behavioural finance - conservatism
Investors tend to be naturally conservative and resistant to changing an option. If profits higher than expected, under react

FM (11 decks)

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