Chapter 6: Corporate Actions Flashcards
What is a Preference Share?
Why are they AKA hybrid?
A PS are hybrid instrument, as income events are dividends, but these are specified (amount & frequency), similar to a bond.
There is a also no contract to oblige the issuer to pay these.
What is a Bullet Payment?
Whereby the principal of the bond is paid in a lump sum payment.
What is a Non-Bullet Issue?
Whereby the principal of the bond can be paid over a series of payments.
Which Bonds Typically Have Higher Coupons?
Bullet or Non-Bullet?
Bullets
As the lump sum payment is more uncertain causing a higher default risk, demanding higher coupons to relfect this.
What is a Sinking Fund?
4 points? ChatGPT ones?
- A variation of the Single Bullet Maturity
- Issuer sets aside funds annually for maturity payment
- Funds held by a trustee, used for bond buybacks (sub par value) or held until maturity
- Reduces defualt risk
What is a Putable Bond?
A bond that gives the investors the flexibility to require the bonds to be redeemed early, after giving the issuer due notice.
What is a Callable Bond?
Where the issuer has the right, at specified points, to redeem some or all of the bonds at a pre agreed amount, often par value.
What is a Bonus Issue?
Definition
A bonus issue is where a company issues new shares to its shareholders for no consideration, raising no further capital.
What is a Bonus Issue AKA?
2 more
- Scrip Issue
- Capitalisation Issue
Why are Bonus Issues Used?
To improve the liquidity and marketability of their shares.
How are Bonus Issue Shares Created?
Why does this change shareholder funds in company accounts?
These are made by converting undistrubuatble capital reserves into share capital. Converts reserves from previous share premiums or retained profits.
What Changes Following a Bonus Issue to a Companies Value?
- Nominal Value of the share capital will increase proportionatley to the number of shares issued.
- The net worth of the business should remian the same
What Changes Following a Bonus Issue to a Companies Mkt. Cap?
- Dividends per share will proportionatley fall, in line with the market value
- However Market Cap should remain the same.
Why Might a Bonus Issue Increase Share Value?
Once a share is double figures (UK) or $200, it is considered expensive, so improving the liquidity can result in a bigger market an increased share price.
What is a Stock Split?
How is this represented?
A corporate action whereby issued shares are divided into muliple shares.
E.g. 1 share becoming 5 is a “5-for-1 Split”
What is a Reverse Stock Split? (Consolidation)
A corporate action whereby issued shares are combined, to boost a shares value. This makes them more valuable if the share values have fallen too low.
This, like a regular split, has no impact on the accounts.
What is the Ex-Bonus Price?
Not an Ex-girl…….
The price after the issue.
What is the Cum-Bonus Price?
The price before the issue.
What is a Pre-Emptive Right?
Definition
A pre-emptive right is a right (but not obligation) of existing shareholders in a corporation to purchase newly issued stock before it is offered to others. To protect current shareholders from dilution or control loss.
Why do Pre-Emptive Rights Exist?
To prevent the issue of new shares, convertibles etc, other than to existing shareholders, with the prior approval in a meeting (AGM).
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What is a Special Resolution?
Why is it needed?
Jurisdictions require this from shareholders before before allowing new shares to be alloted in cash to anyone other than existing shareholders.
What is the Maximum Issuance of New Shares p/a?
5%
Unless there is a detailed reason otherwise
What is a Rights Issue?
What does this mean?, Can this be traded?
- A rights issue is an offer by a company of new shares for cash to the existing shareholders in proportion to their holding
- Usually at a discount
- This right (privellage) can be traded
Do Rights Have an Expiry Date?
If so are they short or long term
Yes, these are usually short term.
What Makes a Rights Issue Attractive?
Think about 5
- No dilution (assuming the take up their rights)
- Discounted Shares (Attractive)
- No obligation
- Can sell the shares of the right
- Can be underwritten
What is the Cum-Rights Period?
How long is it?
Owners of cum-rights shares can maintain their proportionate ownership and avoid dilution. These rights are short-term, minimum 10 days, and can be traded in the secondary market.
What is a Provisonal Allotment Letter?
What does this highlight?
A renouncable and transferable letter that sets out:
* Shareholders Holding
* The rights
* Acceptance date
What is the Nil-Paid Value?
The difference between the theoretical ex-rights price and the rights issue price.
What Options do Shareholders Have When Dealing with a Rights Issue?
4 options
- Take up the rights in full
- Sell the rights nil-paid in full
- Sell the rights nil-paid to preserve current stake without dilution
- Take no action
What is a Share Buyback?
When a company decides to use cash to repurchase shares from existing shareholders.
When are Buybacks Considered Worthwhile?
Why might a company do this?
- When the company has reduced its activities, and has a surplus of cash to return to shareholders.
- When a company wants to reorganise its capital structure to include more debt and less equity.
Why are There Restrictions on Share Buybacks?
- To prevent shareholders from being unfairly preferred to creditors.
- To make sure the company has receieved approval to buy back its own shares.
What is The Creditors Buffer?
Where the capital base of a company (in the majority of cases share capital and share premium) must be maintained.
Do Share Buybacks Need to be Discussed at AGMs?
If so what is discussed?
Yes
In this meeting they willl discuss whether its allowed, the price for the shares and the quanitity. (The limit must be in line with the regulator).
What is a Block Trade?
Where an investement bank acting for the company will seek to do a small number of large trades with investors.
What is an Accelerated Book Build?
Involves offering shares in a short time period, with little or no marketing. This is done very quickly, 1 or 2 days.
