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CISI: Securities > Chapter 6: Corporate Actions > Flashcards

Chapter 6: Corporate Actions Flashcards

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SIE Exam flashcards
1
Q

What is the Eurozone equivalent of LIBOR?

A

EURIBOR

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2
Q

What do dividend paying companies try and do?

A

Issue dividends at a consistent, growing rate

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3
Q

How do FRNs income events differ to fixed income?

A

Will often pay more frequently, quarterly

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4
Q

What are preference shares sometimes described as?

A

Hybrid instrument
Rate of dividend is specified in advance, similar to a bond
Issuer can still stop paying dividends in times of stress

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5
Q

What is a bullet payment?

A

Lump sum repayment of the entire principal at maturity

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6
Q

What are bonds that are structured to be repaid once known as?

A

Bullet issues

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7
Q

What are non-bullet issues?

A

Issues that repay the principal over a series of payments

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8
Q

What is considered riskier between bullet and non-bullet issues?

A

Bullet, as it’s a large payment on a single date

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9
Q

What type of issue is the sinking fund?

A

Bullet

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10
Q

What is a sinking fund?

A

Involves the issuer setting aside a certain amount of funds towards the maturity payment each year

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11
Q

To who is the funds paid to in a sinking fund?

A

Separate trustee

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12
Q

What can the trustee do with the funds from a sinking fund? (2)

A

Hold the money until the scheduled maturity date, or buy back bonds if they are trading below par.

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13
Q

What is a callable bond?

A

One where the issuer has a right to redeem the bonds at a pre-agreed amount, usually at par value.

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14
Q

What is a putable bond?

A

One where the investors have the ability to require the bonds to be repaid early

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15
Q

What are the 3 equity capital events?

A

Bonus issue
Stock split
Reverse stock split

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16
Q

What is a bonus issue?

A

Share are issued to shareholders for no consideration. Pro bono.

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17
Q

What other terms is a bonus issue described as? (2)

A

Scrip issue
Capitalisation issue

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18
Q

Why would a company perform a bonus issue? (2)

A

Public relations
Reducing the current market price

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19
Q

How does a bonus issue impact the way shareholders’ funds are shown in company accounts?

A

Converts undistributable capital reserves into share captial.
Essentially similar to a dividend but they are getting shares worth some value, note this is already intrinsic value and overall value will not change

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20
Q

How are undistributable capital reserves generated? (2)

A

Past shares issues at a premium to nominal value
Accumulation of past profits

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21
Q

How could a bonus issue increase market cap?

A

Making the shares more marketable and accessible, increasing demand, thus increasing share price

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22
Q

How do bonus issues and stock splits differ?

A

For market structure they don’t.
Bonus issues will change company accounts by moving capital from reserves to share capital
Essentially a debit from the retained profit and a credit to share capital - overall value does not change

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23
Q

What are pre-emptive rights?

A

Give existing shareholders the right to subscribe to new shares before offered to public

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24
Q

What is the purpose of pre-emptive rights?

A

Ensure that the level of control a shareholder has is not diluted by any issue without prior agreement

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25
Q

What do jurisdictions require before allowing new shares to be issued to anyone but the existing shareholders?

A

Special resolution from shareholders

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26
Q

Is it common to see pre-emptive rights waived in listed companies?

A

Yes, but best practice is to limit dilution to 5%

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27
Q

What is a rights issue?

A

Company can raise additional capital, complying with pre-emptive rights, by offering new shares for cash to shareholders in proportion to their existing holding.

28
Q

How are rights issued usually priced?

A

At discount to market value

29
Q

What can a shareholder do with their rights if they choose not to partake in the rights issue?

A

They can often be traded on the exchange where the company is listed
Receive cash as payment for the dilution of interest

30
Q

Why would a rights issue be offered at a deep discount to market value? (2)

A

To ensure full subscription, and to reduce/avoid the cost of underwriting the shares

31
Q

What is the cum-rights period?

A

The period where those who hold the companies shares have rights to purchase more in line with the rights issue

32
Q

How long does a cum-rights period tend to last?

A

Minimum of 10 business days, through to the acceptance date

33
Q

What is the acceptance date in a rights issue?

A

Acceptance date is the date where the shareholders have decided to take on the new shares or now

34
Q

What is the provisional allotment letter?

A

Letter where shareholders are advised of their entitlement
It is renounceable and transferable
Sets out the acceptance date and new shares

35
Q

What does pari passu refer to?

A

In a rights issue, new shares rank equally to existing shares

36
Q

How would a “pari passu” rights issue of affect share price?

A

Share price should fall to reflect the dilution affect of the new shares

37
Q

What is the theoretical calculation for the price which shares will fall to post rights issue?

A

[(shares held cum rights * share price) + (no. rights allocated * rights issue price)] / total no. shares held assuming rights exercised

38
Q

What is the difference between the ex-rights price and rights issue price known as?

A

nil-paid value

39
Q

What are the four options that a shareholder have following receipt of the provisional allotment letter?

A

1) Take up rights in full - send cheque to company
2) Sell the rights nil-paid in full
3) Sell part of rights nil-paid
4) Take no action - rights automatically sold

40
Q

How does selling part of rights to preserve current stake work?

A

If an investor wishes to retain shareholding in the company, but does not wish to invest further capital they can sell part of their rights to finance the rights they want to take up.

41
Q

What is the share premium account sometimes known as?

A

Additional paid-in capital

42
Q

What is the share premium account?

A

The capital that a company raises in excess of the nominal value of the shares

43
Q

What is the nil-paid value?

A

The theoretical value of the right to buy a share in a rights issue.

44
Q

How is the nil-paid value calculated?

A

Comparing the theoretical ex-rights price to the price of exercising the right

45
Q

What does “Swallowing the Tail” refer to?

A

Selling part of your rights to fund purchase of them

46
Q

What is the calculation for the number of nil-paid rights to be sold to take up the balance at nil-cost?

A

(issue price of new shares * number of shares allocated)/(theoretical ex-rights price)

47
Q

When might a company issue a share buyback? (2)

A

When a company has surplus cash (e.g. sold business)
When a company wants to re-organise its capital structure to include more debt and less equity

48
Q

Why might there be restrictions on share buybacks?

A

Prevent shareholders from being unfairly preferred to creditors

49
Q

What is an accelerated book build?

A

Share buyback form where an investment bank will contact a number of institutions that hold shares and enquire on their willingness to sell a particular price points

50
Q

What is a strategic stake?

A

A shareholding in a company in order to prevent a company being taken over by a competitor.

51
Q

Why might a company do a strategic stake?

A

Protect company’s supply chain
E.g. supplier provides raw materials, company takes a shareholding to protect its own interests

52
Q

What is a dawn raid?

A

Where a predator will purchase a large amount of shares as soon as the market opens/short period of time.

53
Q

How can a company build a stake in an “indirect “ way?

A

Using CFDs, contracts for difference.

54
Q

How do CFDs work?

A

Agreement between the buyer and the seller to exchanging the difference in the current value of the shares to the value at the end of the contract.

55
Q

When is an investor judged to have a notifiable interest in a company?

A

3% stakeholding

56
Q

At what price must a mandatory cash offer be made under POTAM rules?

A

At least the highest price paid by the offeror over the previous 12 months.

57
Q

What does POTAM stand for?

A

Panel on Takeovers and Mergers

58
Q

What is the difference between a callable and a puttable bond?

A

Callable, issuer can redeem early
Putable, bondholder can redeem early

59
Q

What do jurisdictions require before waiving pre-emptive rights?

A

Special resolution (at AGMs)

60
Q

Why may a stake be built?

A

Prevent takeover and influence the company

61
Q

How can a stake be built indirectly?

A

With CFDs

62
Q

When is a mandatory offer required per PTM rules?

A

hold more than 30% of voting rights
increase holdings from 30% or more but less than 50%

63
Q

What must an investor do when holdings are above 3%?

A

Alert company, and alert for any fall or rise through a whole percentage point

64
Q

What is the limit on the cash offer from the offerer?

A

Cannot be less than the highest price paid in the previous 12 months

65
Q
A

CISI: Securities (10 decks)

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