Chapter 6 - Sources of long term finance Flashcards
What is an equity warrant?
A security issued by a company giving a holder the right to be allotted ordinary shares in that company on terms specified in the warrant.
What are treasury shares?
Equity shares repurchased by the issuing entity, NOT cancelled before the period end
What is a bond described as?
A negotiable instrument offering a fixed rate of interest over a fixed period of time and with a fixed redemption value.
What is the redemption yield on a redeemable bond (ignoring tax)?
The rate of interest at which the total discounted value of future interest payments and capital repayments is equal to the current market value of the bond
What is the market price of convertible shares influenced by?
Current conversion value
Length of time until conversion
Market expectations about future equity returns
3 facts about preference shares
Preferred shareholders may be given a right to participate in surplus profits
Dividends due on preferred shares may be carried forward if they are not paid in a particular year
Preferred shares cannot be secured on a company’s assets.
What is a placing?
An arrangement where most of the shares in a share issue are bought by a small number of institutional investors
What is an underwritten arrangement?
Entity offers its shares to investors by an offer for sale. Not all the shares were purchased by the public.
The unsold shares were purchased by a number of financial institutions under an agreement with the entity.
3 facts about convertible securities
The price at which they are converted into shares is predetermined.
Holders of the securities have the option not to convert.
Factors influencing the market price of convertible securities include the length of time until conversion can occur and the price of straight debt.
What happens if a company’s cost of equity capital falls?
The cost of debt capital would not change.
The share price would go up.
More investment projects would be worth undertaking.
