Chapter 9: Sources of finance

Question 1

Conversion premium

Answer 1

: Conversion premium = Current market value of loan note – current conversion value of shares

Question 2

Convertible loan notes

Answer 2

: Give the loan note holders the right (but not an obligation) to convert their loan notes at a specified future date into new equity shares of the company, at a conversion rate that is also specified when the loan notes are issued.

Question 2

Cum rights price:

Answer 2

A ‘cum rights’ price means that the purchaser of existing shares has the right to participate in the rights issue (ie the price prior to the rights issue).

Question 3

Issue price:

Answer 3

The price at which the new shares are being offered for sale.

Question 3

Theoretical ex-rights price (TERP):

Answer 3

The theoretical price after the rights issue.

Question 4

Value of a right per existing share:

Answer 4

The value of a right divided by the number of shares that need to be possessed in order to own a right.

Question 5

Value of a right:

Answer 5

The price at which a right can be sold (calculate as TERP – issue price).

Question 6

Deep discount loan notes:

Answer 6

These are issued at a price that is at a large discount to the nominal value of the notes, and which will be redeemable at nominal value (or above nominal value) when they eventually mature.

Question 7

Initial public offer (IPO):

Answer 7

An invitation to apply for shares in a company based on information contained in a prospectus.

Question 8

Loan covenant

Answer 8

: A condition that the borrower must comply with. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the bank can demand payment.

Question 9

Rights issue:

Answer 9

In a rights issue, ordinary shareholders are invited to apply for shares in proportion to their existing shareholdings.
In a rights issue, shareholders have a number of choices; they can:
* Buy the new shares
* Sell their ‘right’ to buy shares
* Do a mix of the above

A rights issue will normally be at a significant discount (eg 20%) to the existing share price, so the share price after the rights issue will be below the pre-rights share price. However, this does not in itself damage shareholder wealth because shareholders also benefit from buying the shares at a discount (or by selling the rights).

Question 10

Venture capital:

Answer 10

Risk capital, normally provided by a venture capital firm or individual venture capitalist, in return for an equity stake.

Question 11

Zero-coupon loan notes:

Answer 11

Issued at a discount to their redemption value, but no interest is paid on them.