Chapter Five Flashcards
Earnings per share is usually defined as?
Net profit after tax, preference dividends and minority interests, divided by the number of issued ordinary shares
Does a scrip issue raise extra capital for a company?
No. Scrip, bonus or free (capitalisation) issues do not raise cash but are undertaken to bring the share price down into a more marketable range
What is a scrip issue?
An issue of free shares pro rata to an existing holding in order to dilute the share price into a more marketable range
What is a rights issue?
An issue of shares pro rata to existing holdings, usually at a discount to current market prices, to raise cash for the issuing company. The need for a rights issue isdue to the existence of pre-emption rights
What is a pre-emptive share issue?
It is one where existing shareholders receive the right to subscribe for shares pro rata to their existing shareholding in the company. This is a requirement of the UKLA Listing requirements and meands that a rights issue must take place as opposed to a new issue of shares to non-shareholders of the company
What best describes an offer for subscription?
The company issuing shares sells the shares directly to the investors. This would be without the involvement of an issuing house and is a method generally only used by investment bands/trusts who have the in-house experience to administer all aspects of the issue
Which three issues are the same?
Scrip, capitalisation, and bonus issues. They all relate to an issue of free shares pro rata to an existing shareholding in order to dilute the share price
What is an open issue?
It is a rights issue in non-renounceable form, i.e. shareholders cannot sell their rights to a third party
What is not normally underwritten?
Deep discounted rights issue. The deeper the discount, the more likely investors are to subscribe and as a result, underwriting would not be necessary
Who issues ADRs?
Non-US corporations. They are issued by UK companies to enhance the attractiveness of their shares to US investors
Describe an ADR
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They are the conventional form of trading a UK share in the US. They help facilitate the trading of non-US company shares within the US where international trading on the NYSE is largely made up of such ADRs. They are denominated in USD and pay a USD dividend
Why may a company pay a scrip dividend?
A scrip dividend is paid in shares and may be done to conserve cash
What is not an option in respect of a rights issue?
Sell rights fully paid - the shares can be sold nil paid, not fully paid
What is not a likely implication for a share buy-back?
Increased current ratio - since cash is paid out, the current assets figure would be reduced and the current ratio (current assets/current liabilities) would be reduced
What does a 3 for 1 stock split mean?
There will be three new shares in place of every one old share that existed
Who is an asset-based valuation most appropriate for?
For capital intensive businesses, not service businesses
Can a primary market (LSE) also be a secondary market?
Yes
What is an offer for sale?
A primary market issue
What is a placing?
A marketing operation
What is true of a rights issue?
It is a new issue undertaken at a discount to the current price to raise new finance. Shareholders do not have to take up their rights
Can shares be repurchased as an alternative to paying a dividend?
Yes they can
Do share repurchases increase or decrease gearing?
Increase
Will share repurchases increase or decrease EPS?
Increase
What should a shareholder do in a rights issue where the subscription price is above the market price?
It would not be possible to sell the nil paid right as it would be worth nothing and there is no value from the shareholder’s point of view in buying a share for more that its current price. The best course of action is to let the right expire
Features of an ADR?
- Freely transferrable
- Able to receive dividends
- Able to take ownership of underlying shares
For an ADR, are depositary receipts tradable on an exchange?
Yes
What are the four permitted issue methods?
- Offer for subscription
- An offer for sale
- A placing
- An introduction
Which methods raise cash for a company: placing, bonus issue, rights issue, capitalisation issue?
The placing and a rights issue will raise cash for the company. The bonus issue and capitalisation issue are where shares are distributed freely with no money being raised
If a company has a high P/E ratio, it is likely that it will have?
A low dividend yield and a low earnings yield. A high P/E ratio indicates that the share price is high relative to current company performance. If profits are low relative to the share price, the dividend and earnings yield will also be low
Calculation of EPS defines earnings as?
Consolidated profit after interest, tax, minority interest and preference dividends
What are means of effecting an offer sale?
- Ficed price offer
- Bookbuilding
- Tender offer
Rights issues are offers to the existing shareholders
What is included in a company’s basic earnings per share calculation?
EPS is earnings attributable to ordinary shareholders only
What impact does a scrip issue have on return of capital employed?
It has no impact on the operating profit of the company. It is also not raising finance and so has no impact on the capital employed in the business, thus no overall impact
PEG ratio?
Compares the P/E to the earnings growth and as a rule of thumb should preferably be below 1
Describe FCFF
FCFF is based on cashflow generated by the business which can be approximated by adding back non cash charges to net income and deducting increases in working capital after an allowance for Capex
Describe residual income
Fair value under residual income method = book value plus present value of future residual income. Residual income is after deducted cost of equity capital and is a valid model when cashflow is negative. It recognises more of the firm value earlier which is an advantage
Which reserves can be used to make a bonus issue?
All reserves in shareholders’ funds may be used to account for a bonus issue as this is not a distribution in the form of a dividend.
Which account reserve can account for the distribution of a dividend?
Only the profit and loss account reserve (retianed earnings reserve) can be used to account for the distribution of a dividend
