Corporate Actions

Question 1

Bonds vs Equity (1)

Answer 1

Interest income on bonds generally more reliable than dividends on equity

Question 2

What is a callable bond?

Answer 2

The issuer has the right to redeem some or all bonds at certain points through the bond’s life at a pre-agreed amount

Question 3

What is a bonus issue?

Answer 3

Where a company issues new shares to its holders for no consideration i.e. for free

Question 4

What is a pre-emptive right?

Answer 4

Unless shareholders agree to allow company to issue new shares, they will be given to subscribe before new shares are offered to the public

Question 5

Shareholders’ options in a rights issue (4)

Answer 5

Take up rights in full

Sell rights in full

Sell part of rights to preserve current stake

Take no action

Question 6

What is swallowing the tale?

Answer 6

Preserving one’s position in a rights issue without suffering an dilution by buying shares in the offering

Question 7

Formula for theoretical ex-rights price

Answer 7

[(No of shares held cum rights x cum rights share price) + (No of rights allocated x rights issue price)] / total no. of shares held assuming rights exercised (p. 164)

Question 8

Formula for nil paid rights to be sold to take up balance

Answer 8

(issue price of new shares x no of shares allocated) / theoretical ex rights price (p. 167)