Corporate Actions

Question 1

what is the difference between a callable and putable bond

Answer 1

callable: redeemed earlier at discretion of company,
putable: redeemed at discretion of investor

Question 2

what is a sinking fund

Answer 2

where the principal is paid in part before final redemption date

Question 3

what is a special ex trade,

special cum trade

Answer 3

ex: without dividend,
special ex date: can only happen in last 10 days of cum div period
cum: begin on ex div date, allowed up to one day before payment date (ch6, 5/13)

Question 4

what is claim generation in corporate actions

Answer 4

if dividend not paid to buyer even though bought within cum-div period, buyer’s broker has to make a claim from the sellers broker

Question 5

what are the features of a rights issue

Answer 5

existing shareholders receive provisional allotment letter which is the right to subscribe to more shares in proportion to their existing holding

• mitigates risk of diluting ownership
• shares typically offered at discount to current market price.

Question 6

what is the theoretical nil paid price and what is the equation

Answer 6

when investor sells right to a rights issue, what are your rights worth,

theoretical nil paid price = theoretical ex-rights price - subscription price

Question 7

what is maximum subscription at nil cost

Answer 7

choose to sell a portion of rights available and use funds raised to finance the take-up of the remaining rights,
number of rights to be sold = (number of rights available * subscription price) / theoretical ex-rights price,

always round up

Question 8

what is a bonus/scrip issue

Answer 8

follow on issue to existing shareholders in proportion to their existing holding

• share issued free of charge
• significantly dilutes the share price,

reason is to improve marketability

Question 9

what is share capital on the statement of financial position and the share premium on the statement of financial position during the issue of new shares

Answer 9

reflect the number of shares in issue x nominal value,

any surplus raised on issue

Question 10

what is a stock split and a reverse split

Answer 10

split shares in two, nominal value halves,

consolidate shares, join 2 into 1, nominal value increases

Question 11

When a company issues new shares, what happens to the nominal value of each share ?

Answer 11

must be covered in the share capital account; even if no new capital has been raised. This value is often referred to as the called-up share capital.

Question 12

what are the reasons for share buybacks

Answer 12

rationalise capital structure (less equity more debt),
substitute dividend payouts with share repurchases (give investors capital gain),
deploy excess cash flow and return it to shareholders

Question 13

what needs to be done before share buybacks

Answer 13

approval required by shareholders -> special resolution, 75% approval needed

Question 14

what are the methods of company buy-backs

Answer 14

block trades,
accelerated book-building (who willing to sell),
best efforts
-back stop price - maximum purchase price,
bought deal (company who underwrites takes risk)

Question 15

what is the theoretical ex rights price

Answer 15

total value of shares / number of shares, after rights issue