Equities: types and features Flashcards
share capital
minimum allotted share capital for a public company is £50k
authorised share capital
maximum number of shares a company is permitted ot issue at a nominal value
SHARE CAPITAL
paid up
called up
deferred shares issued t o
directors, employees etc
4 types of preference shares
> cumulative (rolled over)
participating preference shares ( participating rights - dividends over and above fixed rate)
convertible (into ordinary shares within a certain time period)
redeemable (repurchased by firm specific time normally at nominal vlaue)
GDR vs ADR (non-US firm but US bank and US denominated)
> created and issued by non-American banks
denominated in a currency other than US dollars
marketed primarily to non-US investors
traded on non-US exchanges
dividends paid to corporate entities
received as franked investment income - no liability to HMRC
uncovered theory
dividends distributed greater than current earnings per share
> signal that profits will imporve in the future
dividend cover
EPS / DPS
absolute valuation techniques
used absolute returns and discounting to clalculate intrinsic value of the present vlaue of future cash returns
relative valuation techniques
estimate value of equity as some measure of earnings power
[reference share price
P = Div / r (constant fixed payments)
gordon’s gorwth model
Ex- div share price = D0(1+g)/(r-g)
> ordinary shares
> constant growth of dividends
> dividends payment at the end of each period in perpetuity
ways of estimating gorwth rate of idividends
> avrging past dividend growth rate and assuming this will continue
using forecasts
assuming dividends gorwth rate = earnings growth rate
retention ratio
(net income - dividends)/net income
return on equity
net income / shareholders funds
warrants
> securities issued by a company
owner the right to subscribe to new shares in the firm at a fixed price on a future date
sweetener
non-detachable (fixed to bond) and detachable
physically settled only
right to buy only
warrant value
formula value (prfit built in) + premium value
percent premium
(warrant price - formula value)/ # shares created current share price
pricing warrant through an American option
> warrant will dilute share price
WP =( Premamericanoption/(1+%newshares)) *sizenewshares
difference be/een call options and warrants
> warrants increase capital and dilute share prices because new shares in issue
warrants life is in years options life is in months
seller of option has to deliver but warrant just release rights
equity warrants traded on exchange whereas options traded on derivatives market
covered warrant
securitised derivative that trades on LSE
> SHARE, INDEX, CURRENCY, COMMODITY
equity:
issuer of warrant not the issuer of shares
bank covers their position by owning shares
issued at different currency than underlying share
> LSE order driven trading service with EU and US underlying shares for instituional and private clients
covered warrants can be:
calls or puts
cash or physically settled
euroepan style and american style options
