Equities: types and features

Question 1

share capital

Answer 1

minimum allotted share capital for a public company is £50k

Question 2

authorised share capital

Answer 2

maximum number of shares a company is permitted ot issue at a nominal value

Question 3

SHARE CAPITAL

Answer 3

paid up
called up

Question 4

deferred shares issued t o

Answer 4

directors, employees etc

Question 5

4 types of preference shares

Answer 5

> 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)

Question 5

GDR vs ADR (non-US firm but US bank and US denominated)

Answer 5

> 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

Question 6

dividends paid to corporate entities

Answer 6

received as franked investment income - no liability to HMRC

Question 7

uncovered theory

Answer 7

dividends distributed greater than current earnings per share
> signal that profits will imporve in the future

Question 8

dividend cover

Answer 8

EPS / DPS

Question 9

absolute valuation techniques

Answer 9

used absolute returns and discounting to clalculate intrinsic value of the present vlaue of future cash returns

Question 10

relative valuation techniques

Answer 10

estimate value of equity as some measure of earnings power

Question 11

[reference share price

Answer 11

P = Div / r (constant fixed payments)

Question 12

gordon’s gorwth model

Answer 12

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

Question 13

ways of estimating gorwth rate of idividends

Answer 13

> avrging past dividend growth rate and assuming this will continue
using forecasts
assuming dividends gorwth rate = earnings growth rate

Question 14

retention ratio

Answer 14

(net income - dividends)/net income

Question 15

return on equity

Answer 15

net income / shareholders funds

Question 16

warrants

Answer 16

> 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

Question 17

warrant value

Answer 17

formula value (prfit built in) + premium value

Question 18

percent premium

Answer 18

(warrant price - formula value)/ # shares created current share price

Question 19

pricing warrant through an American option

Answer 19

> warrant will dilute share price
WP =( Premamericanoption/(1+%newshares)) *sizenewshares

Question 20

difference be/een call options and warrants

Answer 20

> 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

Question 21

covered warrant

Answer 21

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