Equity Finance (2) Flashcards
What is a public issue?
A direct sale to the general public. This is generally the most expensive method of issuing new shares
What is a offer for sale?
An indirect sale to the public accomplished by selling shares directly to an issuing house (merchant/investment bank), which then sells them to the public
What is a placing?
The sponsor (normally a merchant bank) places the shares with its clients (usually pension funds and insurance companies) rather than the shares being offered to the general public
What is a rights issue?
An offer to allow existing shareholders to buy new shares in proportion to their existing holdings
What is a subscription by tender?
Like an auction, with the public being invited to bid for shares. Useful where setting a price for the shares is difficult.
What is meant by quoted?
Raise new equity finance at the same time as becoming listed. An expensive process
What is meant by unquoted?
Use a rights issue or private placing
Why do ordinary shareholders take more risk than any other type of investor?
Ordinary dividends are discretionary
Ordinary shareholders rank last in the event of bankruptcy/liquidation
Factors for an IPO?
Legal restrictions
Underwriting costs
Valuation
Stock exchange rules
What is the rights issue?
The existing shareholders are offered more shares in proportion to their exisitng holding
What is the expected share price following the rights issue?
The TERP of the share
What happens in a bonus issue?
Reserves are converted into share capital, which is distributed as new shares to existing shareholders
Is finance raised in a bonus issue?
No finance is raised
What are bonus issues also called?
Scrip issue, or capitalisation of reserves
Why do stock splits occur?
As it reduces the market price per share, increasing their marketability
What is the purpose of a bonus issue?
To increase the marketability of the shares, as it increases the number of shares in existence and reduces their price
What does an increase in dividends ususally result in?
Reduce the level of retained cash available and increase the need for external finance to fund investment projects
Legal constraint to dividend policy?
A dividend can only be paid if there is a credit balance in the retained earnings account in the statement of financial position
Liquidity constraint to dividend policy?
Making sure cash is available to pay dividends
Shareholder expectations for large dividends paid in current year?
This may create expectations of the same, or even higher, in future. If these expectations are then not met, key investors may sell their shareholdings
What is the potential result of surprise cut in dividends?
It may be interpreted as a signal of liquidity problems
What is meant by borrowing convenants?
A loan agreement may include a clause which limits dividend payments to help ensure the loan is more secure
