Lecture 6

Question 1

What is the background of a listed company?

Answer 1

legal entity established under a state
shares of public company listed on stock exchange
main source of equity is ordinary shares
listed on ASX in Australia

Question 2

What are some features of a publicly listed corporation?

Answer 2

1.ownership is dispersed among shareholders
2.objectives and policies determined by board who are elected by shareholders
board appoints management team
3.limited liability of shareholders contained to issue price

Question 3

What are the first three advantages of a publicly listed corporation?

Answer 3

1. In a deep and liquid market, large amounts of money can be raised through lots of shareholders
2. Can raise capital on favourable terms as shareholders reduce risk with a diversified portfolio
3. Separation of ownership and control

Question 4

What are the second three advantages of a publicly listed corporation?

Answer 4

4. Perpetual succession
5. Essential for large scale undertakings
6. Strategy is more effective because of management and ownership separation

Question 5

What are two disadvantages of a publicly listed corporation?

Answer 5

1. Agency problem: managers might not have same incentive as owners for good performance
   Remedies exist under corporate law, auditing, AGM, remuneration, effective corporate governance and threat of takeover
2. Greater scrutiny of activities

Question 6

What is an IPO?

Answer 6

Initial public offering and described as flotation of a business

Question 7

What is the process of an IPO?

Answer 7

The method, terms, conditions and timing of an IPO are decided after consultation between the business seeking flotation (promoter) and its financial advisors

Question 8

Who may advisors consist of in an IPO?

Answer 8

The advisers may include stockbrokers,
investment banks and other specialist advisors with the
required financial, technical and legal expertise.

Question 9

What do advisors in IPO do?

Answer 9

Prepare the prospectus (detailed information on performance of org and includes financial statements and reports) and ensures the business meets the listing requirements.

Question 10

What are IPO underwriters?

Answer 10

They agree to take up the shares not prescribed during the IPO and they might also provide advice

Question 11

What are ordinary shares?

Answer 11

Represent a residual ownership claim on the assets of the firm and are the principle source of funding. Also provides shareholders with influence through voting rights at AGM

Question 12

What are limited liability companies?

Answer 12

Shareholders liability is limited to the extent of the fully paid share.
Shares are normally sold on a fully paid basis but can be sold on partly paid or contributing basis.

Question 13

What is a no-liability company?

Answer 13

Some new business ventures are highly speculative so shares are issued on a part paid basis to attract shareholders.
They are not liable for the unpaid portion of the shares.
Only mining companies are allowed to do this in AUS

Question 14

What are three types of hybrid securities?

Answer 14

Preference Shares: Fixed dividend, not voting rights but get dividends first and paid first in event of liquidation
Convertible securities: start as debt security but can be converted to shares at discretion of holder
Converting securities: Start out as debt, automatically convert to shares

Question 15

What are some equity funding alternatives?

Answer 15

Additional equity can be raised in several ways, such as a

rights issue, share purchase plans, private placements and dividend reinvestment schemes.

Question 16

What is a rights issue?

Answer 16

Under a rights issue a company will offer existing
shareholders the right to participate in an additional issue
of ordinary shares in proportion to their current holding.

Under a renounceable rights issue, the rights to the new
shares can be sold.

Question 17

What is a share purchase plan?

Answer 17

Offer to existing shareholders to buy a set dollar amount regardless of how much they own.
Company meets all costs so shareholder doesn’t incur any fees.
Board might insert condition in the prospectus to scale back the offer because they don’t expect all shareholders to take up the plan - might raise too much.

Question 18

What are private placements and the pros/cons?

Answer 18

Additional shares are sold to selected people such as fund managers.
Pros: Able to be arranged quickly and board can ensure they’re sold to a supporter
Cons: Dilute existing shareholders and may result in fall in price.

Question 19

What are dividend reinvestment schemes?

Answer 19

Shareholders are allowed to purchase more ordinary shares with lower brokerage fees. Became more popular after dividend imputation.

Question 20

How are shares valued?

Answer 20

Supply and demand that is affected by new information as it will change investors expectations of future cash flows, earnings, dividends and required rate of return on shares.
Reflects present value of a shares future expected cash flow.