Long-Term Finance

Question 1

Advs of rights issue

Answer 1

Opportunity to increase investment at a cheap cost
If don’t want to invest, can sell and maintain wealth
No change in control
Simple and cheap
Usually successful
Favourable publicity

Question 2

Definition:
Cumulative Preference Shares

Answer 2

Those for which dividend must be paid in a following year if they are not paid in the current year.

Question 3

Definition:
Participating preference shares

Answer 3

Participating preference shares give the shareholder fixed dividends plus extra earnings based on certain conditions being achieved

Question 4

Two main types of share and characteristics

Answer 4

Ordinary - voting rights, discretionary dividends
Preference - no voting rights, guaranteed dividends

Question 5

Definition:
Rights issue

Answer 5

Issue of new shares at a discounted price to current shareholders based on their current shareholding

Question 6

Disabbreviate and define:
CRP

Answer 6

Cum rights price - price of shares immediately before issue

Question 7

Disabbreviate and define:
TERP

Answer 7

Theoretical Ex Rights Price
Price of shares after rights issue

Question 8

Place these in order of debtor priority upon winding up a company:
Preference shares
Debt holders
Ordinary shares

Answer 8

Debt holders
Preference shares
Ordinary shares

Question 9

Define Convertible Preference Shares

Answer 9

Preference Shares which offer the opportunity to be convereted into ORdinary shares at a fixed date in the future or after a fixed period of time.

Question 10

Define the difference between Primary and Secondary capital markets

Answer 10

Primary capital market enables a company to sell shares througha stock market - preventing the need to contact investors individually.

Secondary capital market enables investors to sell to one another.

Question 11

Five benefits of listing on a stock market.

Answer 11

1. More accurate valuation of the company;
2. Creates mechanism for buying and selling shares in future at will;
3. Raise profile of entities, enabling selling of debt in the future;
4. Riase capital for future investment;
5. EMI shcemes more attractive - IPOs can apprecaite price

Question 12

Four disadvantages of listing on a stock market

Answer 12

1. Costly for a small entity;
2. Having to make more shares available leading to a dilution of control;
3. More onerous reporting requirements;
4. Stringent listing requirements on the Stock Market.

Question 13

List the seven advisors who could be involved in a share issue

Answer 13

1. Investment Banks;
2. Stockbrokers;
3. Institutional investors;
4. Registrars of issue;
5. Public and investor relations;
6. Listing accountants;
7. Underwriters.

Question 14

Three methods for issuing new shares

Answer 14

1. IPO (listing);
2. Placement;
3. Rights Issue.

Question 15

Two methodologies for pricing an IPO

Answer 15

1. Fixed price set by the company on sale;
2. Via a tender agreement.

Question 16

Define how a tender will take place

Answer 16

1. Subscribers tender for shares at or a bove a minimum price;
2. Company sets a strike price and allocates shares to all investors who tendered the strik price or more;
3. Investors pay the strike price regardless of the amount of the intial bid.

Question 17

Share placement

Answer 17

Shares placed directly with certain investors under pre-agreement.

Question 18

List the four types of covenant a lender could place on a company after issuing it withe debt.

Answer 18

1. Dividend Restriction;
2. Borrowing rations;
3. Fincial reporting requirements;
4. Issuance of further debt.

Question 19

When securing debt would a lender prefer a fixed or floating charge?

Answer 19

The lender would prefere a fixed charge. If the comapny is wound up, it would have the right to a specific asset as opposed to being considered in the pool of floating charges against the underlying asset. A fixed charge holder would be paid prior to a floating charge holder.