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Unit 2: Securities > 6. Corporate actions > Flashcards

6. Corporate actions Flashcards

1
Q

What are income events?

A

Bonds: Coupons
- fixed
- floating rate

Equities: Dividends
- ordinary shares (variable)
- pref shares (fixed)

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2
Q

What are capital events?

A

Redemption of bonds:
- bullet issue
- callable/putable issues
- sinking funds

Shares:
- rights issues
- bonus issues
- splits and consolidations

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3
Q

What are bullet issues?

A

fixed repayment of capital at end

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4
Q

What are callable vs putable isssues?

A

Callable: redeemed earlier at discretion of issuer
- usually when company believes interest rates will fall in future so want to have option where they can redeem bond and issue smt w lower coupon

  • usually cheaper for investor

Putable: redeemed earlier at discretion of investor
-usually when investor believes interest rates will rise in future, allows them to redeem and invest money somewhere else (as bond prices will fall)

  • usually more expensive
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5
Q

What are sinking funds?

A

Where principal is paid in part before final redemption date

  • reduces risk for investors
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6
Q

What is the difference between the cum-dividend period and the ex-dividend period?

A

Cum-div period: buyer of security will be entitled to next dividend payment

Ex-div period: buyer of security will not be entitled to next div payment (seller will)

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7
Q

What is the record date?

A

The record (books closed) date is the date on which a company inspects
the register of members in order to establish which shareholders will be sent the dividend

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8
Q

What is the usual record date in the UK?

A

Tends to be a Friday

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9
Q

What is the Ex-div date in the UK typically?

A

Day before record date so Thursday

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10
Q

What is a special ex-date trade?

A

A trade where the share is bought/sold without the dividend that takes
place in the cum-div period

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11
Q

What are the regulations around special ex-date trades in the UK?

A

It is only permitted for up to 10 business days before the ex-div date

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12
Q

What is a special cum-bargain?

A

A trade where the share is bought/sold with the dividend that takes place
in the ex-div period

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13
Q

what are the UK regulations around special cum-bargains?

A

It is only permitted up to the day before the dividend
payment date

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14
Q

Why may investors want to trade special-ex?

A

To avoid income tax

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15
Q

How is a claim generated if due to an error a buyer who traded in the cum-div period did not receive dividend?

A

Buyer’s broker makes claim from seller’s broker

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16
Q

What is a rights issue?

A

A follow on issue of shares giving existing shareholders the right to subscribe to more shares in proportion to their existing holding

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17
Q

What are the benefits of a rights issue?

A
  • mitigates risk of diluting ownership
  • shares typically offered at discount to current market price
  • a shareholder who does not want to subscribe more cash and take up
    their rights can sell them
  • issues are generally underwritten
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18
Q

when can shareholders waive preemption rights?

A

Through a special resolution at a general meeting of UK-listed companies

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19
Q

what happens to share price after rights issue?

A

Share price falls because new shares issued at discount trade pari passu with existing shares on markets causes drop in price

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20
Q

What is the theoretical ex-rights price and how to calculate?

A
  • price drop in share price after rights issue
  • add the price of the discounted price to the original price in the rights issue ratio and then divide the total by the number of shares after the rights issue
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21
Q

What do the numbers in the righst ratio represent?

A

Left: new shares

Right: existing shares

So if it is a 1:4 rights issue at 1.50, for every 4 existing shares you have you can buy 1 more at discount of 1.50

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22
Q

How can an investor sell their rights?

A

At the nil-paid price

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23
Q

How to calculate nil-paid price?

A

Theoretical ex rights price - subscription price (for new rights issued shares - so the discount price)

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24
Q

What is an open offer?

A

Very similar to a rights issue, but the investor are not permitted to sell their rights nil-paid

Instead they have only two choices:

  • Take the rights
  • Allow the rights to lapse
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25
Q

What is the letter informing investors of their preemptive rights ?

A

Provisional allotment letter

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26
Q

What are the 4 options an investor has in a rights issue?

A
  • Take up the rights
  • Sell the rights
  • Split the rights
  • Allow the rights to lapse
27
Q

How many days does an investor have to make their decision on a rights issue?

A

Typically at least 10 business days from receipt of letter

28
Q

What is the splitting rights?

A

Selling a portion of the rights available and use the funds raised to finance the take-up of the remaining rights

29
Q

What is splitting rights also known as?

A

Tail swallowing

30
Q

What is maximum subscription at nil cost

A

Buying the largest amount of shares possible at no extra cost

31
Q

What is the calculation to find out how many shares to sell for maximum nil paid rights?

A

Number of rights to be sold = (number of rights available x subscription price)/theoretical ex-rights price

32
Q

Should maximum number of rights to be sold at nil price be rounded up or down?

A

Always round up even if it is 0.1 as we don’t want to contribute any money to afford the new rights

33
Q

What is another name for a bonus issue?

A

A scrip issue

34
Q

What is a bonus issue?

A

A follow on issue of shares to existing shareholders in proportion to their existing holding but:

  • shares issued free of charge
35
Q

What is the key drawback of a bonus issue?

A

Significantly dilutes share price (as the new issues are free)

36
Q

Why might a company issue bonus/scrip issues?

A

In order to improve marketability of shares that have risen significantly in price - liquidity of share falls as price increases

37
Q

How is ex-scrip price calculated?

A

Same as ex-rights price calculation (but new issue is always 0)

38
Q

What are alterations to share capital?

A

Any adjustment to issued shares alters accounts (eg. statement of financial position - BS)

39
Q

WHat is the effect of an issue of new shares on the BS?

A
  • Share capital increases
  • Share premium increases
40
Q

What does share capital reflect on the BS?

A

Number of shares in issue x nominal value of shares

(also referred to as called up share capital)

41
Q

What does share premium reflect?

A

The premium at which a share is issued (any surplus raised on issue - diff between NV and the price share was acc issued at)

42
Q

What is the effect of a bonus issue on the BS?

A

NV per share: remains the same

Called up share cap.: rises

Share premium account: decreases

43
Q

What is a stock split?

A

Reduce share price by splitting existing shares into smaller portions

44
Q

What is the effect of a stock split on the BS?

A

NV: decrease

Called up share cap: Same

Share premium account: Same

45
Q

What is a reverse stock split?

A

Where shares are combined to increase share price (reduces number of shares)

46
Q

What is reverse split also referred to as?

A

Consolidation

47
Q

What is the effect of consolidation of shares on the BS?

A

NV: Increases

Called up share cap: same

Share premium account: Same

48
Q

Why may called up share cap increase even if no new capital has been raised?

A

When a company issues new shares, the nominal value of each share
must be covered in the share capital account; even if no new capital has
been raised

This value is often referred to as the called-up share capita

49
Q

What is a share buyback?

A

When a company uses its own money to buy back shares from existing investors

50
Q

What are 3 main reasons behind share buybacks?

A
  • to rationalise capital structure (buying back equity reduces equity levels meaning more leverage proportianally)
  • to substitute dividend payouts with share repurchases (give investors capital gain rather than income)
  • to deploy excess cash flow and return it to shareholders
51
Q

What is required before a company can do a share buyback?

A

Approval from shareholders through a special resolution at a company meeting

52
Q

What percentage agreement is required in special resolution to allow share buyback?

A

75%

53
Q

What are 4 main methods of company buy-backs?

A
  • block trades
  • accelerated book building
  • best efforts
  • bought deal
54
Q

What is a block trade?

A

Go to institutional asset managers and buy back large blocks of securities

55
Q

What is an accelerated book build?

A

Very quickly gauge potential supply of shares from potential investors

  • sometimes done overnight
56
Q

What is best efforts method?

A

Investment Bank agrees to do their best to buy back the shares that the company wants

  • company will set backstop price
57
Q

What is a backstop price?

A

Maximum price company is willing to buy back its shares at?

58
Q

What is bought deal method?

A
  • more like underwritten deal
  • company gives IB money in exchange for guarantee of set number of shares to be returned in future
  • bank takes on risk for finding shares at this price
59
Q

What is a dawn raid?

A

A direct acquisition technique

  • Acquirer (predator) instructs brokers to
    purchase shares in a target company as soon as the market opens
  • purpose is to take legal control before public disclosures need to be made
60
Q

Why may investors want to buy a stake in a company?

A
  • simply want to own shares
  • building a strategic link
  • attempting to acquire target company
61
Q

When do takeover/merger proceedings have to be announced to market?

A

Once more than 30% of shares in company have been acquired

62
Q

When is a takeover succesful?

A

more than 50% of shares acquired

63
Q

With regards to FCA disclosure and transparency rules which force investors to notify company from 3% what things other than shares are included under this?

A

Indirect exposure to shares

eg.
- options on shares
- contracts for
differences (CFDs)

Unit 2: Securities (13 decks)

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