Equity Finance (2)

Question 1

What is a public issue?

Answer 1

A direct sale to the general public. This is generally the most expensive method of issuing new shares

Question 2

What is a offer for sale?

Answer 2

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

Question 3

What is a placing?

Answer 3

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

Question 4

What is a rights issue?

Answer 4

An offer to allow existing shareholders to buy new shares in proportion to their existing holdings

Question 5

What is a subscription by tender?

Answer 5

Like an auction, with the public being invited to bid for shares. Useful where setting a price for the shares is difficult.

Question 6

What is meant by quoted?

Answer 6

Raise new equity finance at the same time as becoming listed. An expensive process

Question 7

What is meant by unquoted?

Answer 7

Use a rights issue or private placing

Question 8

Why do ordinary shareholders take more risk than any other type of investor?

Answer 8

Ordinary dividends are discretionary

Ordinary shareholders rank last in the event of bankruptcy/liquidation

Question 9

Factors for an IPO?

Answer 9

Legal restrictions

Underwriting costs

Valuation

Stock exchange rules

Question 10

What is the rights issue?

Answer 10

The existing shareholders are offered more shares in proportion to their exisitng holding

Question 11

What is the expected share price following the rights issue?

Answer 11

The TERP of the share

Question 12

What happens in a bonus issue?

Answer 12

Reserves are converted into share capital, which is distributed as new shares to existing shareholders

Question 13

Is finance raised in a bonus issue?

Answer 13

No finance is raised

Question 14

What are bonus issues also called?

Answer 14

Scrip issue, or capitalisation of reserves

Question 15

Why do stock splits occur?

Answer 15

As it reduces the market price per share, increasing their marketability

Question 16

What is the purpose of a bonus issue?

Answer 16

To increase the marketability of the shares, as it increases the number of shares in existence and reduces their price

Question 17

What does an increase in dividends ususally result in?

Answer 17

Reduce the level of retained cash available and increase the need for external finance to fund investment projects

Question 18

Legal constraint to dividend policy?

Answer 18

A dividend can only be paid if there is a credit balance in the retained earnings account in the statement of financial position

Question 19

Liquidity constraint to dividend policy?

Answer 19

Making sure cash is available to pay dividends

Question 20

Shareholder expectations for large dividends paid in current year?

Answer 20

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

Question 21

What is the potential result of surprise cut in dividends?

Answer 21

It may be interpreted as a signal of liquidity problems

Question 22

What is meant by borrowing convenants?

Answer 22

A loan agreement may include a clause which limits dividend payments to help ensure the loan is more secure