Corporate Actions

Question 1

what are the benefits to investors in equity from dividend income events?

Answer 1

dividends tend to be predictable in terms of frequency and the amount can show upside potential when the issuer does well

Question 2

what are the main types of bond repayment events?

Answer 2

• bullet maturities
• callable and puttable bonds
• sinking funds

Question 3

what is bullet payment?

Answer 3

the repayment of the principal borrowed occurs as a single lump-sum at the maturity date specified in the bonds contractual term, riskier- usually pay a higher interest

Question 4

what are non-bullet issues?

Answer 4

repay the principal over a series of payments rather than a lump sum, considered to be less risky than bullet issues

Question 5

what is a sinking fund maturity?

Answer 5

variation of single bullet- issuer sets aside a certain amount of funds toward the maturity repayment each year, money is often paid to a separate trustee- reduces issuer risk in repaying the entire principal

Question 6

what is a callable bond?

Answer 6

one where the issuer has the right at specified points during the bond’s life to redeem some, or all of the bonds at a pre-agreed amount

Question 7

what is a puttable bond?

Answer 7

gives the bond investors the flexibility to require the bond to be redeemed early

Question 8

what is a bonus issue?

Answer 8

where a company issues new shares to its shareholders for no consideration (additional fee)- dilutes the value of each individual share.

Question 9

what happens to EPS/DPS following a bonus issue?

Answer 9

they should fall proportionately with the number of new shares issued

Question 10

what is a stock split?

Answer 10

each share is split into a number of shares. done when the share price has become too high, impacting investor access and liquidity

Question 11

what is the difference between a stock split and bonus issue?

Answer 11

the impact on the accounts of the company- stock split will not alter the share capital line as it remains the same amount just split into a larger number of shares

Question 12

what is a reverse split?

Answer 12

opposite of a split- shares are combined/consolidated

Question 13

what are pre-emeptive rights?

Answer 13

give existing shareholders the right to subscribe for new shares

Question 14

what does the existence of pre-emptive rights mean for listed companies?

Answer 14

can’t issue equity shares, convertibles or warrants for cash other than to current equity shareholders of the company, except with the prior approval of these shareholders

Question 15

what is a rights issue?

Answer 15

offer by a company of new shares for cash to the existing shareholders in proportion to their existing holding- usually priced at a discount to the current market price, shareholder has the right but not the obligation to purchase these shares

Question 16

what are the benefits of a rights issue?

Answer 16

• no dilution of shareholders interest
• issued at discount
• no obligation to take up the offer
• shareholders can sell their rights for cash if they don’t want to take them up (payoff for the dilution of interest they will suffer)

Question 17

what is the rationale behind a rights issue?

Answer 17

could be to fund expansion or raise more capital to allow the business to survive

Question 18

what are the mechanics of a rights issue?

Answer 18

right to participate is only conferred to the shareholders who hold the issuing company’s shares cum-rights (hold shares before share trading starts on an ex-rights basis) - this period starts on or shortly after the rights issue is announced, runs for a period up to the acceptance date.

Question 19

how are those entitled to a rights issue told?

Answer 19

via a provisional allotment letter, this is renounceable and transferrable. sets out their existing shareholding, rights allotted over the new shares and the acceptance date.

Question 20

what is the theoretical ex-rights price?

Answer 20

price to which shares should fall to following the rights issue

Question 21

how is the theoretical ex-rights price calculated?

Answer 21

[(no. shares held cum-rights x cum-rights share price) + (no. rights allocated x rights issue price)] / total no. shares held assuming rights exercised.

Question 22

what is the difference between the theoretical ex-rights price and the rights issue price known as?

Answer 22

nil-paid value

Question 23

what are the options following a rights issue?

Answer 23

• take up the rights in full
• sell the rights nil-paid in full
• sell part of rights nil-paid to preserve their current stake without dilution
• take no action

Question 24

what is ‘swallowing the tail’?

Answer 24

relates to the option that shareholders have to sell part of their rights, during a rights issue, nil-paid and preserve their current stake

investors can sell some of their entitlement and use the cash raised to take up the rest of the offer (without having to pay anything)

Question 25

how is the number of nil-paid rights to be sold to make the balance at nil cost calculated (swallowing the tail)?

Answer 25

(issue price of new shares x number of shares allocated)/ theoretical ex-rights price

Question 26

what is a share buyback?

Answer 26

occurs when a company decides to use cash to repurchase shares from existing shareholders

Question 27

what are the reasons for a share buyback?

Answer 27

• company has reduced its activities
• company wants to reorganise their capital structure to include more debt and less equity

Question 28

how is a share buyback approved?

Answer 28

via approval from shareholders, requires a resolution at the AGM

Question 29

how do the mechanics of a share buyback work?

Answer 29

• block trades via an investment bank
• accelerated book build- IB will contact institutions with holdings and seek their willingness to sell