Types of Listed Equities

Question 1

4 Key points: Ordinary Shares

Answer 1

• Permanent Capital for company
• No Security
• One share, one vote
• Can vote on: Directors, Dividends, takeovers etc.

Question 2

Ordinary Dividend: 4 Key Points

Answer 2

1) Discretionary on the part of the company
2) Paid out of profits
3) Paid after preference dividends
4) Often paid Semi-annual or quarterly

Question 3

Why are ordinary shares known as risk capital?

Answer 3

They are last to be paid out in the event of a wind up.

Question 4

What are “a-shares”
Who issues them?
Why are investors less likely to purchase them?

Answer 4

“Non-Voting Ordinary)
- Same to ordinary but cannot vote
- Issued by founders / families who don’t want to give up control.
- Less attractive to investors as they often trade at a discount

Trade at a discount despite offering the same dividend?

Question 5

What are deferred shares?

Answer 5

Dividend is deferred until a condition is met.

Question 6

What conditions can deferred shares carry?

Answer 6

1) Certain amount of time elapses since issue
2) Certain level of profit is reached
3) Level of profit paid out to other shareholders first.

Question 7

What is a redeemable share?

Answer 7

• Allows the company or shareholder to force a buy back of the share
• Can take place after a specified date
• Must have another class of share in issue first

Question 8

5 Key points about preference shares

Answer 8

• 2nd most common form of shares issued by companies
• Fixed dividend
• Dividend paid in full before ordinary shareholders can be paid
• First equity to be repaid during a wind up (if there is anything left to pay)
• No voting rights (can vote if dividend not paid for 5 years)

Question 9

What is a benefit and a disadvantage of holding preference shares

Answer 9

Fixed dividend limits benefit of increase in profits

Fixed dividend can protect against downside to profit

Question 10

What are cumulative preference shares?

Answer 10

• If coupon is not paid, the coupon accumulates and must be paid next time company are in profit
• Most preference shares take this form

Question 11

What are non-cumulative preference shares?

Answer 11

If a dividend is not paid then it is lost

Question 12

What is a participating preference share?

Answer 12

Entitled to an additional dividend if the company exceeds a certain level of profit

Question 13

Redeemable preference shares

Answer 13

Can be redeemed into an ordinary share by holder / issuer after a certain date

Identifiable by the date in its title

Question 14

Convertible preference shares

Answer 14

• Preference share
• Convertible to ordinary
• Will convert if profit rises to receive better dividend
• Hold as a fixed income security if profit does not increase.

Question 15

What are all the types of preference share?

Answer 15

1) Cumulative
2) Non-Cumulative
3) Participating
4) Redeemable
5) Convertible

Question 16

What are pre-emption rights?

Answer 16

give existing shareholders first refusal if a company issues new shares

Question 17

What are some of the basic rights shareholders are entitled to?

Answer 17

1) Vote at AGM
2) Attend AGM
3) Receive any remaining profit after everything else is paid off
4) Share in profits
5) Receive annual accounts

Question 18

What are the statutory rights of shareholders?

Answer 18

10% or more of shares and can call an EGM

5% or more and can propose resolutions

AGMs must be held at least one a year

Question 19

What are two other names for a bonus issue?

Answer 19

1) Scrip
2) Capitalisation

This process is also known as a capitalisation issue, because in accounting terms, it is achieved through he capitalisation of the company’s reserves.

Question 20

What is the UK convention for a bonus issue?

Answer 20

New shares : Existing Shares

Question 21

What is a rights issue?

Answer 21

An issue of new shares for cash.

Usually at a heavily discounted value

Underwritten by an Investment Bank who will buy any remaining shares

Question 22

How do pre-emption rights differ in France:

Answer 22

shareholders outside the EU are excluded

they receive compensation in the form of proceeds from the sale of their pre-emptive rights

Question 23

What are a shareholders options when faced with a rights issue?

Answer 23

1) Exercise the rights
2) Let rights lapse (recieve lapsed rights payment)
3) Sell the rights nil-paid
4) Split the rights
5) Sell some rights nil-paid and use the money to buy the remainder (Tail Swallowing)

Question 24

What is the nil-paid price?

Answer 24

The price received for selling rights in the market.

Question 25

How is the nil-paid price calculated?

Answer 25

TERP - Subscription Price

Question 26

What is tail swallowing?

Answer 26

The process of:

• Selling some rights to buy more shares with the proceeds

Question 27

What is the formula for calculating the number of rights you should sell?

Answer 27

Question 28

What increases on the statement of financial position following a rights issue?

Answer 28

1) Share Capital
2) Net Assets
3) Shareholders Funds

Question 29

What does not change on the statement of financial position following a rights issue?

Answer 29

1) Share Premium
2) Revenue Reserves

Question 30

What two ways does a company return profits to shareholders?

Answer 30

1) Dividends
2) Share buybacks

Question 31

What is a share buyback?

Answer 31

A company with excess profits will buy back its own shares in the open market.

Question 32

What are two reasons for share buybacks?

Answer 32

1) “Earning enhancements” - increase dividend per share by removing shares from issue

2) Increase value of shares

Question 33

What happens to a share after a buyback?

Answer 33

1) Cancelled
2) Held in “treasury”

Held in treasury means it is kept incase it is needed for future use, e.g. a sale.

Question 34

Why can buybacks be viewed negatively?

Answer 34

• Signals there is nothing more worthwile to company could do with the cash
• Lack of potential future growth.

Question 35

In the companies defence, why is a buyback a more prudent way to pay shareholders?

Answer 35

Increasing a dividend may make it hard to decrease in the future without signalling weakness.

Investors look for a steady stream of dividends.

Question 36

Why might some managers engage in buy backs?

Answer 36

1) Beleive that the share price is undervalued
2) Increase earnings and get targets for bonuses