Chapter 4 - Equities, Part 1

Question 1

What is the difference between a Plc and a ltd company?

Answer 1

Ltd are private companies and must have one shareholderPlc are public limited companies and must have at least two shareholdersOnly Plc’s can issues shares to the public.All listed companies are Plc’sNot all Plc’s are listed

Question 2

What happens at an AGM?

Answer 2

These are compulsory annual general meetings.Shareholders question the directors about the strategy and operations and vote either in person or by proxy (register their vote by filling in a form)Approve dividend and accounts too

Question 3

What is an EGM? Who is it called by?

Answer 3

Extraordinary general meetings.These can be called at any time where there is a major decision by the board or 10% or more of the voting sharesEg acquisition, structure, name change, liquidation

Question 4

When a shareholder appoints someone to vote on his behalf at a company meeting, what is it referred to as?

Answer 4

Voting by proxy

Question 5

What are the two types of equity?

Answer 5

Ordinary - receive dividends half yearly or even quarterly. They carry the full risk and reward. Dividends are variable (% of EPS, earnings per share)Preference - some companies have this. These are normally non-voting (except when dividend haven’t been paid), they pay fixed dividends (% of nominal value), rank above ordinary shares

Question 6

What are the typical features of preference shares?

Answer 6

Non-voting unless their dividends haven’t been paidFixed dividends each year at an amount set at first issue and paid before ordinary sharesNot every company has this type of sharesRank ahead of ordinary shares

Question 7

What’s the difference between a cumulative and participating preference share?

Answer 7

Cumulative- dividend entitlements accumulates if they are not paid. For non-cumulative this dividend is lost if not paid.Participating- when directors can award extra dividend on top during a good year

Question 8

What’s the difference between convertible and redeemable preference shares?

Answer 8

Convertible - the option to convert to ordinary sharesRedeemable shares - with a date the nominal value is repaid

Question 9

What’s the difference between covered and uncovered dividends?

Answer 9

The companies pay dividends out of profits, (any surplus profits form part of their distribution reserves).Covered - paid from this years profitsUncovered - paid from previous years profitsDividend cover = EPS/ Dividends(>1, covered;

Question 10

What are the distributable reserves?

Answer 10

These are the post-tax profits made over the life of a company, in excess of dividends paid.

Question 11

What is the calculation for dividend yield?

Answer 11

Dividend expressed as a percentage of the total value of the company’s share:= Total dividend / (no. Shares * share price) * 100

Question 12

What is an ‘unrealised’ capital gains?

Answer 12

If the share price goes up then the investor has made a capital gains. However if the shares have not been sold, ie. The gains are unrealised, there is a risk the share price will drop

Question 13

What are the constitutional documents of a company more commonly known as?

Answer 13

To form a company you need:1) memorandum of association: confirms the subscribers’ intention to form a company and agreed to take at least one share each (ie. Information of the company to everyone else - name, country, objectives, etc)2) articles of association: covers the relationship between the company and its owners, ie., shareholders (ie. Details internal regulation - proceeding of general meetings, voting rights, etc)

Question 14

What are the 2 key shareholder rights?

Answer 14

1) right to subscribe to new shares (rights issue)2) right to vote

Question 15

What are the 4 main categories of risk to do with owning shares?

Answer 15

1) Price - price could fall2) Liquidity - difficult to sell3) Issuer - if the company collapsed, shares are worthless4) FX/Currency - with overseas investments

Question 16

What are the 3 types of corporate action? Give examples for each.

Answer 16

1) Mandatory corporate action: no shareholder/bond holder intervention (eg. A bonus issue - issue new shares to reduce the price of the share and increase liquidity; and, dividends)2) Mandatory corporate action with options: there is a default option of the shareholders do nothing (rights issue, the shareholder can buy, sell or do nothing with new shares offered at a discount. If they do nothing the shares are offered to the market)3) Voluntary corporate action: requires shareholders to make a decision (take over or merger)

Question 17

For a bonus issue, what are the 2 ways it can be expressed?

Answer 17

If they are offered 1 new share for every 4 they own:1) Euro/Asian= 1:4, ie. ‘X new shares for each Y existing’2) American= 5:4, ie. ‘What you will have: what you had’

Question 18

What is a bonus issue otherwise known as?

Answer 18

A scrip or capitalisation issue

Question 19

What’s the reason companies do rights issues and bonus issues?

Answer 19

Rights issue: raise money. They offer new shares to existing shareholders first.Bonus issue: if share value has got too high, they split the units into more units to make it more liquid.

Question 20

How are shares purchased around the time of dividend payouts?

Answer 20

Shares are bought and sold with the right to receive a dividend up to a date shortly before the dividend payment is made - this period is called CUM-DIVIDEND. If they are bought cum-dividend THE PURCHASER will receive the dividend.Alternative is EX-DIVIDEND.

Question 21

Why might a company have a higher than average dividend yield?

Answer 21

Company is mature - lots of cash but limited growth potential. Or it is expected to be unsuccessful.

Question 22

What’s the difference between authorised share capital and issued share capital?

Answer 22

Authorised : how many you can issueIssued : how many have you issuedDifference between them is where bonus and rights issue come from?

Question 23

What are the 3 ways companies are listed?

Answer 23

1) primary - offer for subscription (eg investment trust) company goes direct to investors2) primary - offer for sale, company raises money through an IB to retail and professionals3) primary - private placement, company raises money through an IB to institutions and wealthy ppl (not to retail because it’s too expensive eg. Advertising)

Question 24

What is nominal value?

Answer 24

Face value (what it was issued at, not the current market value)