Equity Securities

Question 1

Mention the two main types of equity claim.

Answer 1

• Ordinary: “ordinary shares”
• Preferred: “preferred shares”

Question 2

Mention the characteristic of ordinary shares.

Answer 2

• Ordinary Shares:
  
  • Hodlers are not promised a specific rate of return
  • Does not have a maturity date
  • May be listed on a stock exchange
  • Have three main rights:
    
    • Receive on a per-share basis dividends as declared from time to time
    • Sell their shares to others
    • Vote for members of the Board of Directors

Question 3

Mention the characteristics of preference shares.

Answer 3

Preference shares:

• Holders have two main rights:
  
  • Receive on a per-share basis dividends as declared from time to time
  • Sell their shares to others
• Traditional preference shares offers:
  
  • A fixed interest rate (debt-like characteristics)
  • For an infinite life - irredeemable (equity-like characteristics)
• Cumulative: any unpaid preferred dividends must be paid before any ordinary dividends can be paid.

Question 4

Recall NLV.

Answer 4

Question 5

How is new share capital raised?

Answer 5

New share capital can be raised by:

• a new company (called a “float” or IPO)
• an existing company (secondary offering)
  
  • Placements
  • Rights Issue

Question 6

Why raise new share capital?

Answer 6

• To keep a new company going until profitability is achieved
• To fund a substantial business expansion
• To lower the ratio of debt to equity

Question 7

Describe placements.

Answer 7

Placement is the sale of a new share in an existing company to an investor. Its advantage includes the speed and low cost at which the funds can be raised. The disadvantage includes the dilution of the voting power and value of existing shareholders’ shares.

Question 8

What is a rights issue?

Answer 8

Rights issue involves giving all existing shareholders the right to buy new shares proportional to their existing holdings. It can be either renounceable or non-renounceable.

Question 9

What is a bonus issue?

Answer 9

Bonus issues are in principle similar to a rights issue, but the issue price is zero. Shareholders do not have to pay fort he new shares.