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Corporate Finance > Topic 9: Capital Management & Equity Strategy > Flashcards

Topic 9: Capital Management & Equity Strategy Flashcards

1
Q

Under Ch 7 of Corps Law, shares can’t be issued except:

A
  1. disclosure document (prospectus, info statement, profile statement)
  2. one of specific exceptions from prohibition (small scale ie <20 offers in 12 mths; offers to professional/sophisticated investors; offers relating to takeovers (governed by Ch 6 of Corps Law)
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2
Q

ASX Listing Rules

A
  • co prohibited from issuing new shares > 15% of capital in 12 mth period w/out prior approval from S/H (ie making a placement of >15% of cap).
  • prohibition does not apply to pro rata issue to existing S/H
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3
Q

Major categories of new equity issues: (2) describe / give examples

A
  1. public: seasoned vs IPO. Seasoned: rights, placements, DRPs Options Staff plans, general issue
  2. private: angel investors, venture cap, MBOs/LBOs
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4
Q

Why go public / do IPO

A
  1. mobility of capital (liquidity for minority shareholders, realise capital gains, diversify family holdings, employee incentives)
  2. access new funding sources - future equity raising, convertibles
  3. raise profile of company
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5
Q

Sources of generating an IPO

A
  1. entrepreneur floating business
  2. listed companies exiting a particular business (float or spin off)
  3. private equity investors seeking return on investment
  4. privatisation - public entities sold
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6
Q

Costs of IPO

  1. Direct
  2. underpricing
  3. Indirect
A
  1. Direct: underwriting fees, can be substantial
  2. underpricing: sale of eq < mkt p; measured as 1st day return for IPO
  3. Indirect: senior mgmt time in info prep
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7
Q

Placements:

  1. definition
  2. advantages
  3. Disadvantages
A
  1. definition : issue of shares to a selected group of investors
  2. advantages: speed (more quick than pro rata); price (closer to mkt p than rights); control (company can direct placement to friendly institution)
  3. Disadvantages: regulatory limits; dilution; signalling
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8
Q

Public Issues

Reasons against

A
  1. cost (prospectus, accounting/legal; underwriting/brokerage; listing/govt charges
  2. dilution of ownership of existing S/H
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9
Q

Rights issues & entitlement issues

  1. definition
  2. advantages
  3. disadvantages
A
  1. definition: right to buy n ofn new shares at price S on or before expiry date. Call option. Renounceable (can be sold) or non renounceable (right lapses)
  2. advantages: lower cost; if renounceable does not affect wealth of existing S/H; no regulatory limits on size of issue; can be fast track timetable
  3. disadvantages:n slower to implement
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10
Q

Share Purchase Plan

1. definition

A

SPP: allow each subscriber to purchase new shares up to max dollar amt regardless of size of existing S/H
retail friendly

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11
Q

Dividend Reinvestment Plans

  1. definition
  2. advantages
A

DRP: allow S/H to reinvest dividends into shares in the company
These are essentially non renounceable rights - investors have to subscribe to avoid being diluted
2. Advantages to S/H: avoid high transaction costs assoc w/ small trades; enable shares to be acquired at a discount (normally 0 - 5%)

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12
Q

Takeover consideration

  1. definition
  2. advantages
  3. disadvantages
A
  1. definition: share for share exchanges sometimes used to effect change of control of company
  2. advantages: shares issued are valued at mkt p; avoids restrictions of placements away from existing S/H; avoids loss of debt capacity arising from debt funded cash
  3. disadvantages: dilution of control, documentation required
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13
Q

Spin offs

1. definition

A
  1. definition: usually issue shares in satellite co usually a subset of parent. Funds develop new co without affecting parent’s funding capacity
    - enables S/H to participate in new co w/out affecting old
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14
Q

Dividend policy overview

  1. definition
  2. forms of payment
A
  1. definition: any direct payment by corp to shareholders

2. forms of payment: cash, stock, share repurchase

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15
Q

Capital Mgmt transactions

A
  • special dividends
  • pro rata return of capital
  • on market buy back
  • off market, equal access buy back
  • off mkt selective buyback
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16
Q 
Capital Mgmt transactions: 
Under Ch 14 of Corps Law:
1. buybacks are permitted if: 
2. 5 types of share buybacks
3. capital reductions can be made if:

ASX Listing Rules also state

A
  1. buybacks are permitted if: co can still pay creditors; and the required procedures are followed
  2. 5 types of share buybacks: min holding; employee share schemes; on market; equal access; selective buy back
  3. capital reductions can be made if: fair & reasonable; can still pay creditors; approved by S/H
  4. ASX Listing rules: orderly market must be maintained; buybacks only allowed if there is at least 5 trading days in shares in preceding 3 mths and price is not >5% above av mkt p
17
Q

Ordinary Divs:

Special Divs:

A

Ordinary Divs: regular payour of portion of net inc to S/H. received by all pro rata & franking
Special Divs: once-off to all S/H; pro rata and franking attached

18
Q

Pro Rata Cap return

A 
Specified amt per share returned to all shareholders.
# shares remains same, but Paid capital is reduced.
19
Q

On mkt Share Buybacks

A

Co repurchases shares. Programme states # shares, but timing & final quantity is at discretion

20
Q

Off market buyback

    • equal access style
  2. Selective
A
    • equal access style: identical offer to all S/H to acquire % of their shares. May be tender basis
  2. Selective: offer made to select S/H to acquire certain % of shares
21
Q

Pricing new equity issue

A
  1. analysis (PV of future CFs, P/E or Value / EBITDA multiple)
  2. Market Based pricing
22
Q

IPO Underpricing
what is it
Explanation
Vendor

A

what is it: sale of equity below mkt price
Explanation: reimbursement to investment banks and investors for liquidity, capital provision and information processing.
Vendor: compensation to investors & banks as above
Costs are significant

23
Q

Dilution to ownership vs dilution to value

A

Dilution to ownership - ownership reduced, but your value may be higher if ‘pie’ is bigger (wealth transfer)
Dilution to value -

24
Q

Choices for rights

A
  1. do nothing
  2. pay (take up full or partial rights)
  3. if renounceable, could sell (sell a)n cum shares b) ex shares c) rights )
  4. sell the lot
25
Q

When deciding on rights issue consider:

A
  1. size of discount
  2. is issue fully, partially or not underwritten
  3. how should shortfall facility operate
  4. should you use accelerated institutional offering
26
Q

Alternative means of raising equity: consider

A
  1. issue pricing (ie discount)
  2. tranaaction costs
  3. dilution
  4. speed and certainty of execution
  5. amount that can be raised
  6. regulatory requirements
  7. strategic objectives
  8. assessment of likely takeup by existing shareholders
27
Q

Dividend policy:

How to decide how much to pay

A
  1. wise to retain cash to fund NPV positive projects
  2. cash is needed to fund operations and service debt
  3. typically pay an interim and total dividend
  4. sometimes use a ratio, sometimes use target
28
Q

What effect does dividen policy have on a company

A
  1. OFCF cannot be impacted by anything non operational.

OFCF is not impacted by capital structure or financing decisions

29
Q

Lintner model:

A
  1. companies prefer stable dividends.
  2. Managers focus on change in div payout not the amount.
  3. Managers avoid making changes now that might have to be reversed later on.
  4. Earnings changes are main determinant of div change and investment requirements have little effect on div policy.
30
Q

Dividend observations

A
  1. Divs are substantial (US; 2/3 of earnings paid in divs)
  2. a lot of co’s don’t pay divs
  3. corps like paying stable divs
  4. share repurchase are economically significant (buybacks. In Aus - note that cap gains impact decision. Is US, no tax advantage to share buyback - they have no franking credits)
31
Q

M&M Dividend policy - factors determining

A

1 Not wanting to send signal to market,
2 not disappointing investor base (clientele effect),
3. maintain cash reserve for flexibility,
4. not paying out spare cash an agency cost and tax systems (after tax costs).

32
Q

M&M: Corps should follow residual div policy

A
  1. business’ should review available cash,
  2. retain whats needed for future positive NPV projects and
  3. distribute residual as dividends.
33
Q

Tax policy

A

Australian tax policy favours higher dividend payout. (income tax vs cap gains; consider franking credits)

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