shareholder’s rights
Residual holders are the equity holders
Preferred shares
– a form of equity financing
- Event of liquidation, preferred shareholders rank ahead of common shareholders
- Are priced as a perpetuity
- Provide a benefit for taxes given that dividend income receives preferential tax treatment as compared to interest income
- When dividneds are in arrears are paid, the preferred shares have a cumulative provision
Preferred shares are similar to bonds in that
- Call provisions
- Convertible features
- Retraction provisions
- Rated by rating agencies
Straight preferred shares
- Have no maturity date
- Pay a fixed dividend
- Dividends are paid at regular intervals
- Have a positive yield spread over long Canada bonds
Retractable preferred shares
- Can be sold back to the issuer
- The retraction feature allows the shareholder to sell it to the issuer at an early maturity date
- If interest rates go up, it would be beneficial to have a retractable preferred share
- Pay a fixed dividend at regular intervals
- Have a negative yield spread (before tax) over mid-term Canada bonds
- The right to sell them back to the issuer
Floating Rate preferred shares
- Long marturity date
- Divdiends are paid at regular intervals
- Have a positive yield spread (after tax) over banker;s acceptances
Share class
- Prices depend on voting rights of the shares
o Therefore, when there is a takeover,this is the reason they pay a different price for different types of shares
PRemeptive right
- A common stock has the characteristics of a call option because it has unlimited upside potential
What is the tax value of money
- Accounting for the fact that dividends are taxed more favourably than is interest income
warrants
- Differe from call options in that
o Warrants impact the firm while call options do not
o Call options have shorter maturities than warrants - Issuing bonds plus warrants is similar to issuing
o Convertible bonds - They are similar to call options on stocks, the equivalent of the strike price is the price of exercise of the warrant
- A wrrant’s value is due , in part to its long-term maturity
Convertible bonds are issued to
- They are issued to
o Reduce underwting costs
o Permit cheaper initial financing
o Minimize dilution
convertible bonds conversion ratio
specifies the number of shares recived for each convertible bond
the value of convertible debt is
a function fo the risk of default
the prie a convertible bond would sell for if it could be converted into common stock is called
the straight bond value
if the share price rises above conversion price
invesotrs will convert te bonds
what is the conversion premium
- The percentage difference between the value at which the bonds are trading and their conversion value
how do you allocate the amount of hard retractable preferred shares in the f.s
liabilities
how do you allocate the amout of soft retractable preferred shares in te f.s
ownership equity
what is a hard retraction requirement for preferred shares
the preferred shares must be paid off with cash
what are income bonds
- They appear similar to debt but are closer to equity
- They are generally issued after a reorganization
- The interest is tied to some level of the cash flow of the firm
what is an index bond
An Index Bond - Is not not a callable bond - It is a o Commodity bond o Real return bond o Income bond
Rank securities form highest to lowest
- bank loans
- long-term unsecured debt
- convertib le preferred shares
- common equity
