Chapter 6: Corporate Actions

Question 1

What is a Preference Share?

Why are they AKA hybrid?

Answer 1

A PS are hybrid instrument, as income events are dividends, but these are specified (amount & frequency), similar to a bond.

There is a also no contract to oblige the issuer to pay these.

Question 2

What is a Bullet Payment?

Answer 2

Whereby the principal of the bond is paid in a lump sum payment.

Question 3

What is a Non-Bullet Issue?

Answer 3

Whereby the principal of the bond can be paid over a series of payments.

Question 4

Which Bonds Typically Have Higher Coupons?

Bullet or Non-Bullet?

Answer 4

Bullets

As the lump sum payment is more uncertain causing a higher default risk, demanding higher coupons to relfect this.

Question 5

What is a Sinking Fund?

4 points? ChatGPT ones?

Answer 5

• A variation of the Single Bullet Maturity
• Issuer sets aside funds annually for maturity payment
• Funds held by a trustee, used for bond buybacks (sub par value) or held until maturity
• Reduces defualt risk

Question 6

What is a Putable Bond?

Answer 6

A bond that gives the investors the flexibility to require the bonds to be redeemed early, after giving the issuer due notice.

Question 7

What is a Callable Bond?

Answer 7

Where the issuer has the right, at specified points, to redeem some or all of the bonds at a pre agreed amount, often par value.

Question 8

What is a Bonus Issue?

Definition

Answer 8

A bonus issue is where a company issues new shares to its shareholders for no consideration, raising no further capital.

Question 9

What is a Bonus Issue AKA?

2 more

Answer 9

• Scrip Issue
• Capitalisation Issue

Question 10

Why are Bonus Issues Used?

Answer 10

To improve the liquidity and marketability of their shares.

Question 11

How are Bonus Issue Shares Created?

Why does this change shareholder funds in company accounts?

Answer 11

These are made by converting undistrubuatble capital reserves into share capital. Converts reserves from previous share premiums or retained profits.

Question 12

What Changes Following a Bonus Issue to a Companies Value?

Answer 12

• Nominal Value of the share capital will increase proportionatley to the number of shares issued.
• The net worth of the business should remian the same

Question 13

What Changes Following a Bonus Issue to a Companies Mkt. Cap?

Answer 13

• Dividends per share will proportionatley fall, in line with the market value
• However Market Cap should remain the same.

Question 14

Why Might a Bonus Issue Increase Share Value?

Answer 14

Once a share is double figures (UK) or $200, it is considered expensive, so improving the liquidity can result in a bigger market an increased share price.

Question 15

What is a Stock Split?

How is this represented?

Answer 15

A corporate action whereby issued shares are divided into muliple shares.

E.g. 1 share becoming 5 is a “5-for-1 Split”

Question 16

What is a Reverse Stock Split? (Consolidation)

Answer 16

A corporate action whereby issued shares are combined, to boost a shares value. This makes them more valuable if the share values have fallen too low.

This, like a regular split, has no impact on the accounts.

Question 17

What is the Ex-Bonus Price?

Not an Ex-girl…….

Answer 17

The price after the issue.

Question 18

What is the Cum-Bonus Price?

Answer 18

The price before the issue.

Question 19

What is a Pre-Emptive Right?

Definition

Answer 19

A pre-emptive right is a right (but not obligation) of existing shareholders in a corporation to purchase newly issued stock before it is offered to others. To protect current shareholders from dilution or control loss.

Question 20

Why do Pre-Emptive Rights Exist?

Answer 20

To prevent the issue of new shares, convertibles etc, other than to existing shareholders, with the prior approval in a meeting (AGM).

Question 21

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What is a Special Resolution?

Why is it needed?

Answer 21

Jurisdictions require this from shareholders before before allowing new shares to be alloted in cash to anyone other than existing shareholders.

Question 22

What is the Maximum Issuance of New Shares p/a?

Answer 22

5%

Unless there is a detailed reason otherwise

Question 23

What is a Rights Issue?

What does this mean?, Can this be traded?

Answer 23

• A rights issue is an offer by a company of new shares for cash to the existing shareholders in proportion to their holding
• Usually at a discount
• This right (privellage) can be traded

Question 24

Do Rights Have an Expiry Date?

If so are they short or long term

Answer 24

Yes, these are usually short term.

Question 25

What Makes a Rights Issue Attractive? ## Footnote Think about 5

Answer 25

* No dilution (assuming the take up their rights) * Discounted Shares (Attractive) * No obligation * Can sell the shares of the right * Can be underwritten

Question 26

What is the Cum-Rights Period? ## Footnote How long is it?

Answer 26

Owners of cum-rights shares can maintain their proportionate ownership and avoid dilution. These rights are short-term, minimum 10 days, and can be traded in the secondary market.

Question 27

What is a Provisonal Allotment Letter? ## Footnote What does this highlight?

Answer 27

A renouncable and transferable letter that sets out: * Shareholders Holding * The rights * Acceptance date

Question 28

What is the Nil-Paid Value?

Answer 28

The difference between the theoretical ex-rights price and the rights issue price.

Question 29

What Options do Shareholders Have When Dealing with a Rights Issue? ## Footnote 4 options

Answer 29

* Take up the rights in full * Sell the rights nil-paid in full * Sell the rights nil-paid to preserve current stake without dilution * Take no action

Question 30

What is a Share Buyback?

Answer 30

When a company decides to use cash to repurchase shares from existing shareholders.

Question 31

When are Buybacks Considered Worthwhile? ## Footnote Why might a company do this?

Answer 31

1. When the company has reduced its activities, and has a surplus of cash to return to shareholders. 2. When a company wants to reorganise its capital structure to include more debt and less equity.

Question 32

Why are There Restrictions on Share Buybacks?

Answer 32

1. To prevent shareholders from being unfairly preferred to creditors. 2. To make sure the company has receieved approval to buy back its own shares.

Question 33

What is The Creditors Buffer?

Answer 33

Where the capital base of a company (in the majority of cases share capital and share premium) must be maintained.

Question 34

Do Share Buybacks Need to be Discussed at AGMs? ## Footnote If so what is discussed?

Answer 34

Yes In this meeting they willl discuss whether its allowed, the price for the shares and the quanitity. (The limit must be in line with the regulator).

Question 35

What is a Block Trade?

Answer 35

Where an investement bank acting for the company will seek to do a small number of large trades with investors.

Question 36

What is an Accelerated Book Build?

Answer 36

Involves offering shares in a short time period, with little or no marketing. This is done very quickly, 1 or 2 days.