Ffr Chapter 3

Front 1

Financial Instruments

Back 1

Term for tools a company can use to raise funds / Finance

Front 2

Ordinary Shares

Back 2

Pay cash for returns on investment and potential dividends (not guaranteed, and not interest paying). Bear most of the risk

Front 3

Preference Shares

Back 3

Offer fixed dividend (not guaranteed), no voting rights. Paid before Ordinary Shares in windup, Less Risky than Ordinary

Front 4

Other Types of Preference shares

Back 4

a.       Cumulative (carry forward div pmt), Participating (profit sharing), Variable (var. rate), Convertible (into Ord Shares) are different forms of Preference Shares

Front 5

Debt-Based

Back 5

– use Bonds to Borrow money and pay interest (coupon) – Lower Risk and Rate of Return

Front 6

Debt Based Tools

Back 6

1. Floating Rate notes are linked to a benchmark (usually libor and can be capped or floored (Max / Min))
2. EuroBonds- not taxed, used in Medium to Long Term Financing, sold outside of issuing country
3. Debentures – Interest Bearing Loans, can be purchased by individuals, sold in fixed or floating charges against company assets, can be ranked by seniority
4. Convertible Unsecured Loan Stocks – holder has right to convert into ordinary shares

Front 7

Derivatives

Back 7

a) Financial instrument whose value changes along with an underlying variable
b) low initial investment and
c) settled at future date

Front 8

Types of Derivatives

Back 8

Options
Futures - Buy or sell in future at given price and time, Bid/Offer Spread, Marked to Market,
Swaps - agreement to exchange cash payments to avoid risk, usually in different currencies
Warrants - Options to buy shares at price and date specified by company. Used to incentivize investment

Front 9

New Issues of Shares (Equity)

Back 9

The sponsor takes care of: 1. Determining Issue Price, Marketing, Underwriters (who buys any shares not bought by investors), Stock listing

Front 10

New Issue Methods

Back 10

1. Offer for Sale – Public can buy shares at fixed price
2. Offer for Sale by Tender – Determines interest by gauging price investors are willing to pay. After offers are in, price is determined, and only bids above the price receive shares
3. Offer for Subscription – If desired level of shares are not reached, offer can be withdrawn
4. Placing – Shares are given to clients of the broker
5. Introduction – existing shares are used to obtain a listing on an exchange

Front 11

Rights Issue

Back 11

Shares offered to existing shareholders proportionate to current holdings.
1. If current investors to not purchase new shares, their shares are diluted
2. Scrip Issue (Stock Split) is alternate method where no new money is raised, but share prices are reduced. Makes it more tradeable

Front 12

Seeking a Listing / Quotation

Back 12

Financial Services Authority overlooks Markets (UK Listing Authority is a dept of FSA)

Front 13

Listing Requirements

Back 13

UKLA is in charge of process:
1. Starts with a prospectus which sets out company objectives •
2. Share Value must be Minimum 700K Pounds
3. Advantage of a Listing: Ability to Raise significant funds for Investment and Growth, also Reputation and Status are gained
4. Disadvantage: Costly to obtain and expectations of investors and directors can sometimes be vastly different

Front 14

Advantage to Listing

Back 14

Ability to Raise significant Funds for Investment and Growth. Status Repuatation are indirect advantages

Front 15

Disadvantage to Listing

Back 15

Expensive. Expectations Assymetry between directors and investors

Front 16

Calc Ex Rights Share PRice

Back 16

Mp = 4, 3 for 5 issue at 3.40
5 * 4 + 3 * 3.4 = 30.2 / 8 = 3.78