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27 Cards in this Set
- Front
- Back
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What is a capital market? |
Financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.
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What is the primary function of Capital Markets |
Enable companies to raise new finance (either equity or debt).
Through the stock market, a company can communicate with a large pool of potential investors, so it is much easier for a company to raise finance this way, rather than contacting investor individual.
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What is the secondary function of Capital Markets |
Enable investors to sell their investments to other investors. A listed company’s shares are therefore more marketable than an unlisted company, therefore they are more attractive to investors.
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What is the major distinguishing feature between a private limited company and public limited company |
A private limited company’s s disclosure requirements are lighter, but for this reason its shares may not be offered to the general public and therefore cannot be traded on the stock exchange.
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Discuss Public Limited Company |
Public limited company Is a limited liability company that may sell shares to the public. It can either an unlisted or a listed company on the stock exchange. The company will have Plc after its name to indicate its status a public limited company.
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What is a stock exchange listing? |
When an entity obtains a listing (or quotation) for its shares on a stock exchange this is referred to as a FLOATION or INITIAL PUBLIC OFFERING (IPO)
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What are the advantages of a listing |
Once listed, the market will provide a more accurate VALUATION of the entity than had been previously possible. Creates a mechanism for BUYING and SELLING of shares in the future at will. Raise PROFILE of entity, which may have an IMPACT on revenues, CREDIBIITY with suppliers and long-term providers of finance. Raise capital for future investment. Make employee share scheme more accessible
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What are the disadvantages of a listing |
COSTLY for a small entity (floatation, underwriting costs etc Making enough shares available to allow a market, and a result the original owners lose some CONTROL REPORTING REQUIREMENTS are more onerous. (great deal of effort) Stock exchange RULES for obtaining a quotation can be stringent
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What are the two capital markets in the UK |
The full Stock Exchange The Alternative Investment Market (AIM)
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Discuss the full Stock Exchange |
A market for LARGER companies
Entry COSTS are high and SCRUTINY is very high for companies listed on the ‘full list”
but thePROFILE of a Stock Exchange listed company’s shares is very high, so the shares are extremely marketable
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Discuss the Alternative Investment Market (AIM) |
A market for smaller companies, with lower associated costs and less stringent entry criteria.
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Who are the advisors in a share issue? |
Investment bank
Stockbroker
Institutional investors
Registrars to an issue
Public and investor relations
Reporting accountants
Underwriters
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Briefly explain what their role is |
INVESTMENT BANK – takes the lead role in share issues and advise on appointment of other specialist (lawyers), stock exchange requirements, no of shares to be issued and the issue price, arrangement for underwriting and publishing the offer.
STOCKBROKERS – provide advice on the various methods of obtaining a listing. May work with Investment bankers on identifying institutional investors.
INSTITUTIONAL INVESTORS – main involvement is as an investor, agreeing to buy a certain number of shares. Entity will also use them as a gauge to provide an indication of the likely take up and acceptable offer price for the shares.
REGISTRAR TO AN ISSUE – provide administrative functions, such as collecting and processing applications from potential investors, monitoring payments, providing advice and information regarding share issues to stock exchanges, investors and issuing shares.
PUBLIC AND INVESTOR RELATIONS will work with the entity to ensure communications regarding the share issue are transparent, informative and are understandable to those investing. Work could improve the uptake of the share issue and increase the market value of the issued shares.
REPORTING ACCOUNTANTS will provide advice regarding the impact on the financial statements of any potential shares issues. The must considers the implications of the economic decisions of the users of the financial statements caused by the potential share issues.
UNDERWRITERS are financial institutions that help corporations raising finance by taking on the RISK associated with a new issue and attempting to promote the new share issue to 3rd party investors.The underwriters take on the risks associated with the share issues but retain part of the proceeds from raising the finance.
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What are the methods to obtaining a listing on the capital market? |
An IPO (Initial public offering) or floatation
A placing
A rights issue
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When is an IPO suitable? & For who are placings and rights issues suitable |
When an entity seeks a listing on a stock market for the first time
Relevant for entities that already list their shares on a stock market and are seeking further financing through financing a new share issues.
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Discuss IPO & Shares are offered to investors, how is the offer made |
IPO’S occurs when entities seek to listed on the stock exchange for the first time.
These offers may be completely new shares or they may derive from the transfer to the public of some or all of the shares already held privately.
Shares are offer for sale to investors through an issuing house.
Shares are offered to investors, how is the offer made Either at a fixed price set by the company In a tender offer
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What is a tender offer |
Investors are invited to tender for new shares at their own suggested price.
Once all offers are received the company sets a “strike” price and allocates shares to all bidders who have offered the strike price or more.
Strike price is set to ensures that the company raises the required amount of finance from the share issue.
All shares being offered are sold at the best price that would generate the required finance.
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What is a placing |
Shares are placed DIRECTLY with certain investors on a PREARRANGED basis.
Shares are not offered to the public,Issuing house will arrange for the shares to be issued to its institutional clients
This method is popular, cheaper and quicker to arrange than most other methods.
Drawback – does not lead to a very active market for the shares after flotation.
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What is a rights issue? |
Where new shares are offered to existing shareholders, in proportion to the size of their shareholding.
Raising new capital by giving existing shareholders the right the subscribe to new shares in proportion to their current holdings.
These shares are usually offered at a discount.Company cannot offer an unlimited supply at this lower price, market price will fall to this value.
Offer to shareholders is limited. Eg. One new share for every four held.
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What is a pre-emptive right that existing shareholders have in a rights issue |
The right to buy new shares ahead of outside investors Pre-emptive right ensure that shareholders have an opportunity to prevent their stake being diluted by the new issues. Pre-emptive rights are protected by law. Right issues are cheaper to organize than a public issue
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What should be considered when setting an is issue price (rights issue) |
LOW enough to ensure acceptance of shareholders Not too low, so as to avoid EXCESSIVE dilution of the earnings per share NO upper limited, but should not exceed prevailing market price of the shares (MPS), shareholders would purchase existing shares at the exiting market price. No lower limit to an issue price, but in practice can never be lower that the nominal value of the shares. As the issue price is reduced, the number of shares that has to be issued to raise a required sum is increased.
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How is the issue quantity selected? |
First the issue price is selected and then the quantity of shares to be issued. The effect of additional shares on earnings per share and dividend should be considered
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What happens to the market price after issue & What happens to the market price after the actual issue |
After the announcement of a rights issue there is a tendency for share prices to fall.The temporarily fall is due to UNCERTAINTY about – CONSEQUENCES of the issue, future PROFITS, future DIVIDENDS. After actual issue The market price will normally fall again because there are more shares in issue (adverse effect on earnings per share) and New shares were issued at market price discount
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What are “Cum Rights” |
When a rights issue is announced, all existing shareholders have the right to subscribe for new shares. Share are traded “cum rights”
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What are “Ex Rights” |
On the first day of dealings in the newly listed shares, the rights no longer exist and the old shares are now traded ‘ex rights’ (without rights attached)
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What are the implications of a rights issue from the shareholder viewpoint |
They have the OPTION of buying shares at preferential price.
They have the OPTION of withdrawing cash by selling their rights
They are able to maintain their existing relative VOTING POSITION by exercising the rights.
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What are the implications of a rights issue from the company’s viewpoint |
It is simple and cheap to implementIt is usually successful. (fully subscribed)It often provides favorable publicity.
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