Chapter 4: IMC

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Authorised share capital
maximum number of shares a company is permitted to issue
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Issued share capital
the number of shares the company has allotted to shareholders
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Ordinary shares or 'common shares'
Have right to vote and right to a dividend after preference shares. Ordinary shares have the right to a surplus on winding up
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Deferred share
special type of ordinary share where one or all rights are deferred. Worthless during deferral period.
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Types of preference share
1) Cumulative preference share: should company not pay dividend, rolled over to next period.
2)Participating pref share: additional divs may be paid over and above fixed rate should the company be particularly profitable.
3) Convertible pref share: can co
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American Depositary Reciepts
Represents the shares in a non-US company denominated in US dollars
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Global Depositary Reciepts
Similar to ADRs but deposited and issued by non-American banks and in a currency other than US dollars and traded on non-US exchanges.
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Tax credit on dividends
dividends are quoted and paid net of a 10% tax credit, so have already paid 10% income tax at source
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Dividend signalling theory
Rise in dividend payment is a positive signal, lowered is a negative signal
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Stable dividend policy
attract pension funds and income seeking investors by offering a constant level of dividend. Can use dividend cover ratio to see if div income is stable.
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Uncovered dividend
Company distributes dividends greater than the current earnings per share by using previous years earnings. This is clearly not sustainable, signals that although times are tight they will get better.
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Total holding period return formula
(end val - start val) + dividends received / Start val
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Preference share valuation formula
Price = Dividend / r
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Gordon's growth model
Do (1+g) /( r - g)


Do - most recent dividend
r - investors rate of return
g - growth rate
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Limitations to Gordons Growth Model
1) purely quantitative model so does not take into consideration company or industry trends.
2) Assumes constant growth
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Rearrange Gordons growth model for the constant growth rate
g = (price x r) - Do / (Price + Do)
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Using retention ratio to calculate growth rate
g = retention ratio x return on equity
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retention ratio formula
(net income - dividends)/ net income
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Warrants
Securities issued by a company that give the owner the right to subscribe for new shares in the company at a fixed price on a future date. Typically offered as a sweetener to other investments. Risky investment

Warrant Value = Formula Value + Premium Val
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Formula Value or 'intrinsic value'
the profit 'built in' to the warrant (if any). e.g. if the warrant has an exercise price of 2 and the current share price is £2.50, the formula value will be 50p. Can only be positive or nil.
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Premium value or 'time value'
warrant price - formula value
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Percent premium of warrant
warrant price - formula value / (no of shares created x current share price)
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Pricing a warrant
WP = Prem / (1+%new) x size

%new - percentage increase in number of shares when the warrant is exercised
size - number of new shares created by the warrant
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Differences between call options and warrants
1) warrant is a security giving the holder the right to buy new shares, whilst call option is the right to buy existing shares in the secondary market
2) Warrants life is in years whilst an options tends to be in months
3) Seller of option is always respo
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Covered warrants
warrants in a company's shares issued by an organisation other than the company itself. Usually issued in diff currency than underlying shares.
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Covered warrants European style / American style
European- expiry only
American - any day up to and including expiry
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Other cards in this set

Card 2

Front

the number of shares the company has allotted to shareholders

Back

Issued share capital

Card 3

Front

Have right to vote and right to a dividend after preference shares. Ordinary shares have the right to a surplus on winding up

Back

Preview of the back of card 3

Card 4

Front

special type of ordinary share where one or all rights are deferred. Worthless during deferral period.

Back

Preview of the back of card 4

Card 5

Front

1) Cumulative preference share: should company not pay dividend, rolled over to next period.
2)Participating pref share: additional divs may be paid over and above fixed rate should the company be particularly profitable.
3) Convertible pref share: can co

Back

Preview of the back of card 5
View more cards

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