Constitución de la República del Ecuador

Learning Objective 7.3 – Understand the following terms:

 Record date  Ex-date  Cum benefit  Ex benefit  Special ex  Special cum

Note: Assumption: T+ 0 settlement period

We have seen that dividends are an example of a mandatory corporate action, and represent the part of a company's profit that is passed to shareholders. The amount paid per share may vary, as it depends on the overall profitability of the company and the availability of cash. The individual shareholder will receive the dividends either by check, or by the money being transferred straight into their bank accounts.

A practical difficulty, especially in a large company where shares change hand frequently, is determining who the correct person to receive the dividend is. Markets have developed procedures to minimize the extent that people get dividends when they are not entitled, or fail to receive a dividend to which they are entitled. The shares will be bought and sold with the right to receive the next declared dividend until a particular date Known as the 'ex dividend' date. Up to that point the shares are described as 'cum-dividend'. If the shares are purchased cum dividend; the purchaser gets the declared dividend. For the period from the ex-dividend date up to the dividend payment date, the shares are bought and sold without the right to the impending dividend.

Example 7.6

The sequence of events might be as follows:

Example Corporation decides to pay a dividend, the dividend is announced on 17th August and Example will pay the dividend to shareholders on the register of shareholders on 8th October. This date is known as the record date.

Given the record date of 8th October, the local exchange usually sets the ex-dividend date a few days earlier. When the shares go ex-dividend, the price should fall by the amount of the impending dividend.

This process should ensure that the investors, who buy just before the dividend is paid, pay the lower price because they will not get the dividend. Similarly, those that sell just before the dividend is paid receive the lower price, because they will still receive the dividend.

currently trading cum-dividend. In such circumstance they may find counterparty willing to sell the shares without the dividend - this is known as a 'special ex' transaction. A similar possibility may exist where a seller wants to sell when the shares are trading ex-dividend, but wants to sell both the share and the impending dividend - this is known as a 'special cum' transaction.

Like dividends, shares subject to other corporate actions move from being with entitlement (cum) to without entitlement (ex), so that it is clear to existing investors and potential investors whether they are selling and buying with, or without the benefit of the impending corporate action.

7.4 CALCULATIONS

Learning Objective 7.4 – Be able to calculate corporate actions related data on:

• Capitalization

• Bonus scrip issues

• Rights issues

A bonus issue (also known as a scrip or capitalization issue) is the corporate action whereby the company gives the existing shareholders new shares for nothing. The company is simply increasing the number of shares held by each shareholder and capitalizes earnings by making a transfer to shareholders' equity.

Example 7.7

Rabbit Corporation shares currently trade at S.R I2 each. Rabbit decides to have a I for I bonus issue, giving each shareholder an additional share for each share they currently hold.

The result is that a single shareholder that held one share worth S.R 12 now has two shares worth the same amount in total, i.e., the share price will fall to S.R 6 each.

The reason for having a bonus issue is to increase liquidity of the company's shares in the market and to bring about a lower share price. It is felt that if a company's share price gets too high it will become unattractive to investors. For example, traditionally large companies in the UK have tried to keep their share prices below SR10. Several years ago HSBC shares were trading at £ 21, and were subject to a 2:1 scrip issue (2 new shares for every 1 previously held), and the share price fell to £7.

The simplest way to calculate the 'ex-bonus' price is to adopt a tabular approach. Using the Company A example above:

Number of shares

Price

Example 7.8

ABC currently has 100 million shares in issue, currently trading at SR 40.00 each. To raise finance for expansion, ABC decides to offer its existing shareholders the right to buy one new share for every five previously held. This is described as a 1 for 5 rights issue. The price of the new shares is set at a discount to the prevailing market price, at only S.R 35.00.

Number of shares Price

Before – use the minimum number to qualify

5 5xS.R40 = S.R200

Right 1 1xS.R35 = S.R 35.00

After 6 (S.R200 + S.R35.00) / 6 = S.R39.2

Because shareholders are given the choice of selling the rights to another investor, we can also calculate the price at which the rights can be sold. This is referred to as the 'nil paid price' and is simply the difference between the 'ex rights' price and the cash that needs to be paid to exercise the right. In the above example it is 39.2 – 35.0 = 4.2 SR.