Mandatory Corporate Actions

Definition

A company distributes part of its profits to shareholders in cash (per share). This is mandatory in the sense that once declared, every shareholder on the record date receives the cash without opting in.

Mechanics / Key Dates

• Declaration Date: Board announces dividend amount and dates.
• Ex-dividend Date: First trading day when new buyers are NOT entitled to the dividend. Price usually adjusts downward.
• Record Date: Shareholders on the company’s books at this date receive the dividend.
• Payment Date: Cash is paid to shareholders.

Effect on Price & Shareholders

The market price typically drops roughly by the dividend amount on the ex-dividend date. Shareholders receive cash but their proportional ownership stays the same.

Example (Step-by-Step)

Company XYZ declares a $0.50 per share cash dividend. You own 1,000 shares, and the stock closed at $20.00 the day before ex-dividend.

1. Cash you receive: 1,000 shares × $0.50/share = $500 cash on payment date.
2. Expected theoretical price drop: $20.00 - $0.50 = $19.50. The new approximate price is $19.50.

Interview Q / Model Answer

Q: Why does the stock price fall ex-dividend?
A: Because the company's value reduces by the cash paid out. Investors buying after the ex-date don’t receive that cash, so the price adjusts to reflect this.

Definition

Instead of cash, the company distributes additional shares to existing shareholders (e.g., a 10% stock dividend). This increases total shares outstanding, but each shareholder’s percentage ownership is unchanged.

Example (10% stock dividend)

You own 100 shares of ABC. The company declares a 10% stock dividend.

1. New shares received: 100 shares × 10% = 10 new shares.
2. Total shares after dividend: 100 + 10 = 110 shares.
3. Theoretical price adjustment: If pre-distribution price was $50, the post-distribution price is approximately $50 / 1.10 = $45.45 per share.

Interview Q / Model Answer

Q: How is a stock dividend different from a stock split?
A: Both increase shares and reduce price per share, but a stock dividend issues additional shares by a percentage (e.g., 10%), while a split is a simple ratio (e.g., 2-for-1).

Definition

• Stock Split (Forward): Increases the number of shares and reduces the price proportionally (e.g., 2-for-1).
• Reverse Stock Split: Reduces the number of shares and increases the price proportionally (e.g., 1-for-5). Often used to boost a low share price.

Examples

1. 2-for-1 Stock Split: You own 150 shares at $100. Post-split, you own 300 shares at ~$50.
2. 1-for-5 Reverse Split: You own 1,000 shares at $1.20. Post-split, you own 200 shares at ~$6.00.

Interview Q / Model Answer

Q: Why would management do a reverse split?
A: To raise the per-share price, often to meet exchange listing minimums or attract institutional investors. However, it can sometimes be perceived as a sign of distress.

Definition

Two companies combine. Shareholders of the target company typically receive cash, shares in the acquiring company, or a combination of both.

Example (Stock Exchange Merger)

Acquirer A offers 0.8 shares of A for each share of Target B. You own 100 shares of B.

You will receive: 100 shares × 0.8 = 80 shares of company A.

Interview Q / Model Answer

Q: What’s an exchange ratio?
A: It's the rate at which shares of a target company are converted into shares of the acquiring company, determined through valuation and negotiation.

Definition

A company separates a business unit into a new, independent company and distributes shares of the new company ("NewCo") to its existing shareholders.

Example

Parent P distributes 1 share of NewCo for every 5 Parent shares held. You own 200 Parent shares.

You will receive: 200 / 5 = 40 shares of NewCo. You will still own your 200 Parent shares.

Interview Q / Model Answer

Q: Why would a company do a spin-off?
A: To unlock value (as separate businesses may be valued higher), to sharpen management focus on core operations, or to resolve strategic conflicts.

Definition

A security is removed from trading on an exchange, either voluntarily (company goes private) or involuntarily (failure to meet listing rules).

Effect on Shareholders

Liquidity drops sharply as the stock is no longer easily tradable. It may trade over-the-counter (OTC) or become illiquid. Shareholders might be forced into a buyout or left holding shares that are difficult to sell.

Interview Q / Model Answer

Q: What’s the difference between voluntary and involuntary delisting?
A: Voluntary is a strategic choice by the company (e.g., going private). Involuntary is forced by the exchange due to non-compliance (e.g., share price too low, failure to file reports).

Definition

The company legally changes its name and possibly its ticker symbol. This is an administrative change with no impact on a shareholder's economic interest.

Interview Q / Model Answer

Q: Does a name change affect a shareholder’s economic interest?
A: No, it is purely an administrative update to the company's branding and legal identity.

Definition

The security's unique identifier (CUSIP in North America, ISIN internationally) is changed. This usually happens due to a significant reorganization, such as a re-domicile to another country or a change in the security's legal structure.

Interview Q / Model Answer

Q: Why does a CUSIP/ISIN change matter operationally?
A: It's critical for operations because all systems—custodians, clearing houses, data providers—must map the old identifier to the new one to avoid trade and settlement failures.

Definition

The issuer repays the principal amount of a bond to its holders. This typically happens at the bond's maturity date but can happen earlier if the bond is "callable."

Example (Maturity Redemption)

You hold a $1,000 face value bond with a 5% annual coupon. On its maturity date, you will receive your final $50 coupon payment plus your $1,000 principal, for a total of $1,050.

Interview Q / Model Answer

Q: What is reinvestment risk in this context?
A: It's the risk that when a bond is redeemed, the investor has to reinvest the principal at a lower interest rate than the original bond offered, resulting in lower future income.

Definition

The company's business is shut down, its assets are sold, and the proceeds are distributed to claimants in order of priority.

Priority of Payout

1. Liquidation costs and fees.
2. Secured Creditors (e.g., banks with collateral).
3. Unsecured Creditors (e.g., suppliers).
4. Subordinated Debt holders.
5. Preferred Shareholders.
6. Ordinary/Common Shareholders (receive whatever is left).

Interview Q / Model Answer

Q: Who gets paid first in a liquidation?
A: Secured creditors and administrative costs are paid first. Common shareholders are last in line and often receive little to nothing.