19.2: Different Classes of Shares

Question 1

What are the different classes of shares and the rights associated with Class A shares?

Answer 1

• Class A shares have no voting rights as long as dividend payments are made.
• They receive a $0.05 dividend in addition to dividends paid to Class B shares, but only if Class C dividends are not in arrears.
• They have an equal share with Class B shares in any residual receipts on the winding up of the company.

Question 2

What rights are associated with Class B shares?

Answer 2

• Class B shares have full voting rights.
• They receive no dividends if dividends on Class C shares are in arrears.
• They share equally with Class A shares in any residual receipts on the winding up of the company.

Question 3

What are the rights associated with Class C shares?

Answer 3

• Class C shares have no voting rights unless dividends are in arrears for two years, after which each share gets one vote.
• They receive a dividend of $0.30 per share every quarter when declared by the BOD.
• Payment of $25 par value before any payments to Class A and B shares on the winding up of the company.

Question 4

Define ‘non-voting or limited voting shares.’

Answer 4

Non-voting or limited voting shares are common shares that have no voting rights but a slight preferential dividend.

Question 5

How does the share structure affect the allocation of voting rights?

Answer 5

Voting rights provide control over corporate decisions and the ability to influence the BOD and senior management. Companies may have dual-class shares where one class has more voting rights than another, impacting control value.

Question 6

What is a family trust, and how does it maintain control within a company?

Answer 6

A family trust is a trust that ensures income flows to the people descended from the company founder while all the votes are held by the trustees, maintaining control even if ownership is dispersed.

Question 7

What is the impact of limited and non-voting shares on investor decisions?

Answer 7

Investors may avoid limited or non-voting shares due to reduced influence over corporate decisions, leading to less interest from institutional investors who value control.

Question 8

How does the dual-class share structure affect company control?

Answer 8

Dual-class shares allow founders or specific shareholders to retain control through voting rights, despite owning a smaller proportion of the company, affecting shareholder influence over corporate decisions.

Question 9

What is Book Value Per Share (BVPS) and how is it calculated for Canadian Pacific (CP)?

Answer 9

BVPS is the value of a company’s equity available to common shareholders divided by the number of outstanding shares.

For CP, it was calculated as:

BVPS = Common equity / Number of shares

BVPS = $6,636 million / 140.5 million = $47.23

Question 10

How is the market-to-book ratio (M/B) calculated and what does it indicate for CP?

Answer 10

The M/B ratio is calculated as the market price per share divided by the book value per share (BVPS).

For CP, it is:
M/B = Price / BVPS = $242.24 / $47.23 = 5.13

This high ratio suggests CP is considered a growth company.

Question 11

How do you calculate dividend yield and what was CP’s dividend yield at the end of 2018?

Answer 11

Dividend yield is calculated as the annual dividend per share divided by the market price per share.

Dividend yield = Dividend per share / Price

CP’s dividend yield = $2.60 / $242.24 = 1.07%

Question 12

Why is a dividend yield of 1.1% considered low for a stable company like CP?

Answer 12

A dividend yield of 1.1% is low for a stable company because it indicates that the company pays a smaller proportion of its profits as dividends compared to its market value, often seen in growth companies.

Question 13

What are the tax advantages of dividend income in Canada?

Answer 13

In Canada, eligible dividends receive a tax credit, reducing the effective tax rate compared to interest income.

For an Ontario resident in the top tax bracket, the combined tax rate on eligible dividends is 39.34%, compared to 53.53% for interest income.

Question 14

How does the dividend tax credit benefit Canadian investors?

Answer 14

The dividend tax credit allows Canadian investors to pay a lower tax rate on eligible dividends, making dividends more attractive compared to other forms of income like interest, which is taxed at higher rates.

Question 15

Why are dividends considered attractive for both corporations and individual investors?

Answer 15

Dividends are attractive because they provide a tax-efficient form of income, benefiting from lower tax rates compared to interest income, and are not subject to double taxation at the corporate level.

Question 16

What trend does Figure 19.2 indicate about the TSX Dividend Yield since 1956?

Answer 16

Figure 19.2 shows the fluctuation of the TSX Dividend Yield, indicating periods of high yields during market downturns, like the 2008 financial crisis, and generally lower yields during stable growth periods.

Question 17

What are the implications of CP having no preferred shares outstanding?

Answer 17

With no preferred shares, all equity value and dividend payments are distributed to common shareholders, which can lead to higher volatility in returns and more influence over corporate decisions for these shareholders.

Question 18

Why do voting rights affect the prices of some common shares and not others?

Answer 18

Voting rights affect the prices of common shares because they provide shareholders with control over corporate decisions, including electing the board of directors and approving major changes. Shares with voting rights are generally more valuable, as they allow shareholders to influence the company’s direction.

In companies with dual-class shares, voting shares typically trade at a premium over non-voting shares due to this control advantage.

Question 19

Why is dividend income preferred by both corporations and individual investors?

Answer 19

Dividend income is preferred because it offers tax advantages.

For individual investors, dividends are often taxed at a lower rate than interest income, thanks to the dividend tax credit.

For corporations, dividends received from other Canadian corporations are usually tax-free, allowing them to pass on profits to shareholders more efficiently.

This makes dividends an attractive source of income compared to other investment returns.

Question 20

How does the dividend tax credit benefit individual Canadian investors?

Answer 20

The dividend tax credit reduces the effective tax rate on eligible dividends, making them more attractive than other income forms.

This tax advantage is because dividends are taxed less heavily, considering they have already been taxed at the corporate level.

For example, an Ontario resident in the top tax bracket pays a lower combined tax rate on eligible dividends than on interest income.

Question 21

How do different classes of shares, such as those discussed for Canadian Pacific, reflect varying shareholder rights?

Answer 21

Different classes of shares, like Class A, B, and C, offer varied rights, such as voting privileges, dividend entitlements, and residual claims.

Class A shares might prioritize dividends over voting rights, Class B might offer full voting rights, and Class C could have contingent voting rights based on dividend payments.

This structure allows companies to balance control and financial returns among shareholders.