A. Describe Characteristics of Types of Equity Securities Flashcards
SchweserNotes: Book 4 p.260 CFA Program Curriculum: Vol.5 p.159
Common (– Most prevalent form of corporate ownership
– Residual claim after the claims of debt holders and preferred
stockholders) on firm assets if the firm is liquidated
– Govern the corporation through voting rights
Common shareholders have a residual claim on firm assets and govern the corporation through voting rights. Common shares have variable dividends which the firm is under no legal obligation to pay.
Annual Vote - In person, or proxy
Voting - Statutory (of, pertaining to) one vote per share
Cumulative - Shareholder vote allocation to a single candidate
Callable common shares give the firm the right to repurchase the shares. Putable shares give holder the right to force the company to buy back the shares.
Callable common shares allow the firm the right to repurchase the shares at a pre-specified price. Putable common shares give the shareholder the right to sell the shares back to the firm at a pre-specified price.
Preferred (No maturity, may be callable or putable)
Preferred stock typically does not mature, does not have voting rights, and has dividends that are fixed in amount but are not a contractual obligation of the firm.
• Dividends on preference shares
– Cumulative or non‐cumulative
• Cumulative – accrue until paid
• Non‐cumulative – if not declared and paid, no obligation to
pay
– Participating or non‐participating
– Any unpaid must be paid in advance of common dividends
Participating preference shares –
– May receive “standard” preferred dividend
– Additional dividend if the company’s profits exceed a prespecified
level
– Often used for smaller, riskier companies
• Convertible preference shares
– Potential for higher return than “stated” dividend (dividend on common may exceed yield on preferred, or conversion illicits a repurchase response which on net does nothing to EPS or increases it to reflect a new additional market value)
– Ability to share in profits
– Ability to share in growth of value of company (conversion option)
– Less volatile price due to dividend and liquidation preference
Cumulative
Cumulative preferred shares require any dividends that were missed in the past (dividends in arrears) to be paid before common shareholders receive any dividends. Participating preferred shares receive extra dividends if firm profits exceed a pre-specified level and a value greater than the par value if the firm is liquidated. Convertible preferred stock can be converted to common stock at a pre-specified conversion ratio.
Statutory Voting
In a statutory voting system, a shareholder can vote in each separate board election based on the number of shares she owns. Under cumulative voting, the shareholder may choose to cast her total number of votes (200 in this example) for a candidate in one of the elections.
Dividends on Non-Participating Preference Shares are typically…
a fixed percentage of par value.
Similar to the interest payments on a debt security, dividends on non-participating preference shares (preferred stock) are typically fixed. Unlike the interest payments on a debt security, the company is not contractually obligated to pay preferred dividends. Preferred dividends are typically higher than a firm’s common dividends.
An equity security that requires the firm to pay any scheduled dividends that have been missed, before paying any dividends to common equity holders, is a: cumulative preference share.
Cumulative preference shares (cumulative preferred stock) must receive any dividends in arrears before the firm may pay any dividends to common shareholders.
Participating preference shares most likely: receive extra dividends if firm profits exceed a predetermined threshold.
Participating preference shares receive extra dividends if firm profits exceed a predetermined threshold. Convertible preference shares can be exchanged for common stock at a conversion ratio determined at issuance. Putable common shares give the shareholder the right to sell the shares back to the firm at a specific price.
Securities that can be sold back to the issuing firm at a specific price are best described as: putable.
Putable securities give the investor the right to sell the securities back to the firm at a predetermined price. Callable securities give the issuer the right to buy the securities back at a predetermined price. Convertible securities give the investor the right to exchange the securities for a predetermined number of the firm’s common shares.
