Book 3_Equity_READING 44_OVERVIEW OF EQUITY SECURITIES

Question 1

Common shareholders

Answer 1

• 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.

Question 2

Voting system

Answer 2

• statutory voting: one share - one vote
• cumulative voting: allocate their votes to one or more candidates as they choose

Question 3

Preferred stock

Answer 3

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.

Question 4

Cumulative preferred shares

Answer 4

require any dividends that were missed in the past (dividends in arrears) to be paid before common shareholders receive any dividends

Question 5

Participating preferred shares

Answer 5

receive extra dividends if firm profits exceed a pre-specified level and a value greater than the par value if the firm is liquidated.

Question 6

Convertible preferred stock

Answer 6

can be converted to common stock at a pre-specified conversion ratio.

Question 7

Callable shares

Answer 7

allow the firm the right to repurchase the shares at a pre-specified price

Question 8

Putable shares

Answer 8

give the shareholder the right to sell the shares back to the firm at a pre-specified price.

Question 9

Share Class

Answer 9

• Some companies’ equity shares are divided into different classes, such as Class A and Class B shares.
• Different classes of common equity may have different voting rights and priority in liquidation.

Question 10

Private equity firms compared to publicly traded firms

Answer 10

• Adv: have lower reporting costs, greater ability to focus on long-term prospects, and potentially greater return for investors once the firm goes public
• Dis: illiquid, firm financial disclosure may be limited, and corporate governance may be weaker

Question 11

Investors who buy foreign stock directly on a foreign stock exchange

Answer 11

• receive a return denominated in a foreign currency,
• must abide by the foreign stock exchange’s regulations and procedures,
• and may be faced with less liquidity and less transparency than is available in the investor’s domestic markets.

Question 12

Depository receipts

Answer 12

Investors can often avoid these disadvantages by purchasing depository receipts for the foreign stock that trade on their domestic exchange.

Question 13

Global depository receipts

Answer 13

Are issued outside the United States and outside the issuer’s home country. American depository receipts are denominated in U.S. dollars and are traded on U.S. exchanges.

Question 14

Global registered shares

Answer 14

are common shares of a firm that trade in different currencies on stock exchanges throughout the world

Question 15

Baskets of listed depository receipts

Answer 15

are exchange-traded funds that invest in depository receipts.

Question 16

Equity investor returns

Answer 16

consist of dividends, capital gains or losses from changes in share prices, and any foreign exchange gains or losses on shares traded in a foreign currency

Question 17

Compounding of reinvested dividends

Answer 17

has been an important part of an equity investor’s long-term return

Question 18

preferred stockholders

Answer 18

have a claim equal to par value if the firm is liquidated

Question 19

Putable shares and Callable shares

Answer 19

Putable shares are the least risky and callable shares are the most risky

Question 20

Cumulative preferred shares vs non-cumulative preferred shares

Answer 20

Cumulative preferred shares are less risky than non-cumulative preferred shares, as any dividends missed must be paid before a common stock dividend can be paid.

Question 21

Equity securities

Answer 21

• provide funds to the firm to buy productive assets, to buy other companies, or to offer to employees as compensation
• provide liquidity that may be important when the firm must raise additional funds.

Question 22

Market value

Answer 22

reflects investors’ expectations about the timing, amount, and risk of the firm’s future cash flows.

Question 23

The firm’s cost of equity

Answer 23

• The minimum rate of return that investors in the firm’s equity require.
• Investors’ required rates of return are reflected in the market prices of the firm’s shares.

Question 24

three main types of private equity investments

Answer 24

• venture capital,
• leveraged buyouts,
• and private investments in public equity.