Chapter 10: Equity Securities

Question 1

The main type of equity security issued by companies. They have an infinite life (no maturity date), may or may not be issued with a par value, and represent ownership interest in a company.

Answer 1

Common Stock

Question 2

Shares in which the owners will receive dividends before common shareholders. They also have a higher claim on the company’s assets compared with common shareholders if the company ceases operations.

Answer 2

Preferred stock

Question 3

An equity-like security that entitles the holder to buy a pre-specified amount of common stock of the issuing company at a pre-specified per share price prior to a pre-specified expiration date.

Answer 3

Warrant

Question 4

A security issued by a financial institution that represents an economic interest in a foreign company. The financial institution holds the foreign company shares in custody and issues ________ against the shares held. These trade like common stock on the local stock exchange.

Answer 4

Depositary receipt

Question 5

Estimates the value of common stock by calculating the difference between the value of a companies total assets and it’s outstanding liabilities

Answer 5

Asset-based valuation approach

Question 6

Selling shares to the public for the first time (when a private company becomes a public company)

Answer 6

Initial public offering (IPO)

Question 7

Selling shares to the public in an offering subsequent to the initial public offering

Answer 7

Seasoned equity offering or secondary equity offering

Question 8

Buying back existing shares from shareholders

Answer 8

Share repurchase or share buyback

Question 9

When a company replaces one existing common share with a specified number of common shares

Answer 9

Stock split

Question 10

A transaction in which a company distributes additional shares of its common stock to shareholders instead of cash. This transaction increases the number of shares outstanding but does not affect the companies value because the stock price decreases accordingly.

Answer 10

Stock dividend

Question 11

A company may create a new company from an existing subsidiary in a process referred to as a _____. Shares of the new entity are distributed to the parent company’s existing shareholders.

Answer 11

Spinoff

Question 12

Requires that the company pay for any missed dividends before paying dividends to common shareholders

Answer 12

Cumulative preferred stock