Chapter 5: Equity Analysis and Strategies

Question 1

What are the features of common equity shares

Answer 1

1. Voting Rights - common shareholders are able to vote on important corporate matters
2. Limited Liability - maximum loss for investors is their original capital placed

3, Participation in profits - if the company does well, they may distribute their excess profits to shareholders

4. Residual claim
   - Shareholders only have claim on assets after employees, bondholders other creditors and preference shareholders
5. Potential to receive dividend payments

Question 2

What are blue chip stocks

Answer 2

Blue chip stocks cater to conservative investors who seek safety and stability of returns. They are stocks of well- established and financially sound companies with a long track record of consistent earnings.

Question 3

What are Preference shares

Answer 3

Preference shareholders receive fixed dividends, get paid ahead of common shareholders but after bond holders, and are not entitled to voting rights

For cumulative preference shares, any unpaid dividends are accrued and eventually paid. In contrast, for non-cumulative preference shares, there is no obligation on the part of the issuer to pay the dividends.

Question 4

Why are common shares preferred over preference shares

Answer 4

The appeal of common shares as compared to preference shares lies in the former’s ability to provide participation in the profits of a company. Preference shareholders receive a fixed return in the form of preference dividends, while common shareholders receive variable dividends depending on how the company is performing.

As such, it is more attractive to invest in company’s common shares especially when the company is returning strong profits

Question 5

What are convertible preference shares

Answer 5

Convertible preference shares allow the investor to exchange his preference shares for a fixed number of common shares

allow investor to capture potential upside since able to convert to common shares

Question 6

What is a warrant

Answer 6

Issued by the COMPANY, its primary goal is for the issuer the company to raise capital.

An investor normally has the option to convert his warrants to the underlying common shares at a price which is higher than the current market price at time of issue

Question 7

What is the advantage of holding a warrant?

Answer 7

Enables the investor to hold a position in a stock through a smaller outlay than the underlying stock price (think of a call option)

• Note that a warrant does not convey ownership rights to the underlying stock and hence the warrant holder will not receive any company payouts such as dividends, bonus issues or share buybacks. It does not have voting rights.

Question 8

What is the purpose of a stock split

Answer 8

The purpose of a stock split is usually to increase liquidity in the shares, especially if the share price has climbed up beyond the normal trading range on the exchange. With an increase in the number of outstanding shares, the stock will be made more available to interested buyers

Question 9

What is the purpose of a reverse stock split

Question 10

What is the receivables turnover and annual collective period formula. What does it mean

Answer 10

Receivable TUrnover = Net Annual Sales / Average Receivables

Annual Receivables Collective Period = 365/ Receivable Turnover

This ratio measures the turnover of receivables. It reflects the credit policy of the company. The faster the receivables are turning over, the sooner the company is able to free up receivables into cash.

The higher the turnover, the shorter the receivables collection period measured in days.

Question 11

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