Chapter 8

Question 1

`How do common shares compare to preferred shares in terms of asset claims in the case of bankruptcy?

Answer 1

Senior creditors, bondholders, preferred shareholders have prior claims over common shares

Common shares have weak position on asset claims

Question 2

How do common shares compare to preferred shares in terms of dividend payments?

Answer 2

Common shares dividends are payable at the discretion of the board of directors. No guaranteed dividend income

Question 3

Can you describe the difference between a standard trading unit and odd lots?

Answer 3

Standard trading unit = 100 shares

Odd lot = less than standard trading

Question 4

Can you list benefits of common share ownership? (7)

Answer 4

1. Potential for capital appreciation
2. Right to receive any common share dividends paid by company
3. Voting privileges
4. Favourable tax treatment in Canada (capital gains)
5. Marketability
6. Right to annual and quarterly reports
7. Limited liability

Question 5

Can you list three risks of common share ownership?

Answer 5

1. No obligation to pay dividends
2. Little influence over operations of company
3. Price can be volatile, investor can lose money
4. Common shareholders have weak position on asset claims

Question 6

Can you define capital appreciation and explain the role it plays in the value of common share ownership?

Answer 6

Any increase in the value of a company’s assets

When earnings are retained, value of common share increases, size of shareholder equity increases, becomes more attractive

Question 7

Can you describe the difference between regular dividend and an extra dividend?

Answer 7

Regular = companies designate specific amount of dividends to be paid each year as dividend

Extra = some companies pay extra dividend at end of year, as a bonus

Question 8

Can you compare the cum dividend period and the ex-dividend period?

Answer 8

Cum Dividend - shares sold with dividends

Dividend record date = all shareholders recorded as of a specific date are entitled to declared dividends (usually 2/4 weeks before payment)

Ex-Dividend = shares sold after dividend payment period. set 1 business day before dividend record day

Question 9

If you purchased shares on a Monday, would you be able to describe the ramifications of a dividend record date on Wednesday of that same week?

Answer 9

Monday, trades cum dividend

Tuesday, ex-dividend date

Wednesday, dividend record date

Question 10

How does a reinvestment plan work?

Answer 10

Company diverts dividends to the purchase of additional shares in the company

Question 11

Define dollar cost averaging

Answer 11

Shareholders acquire a regular, gradually increasing share position in the company at a reduced cost per unit

Question 12

How do cash dividends compare to stock dividends?

Answer 12

Stock dividends = typically paid by rapidly growing companies that must retain a high proportion of earnings to finance future growth

Most investors prefer cash dividends

Question 13

Name the 3 categories of restricted shares and describe

Answer 13

1. Non-voting shares carry no right to vote, except in certain limited circumstances
2. Subordinate voting shares carry a right to vote, if another class of shares is outstanding and those shares carry a greater voting right on a per share basis
3. Restricted voting shares carry a right to vote, subject to a limit or restriction on the number of shares

Question 14

List the stock exchange and securities commissions regulations regarding restricted shares

Answer 14

1. Restricted shares must be identified by appropriate share term
2. Disclosure documents
3. Must be identified in the financial press with a code
4. Literature must properly describe shares
5. Trade confirmations must identify shares

Question 15

How do stock splits and reverse stock splits affect the number of shares an investor owns, price of the share, and investment value

Answer 15

Stock split = number of shares outstanding increases, company will issue more shares to the current shareholder. After split, stock price will be reduced, split does not affect shareholder value

Reverse split = when company share prices are too low, consolidates shares. Used if at risk of being delisted

Question 16

Why do companies issue preferred shares compared to debt?

Answer 16

Preferred shares do not create the demands of a debt issue, more flexibility

Question 17

Why do companies issue preferred shares compared to common shares?

Answer 17

Preferreds offer advantage of avoiding dilution of equity that results from new issue of common shares

Preferreds can be marketed as a compromise if market conditions are unfavourable

Question 18

Describe how cumulative and non-cumulative features work

Answer 18

Cumulative = if company does not pay dividends when due, all unpaid dividends accumulate as arrears, all arrears must be paid to preferred shareholders before common shareholders

Non-cumulative = arrears do not accrue, not entitled to catch-up payments

Question 19

Describe how a callable and non-callable feature works

Answer 19

Callable preferreds can be redeemed by the issuer at a stated time and price

Non-callable preferreds cannot be redeemed as long as the issuing company is in existence

Question 20

What is a retractable preferred share? Describe a soft retractable preferred share

Answer 20

Shareholder can force the company to buy back retractable preferreds for cash on a specific date/price. (pulling back)

Soft retractable preferred is where redemption value may be paid in cash or common shares

Question 21

What is the advantage to an investor who owns a floating-rate preferred share? (variable-rate preferred)

Answer 21

Shares pay dividends in amounts that fluctuate to reflect changes in interest rates

Provides higher income if interest rates rise

Provide a variable amount of annual income

Market price is less sensitive to changes in interest rates compared to straight preferreds

Question 22

What are the two circumstances in which an issuer would issue floating-rate preferred shares?

Answer 22

1. Issued during periods in the market when a straight preferred is hard to sell, and issuer does not want a convertible/retractable
2. Issued when the issuer believes that interest rates will not go much higher than the rate on the new issue date

Question 23

Name a US stock index and US stock average

Answer 23

The Dow Jones Industrial Average; top 30 issues

The S&P 500 Average; top 500 issues

NYSE Composite Index

NASDAQ Composite Index

Question 24

What is the mathematical difference between a stock average and a stock index?

Answer 24

Stock index = a time series of numbers used to calculate a percentage change of series over any period time. mostly value-weighted and derived using total market value

Stock average = arithmetic average of the current prices of a group of stocks

Question 25

What does the S&P/TSX60 Index measure?

Answer 25

Includes the 60 largest companies that trade on the TSX as measured by market capitalization. Broken down into 11 sectors that cover all S&P subgroups