Equities

Question 1

what are the two ways of raising equity

Answer 1

private (from yourself, savings, family, friends, venture capital funds)
going public (issuing shares to be exchanged on the stock exchange)

Question 2

what are the three types of private investors

Answer 2

angel investors
corporate ventures
private equity investing

Question 3

what are angel investors

Answer 3

investors who finance companies in the earliest stages of growth

typically wealthy individual investors

Question 4

who are corporate ventures

Answer 4

corporations that offer venture assistance to finance young and promising companies, usually strategically picked as their product/service is something that could be of use to the company

Question 5

what are private equity investors

Answer 5

investors who offer funds to finance firms that do not trade on pubilic stock exchanges

eg venture capital

Question 6

what does IPO stand for

Answer 6

initial public offering

Question 7

what does SEO stand for

Answer 7

subsequent equity offerings

Question 8

which are the primary market where equities are traded

Answer 8

IPOs

SEOs

Question 9

what are the secondary markets where equities are traded

Answer 9

NYSE
Euronext
NASDAQ
LSE
TSE

Question 10

what is the difference between a company’s market value and its book value is determined by

Answer 10

1. future earnings expectations
2. intangible assets
3. value of future investments

Question 11

what is the difference between growth stick and income stock

Answer 11

growth stock is stock which values grows rapidly. People buy this to resell for higher

income stock is stock from a mature, stable company. People buy this for the dividends

Question 12

what does EPS stand for

Answer 12

earnings per share

Question 13

what does the price earnings ratio show

Answer 13

the price per share vs the earnings per share

Question 14

which is more senior in payout queue preferred stock or common stock

Answer 14

preferred stock

Question 15

do common stock holders get voting rights

Answer 15

yes

Question 16

do preferred stock holders get voting rights

Answer 16

no

Question 17

who gets dividends first preferred or common stock

Answer 17

preferred

Question 18

what does residual claim mean

Answer 18

in the case of the company ending, they must pay out their debts, bonds and other liabilities

then they will pay their preferred stock

what’s left will go to the common stock holders (this is called the residual claim)

Question 19

why aren’t dividends tax deductible

Answer 19

not considered a business expense

Question 20

what does the dividend discount model value the price of shares based on

Answer 20

the present value of all expected future dividends
+
the price of selling the share

Question 21

what are the three cases for dividend growth

Answer 21

no growth
constant growth
non constant growth

Question 22

what does DGM stand for

Answer 22

dividend growth model

Question 23

if the current price of the share is less than the market value, should it be purchased

Answer 23

undervalued so yes

Question 24

if the current price of the share is greater than the market value, should it be purchased

Answer 24

overvalued so should be avoided

and sold if held

Question 25

why do companies watch their share price closely

Answer 25

• may need to go to market to issues more shares (to fund expansions etc), a higher share price will mean less shares will have to be issued and current ownership is less diluted
• corporate aquisitions, if share price is lower you’re a target
• indicates health of company
• declining price makes it harder to secure credit
• employees have share options (incentive to perform well)

Question 26

what are the two components of rate of return of holding equity

Answer 26

income (dividend)

price appreciation

Question 27

how is dividend discount model used for companies that do not pay dividends

Answer 27

all firms are expected to pay dividends at some stage

when they reach maturity and become more stable

Question 28

why might a company hold off on paying dividends in the high initial growth phase

Answer 28

hang onto their earnings to re invest into the firm

Question 29

what does it mean when you say dividends are sticky

Answer 29

they are not contractional but once they’re paid out they’re expected to continue to be paid out

Question 30

what is the difference between value of share and price of share

Answer 30

value is made up of the present value of dividends received out to the investment horizon plus the present value of the forecast stock price at the horizon

price is what you’d pay for share

Question 31

Which of the following statements are CORRECT regarding the advantages for a firm of issuing debt rather than equity?

The interest payments on debt are tax deductible.

There is no change in ownership.

The firm cannot go bankrupt if it misses interest payments on its debt.

The firm does not give up any voting rights.

Answer 31

The interest payments on debt are tax deductible.

There is no change in ownership.

The firm does not give up any voting rights.

Question 32

true or false

In the event of a default, preference shares will incur losses before common shares but after bonds.

Answer 32

false