Equities

Question 1

• Stockholders are owners. Owners have equity.
• An equity security.
• Negotiable – Trades in the open market.
• Transferable.
• Non-Callable – Cannot be called by the issuer.
• Issued by corporation, invest companies (i.e. Mutual Funds & Real Estate Investment trusts)
• Common shareholders have limited liability – the most they can lose is their investment.

Answer 1

Common Stock

Question 2

• When a corporation is formed, a fixed number of shares are authorized to be issued.
• Assigned an arbitrary par value, which is typically set quite low.

Answer 2

Authorized Stock

Question 3

• For Common Stock – An arbitrary (meaningless) value assigned to shares at issuance.

Answer 3

Par Value

Question 4

• A corporation has the option to issue a portion of their authorized stock to the public, and sell the rest at a later date.

Answer 4

Issued Stock

Question 5

• Stock that is in the public’s hands / Shares that trade in the market.

Answer 5

Outstanding stock

Question 6

• Outstanding stock that is repurchased by the issuer.

Answer 6

Treasury Stock

Question 7

• Low Market Price / Good Buy Price
• Reduces the number of outstanding shares / Increases Earnings per share.
• Used to Fund pension plan and stock option plans
• Can be used for payment for an acquisition or merger

Answer 7

Reasons to Repurchase Stock (Treasury Stock)

Question 8

• Right to vote
• Right to inspect books and records
• Right to transfer ownership
• Preemptive right
• Right to corporate distributions
• Right to corporate assets upon dissolution (Last in line)

Answer 8

Rights of a common share holder

Question 9

Is shareholder approval needed to?

• Declare a stock split (Can change par value of company stock)
Declare a reverse stock split (Can change par value of company stock)
• Issue convertible bonds of preferred stock (Results in the issuance of more common stock. Dilutive)
• Issue stock options to officers on a preferential basis

Answer 9

Needs Shareholder Approval

Question 10

Is shareholder Approval needed to?
•	Declare a cash dividend
•	Declare a stock dividend
•	Declare a rights distribution
•	Repurchase shares for treasury

Answer 10

Shareholder approval is not required

Question 11

• Assume that 6 directorships are open (6 voting items), with a choice of one of three persons for each directorship. Voting for a 100-share owner works as follows
• 100 votes maximum are allowed for each directorship. In total, 600 votes are cast. (Used by most corporations)
• Known as proportionate voting.

Answer 11

Statutory Voting

Question 12

• Assume that 6 directorships are open (6 voting items), with a choice of one of three persons for each directorship. Voting for a 100-share owner works as follows
• 6 directorships x 100 votes = 600 votes that can be cast in any manner. (Considered to be an advantage for the small investor)

Answer 12

Cumulative Voting

Question 13

• Used to combat corporations who make it difficult to attend annual meetings.
• Shareholders can’t vote if they don’t attend.
• Voting cards that shareholders not attending the annual meeting must receive.
• Many shareholders don’t respond to these.

Answer 13

Proxies

Question 14

• Dividends are paid to common stockholders only if declared by the Board of Directors.
• Cash dividends are typically paid quarterly.
• Stock dividends and stock splits are distributed on a non-regular basis.

Answer 14

Common Dividends Paid Quarterly

Question 15

• Common stockholders have the right to maintain proportionate ownership.
• If the company wishes to issue additional common shares, the existing common shareholders have the right to buy them before anyone else.

Answer 15

Preemptive Right

Question 16

• Takes the annualized common stock dividend and divides by the current market price of the stock.
• = Annual Income / Market Price

Answer 16

Dividend Yield

Question 17

• = Market Price of Security/ Earnings Per Share
• Used to determine if a stock is overpriced.
• Is a measure of valuation

Answer 17

P/E Ratio

Question 18

• Market Price/Multiple

Answer 18

Earnings per Share

Question 19

• Can distribute cash dividends
• Can distribute additional shares of stock in that company as a dividend to conserve cash
• Can distribute shares of another company (such as a subsidiary) to shareholders

Answer 19

Corporate Distributions:

Question 20

• Cannot be distributed to shareholders under the corporate business form
• Can only be passed to owners of partnerships.

Answer 20

Tax Credits

Question 21

• Termed a “senior” security.
• Has priority over the common stock issued by the company
• Must receive dividend payments before common stock
• In the case of liquidation, receives payment before common stock
• Typically issued at $100 Par w/ a stated dividend rate

Answer 21

Preferred Stock

Question 22

• Termed a “senior” security.
• Has priority over the common stock issued by the company
• Must receive dividend payments before common stock
• In the case of liquidation, receives payment before common stock
• Typically issued at $100 Par w/ a stated dividend rate

Answer 22

Preferred Stock Dividends

Question 23

• = Annual Income from Security / Market price of Security
• 10%= $10 Annual Dividends/ Market Price

• ABC 8% $100 par preferred is trading at $105 in the market. The _____ ____ is:
8% of 100 / 105 * 100 = 7.6

Answer 23

Current Yield

Question 24

• = Annual Income/Market Yield

* $10/10% or 0.1 = $100

Answer 24

Theoretical Market Price

Question 25

• If Interest rates rise, theoretical price falls.

* If Interest rates fall, theoretical price rises.

Answer 25

Interest Rates effect on Theoretical Price

Question 26

• Does not have the right to vote
• Doesn’t have preemptive rights.
• Issuance of additional shares does not dilute existing holders return.

Answer 26

Preferred Stock Features

Question 27

• Has an indefinite life
• Bondholders have priority of claim to interest payments and corporate assets upon liquidation before preferred shareholders;
• Preferred dividends are only paid if declared by the Board of Directors

Answer 27

Preferred vs Bond

Question 28

• Cumulative
• Callable
• Convertible
• Participating (Performance)

Answer 28

Preferred Stock Features

Question 29

• If the issuer omits dividend payments, they “accumulate” and are paid if the issuer can ever resume making dividend payments. Must be paid in order to make common div distributed

Answer 29

Cumulative

Question 30

• The issuer has the right to “call in” the shares after a set date, usually at par. Issuers call in shares if interest rates have fallen. After retiring the old high rate shares, the new preferred shares can be issued at the current lower rates.

Answer 30

Callable

Question 31

• The preferred shareholder can “convert” his or her shares into common stock of the issuer based on a predetermined price. Value is impacted by the market price of the common. Convertible holders can enjoy capital gains if the price of the common movers up. The issuer can sell convertibles at lower dividend rates because of the value of the conversion feature.

Answer 31

Convertible

Question 32

In addition to the fixed dividend rate, the preferred “participates” in any “extra” dividends declared by the Board of Directors.

Answer 32

Participating / Performance

Question 33

• A long-term option to buy a stock at a fixed price.
• Typically attached to the sale of a new or bond, to enhance the deal.
• An example: A stock is sold at $20; the ______ allows for the purchase of an additional stock at $30.

Answer 33

Warrant

Question 34

• Usually have a wait period, before they can be exercised (i.e. 1 year)
• Usually have an expiration date (i.e. 5 years)
• Indeterminate value at issuance.
• Allows the issuer to raise the price (if it is stock) or lower the interest rate (if it is debt) of the issue to which the _______ is attached.
• Issued at a substantial premium to the stock’s current market price and only gain additional value if the common stock price rises.

Answer 34

Warrant Features

Question 35

• No life cycles.

* Trades separately from common stock on the exchange where the stock is listed

Answer 35

Perpetual Warrants

Question 36

• Very short term.
• They typically have a 30-60 Day expiration date.
• Issued under an offering of new common share to existing shareholders under their pre-emptive rights.
• Companies can raise additional capital from existing customers without an underwriter.

Answer 36

Rights

Question 37

• Issued when buying shares of foreign companies, instead of stock certificates.
• Issued by US banks. Backed by securities held in trust.
• Market price is influenced by foreign company’s performance and fluctuation of the currency exchange

Answer 37

American Depositary Receipts

Question 38

• Doesn’t have voting or preemptive rights.
• The bank has voting rights and sells preemptive rights.
• Has the dividends passed on to them by the bank.
• Dividends are declared by the foreign company in their local currency, then converted into U.S. dollars.

Answer 38

ADR Holder

Question 39

• Assembled by banks and broker-dealers without issuer’s participation.
• May have more than one depositary bank.
• Receives annual reports in the language of the issuer.
• Trades “Over the counter”

Answer 39

Non Sponsored ADRs

Question 40

• Exchange listed. The foreign company “sponsors” the issue to increase its worldwide ownership base.
• Use one depositary bank – appointed by the issuer.
• Issuers provide quarterly and annual financial reports to shareholders in English.
• Listed and traded on the NYSE, NYSE American, and NASDAQ.

Answer 40

Sponsored ADRs