Equities: Equity Securities Flashcards
Common Shares =
ownership interest
residual claim on assets (after debt/pref stock holders)
voting rights (via proxy if needed)
no obligation to pay dividends
note: a firm may have different classes of common stock - with different voting power and seniority, as well as treatment of dividends, stock splits etc
Voting: statutory and cumulative =
statutory: each share is assigned one vote for the election of each board member
cumulative: shareholders can allocate their votes to any candidate (allows more representation for minority share holders - a 30% shareholder can choose 3 of 10 board members by giving them each 10% of the total vote)
Callable/Putable common shares =
shares are callable at a certain price
ie 50, so that if shares are trading at 60 the firm can repurchase then at 50 and reissue them at a higher price
putable shares can be put back to the issuer by the shareholder
Preferred Stock (preference shares) =
ownership right, but with recurring dividends and no voting rights (usually)
(mixture between debt and common stock)
Cumulative pref stock =
dividends not paid must be paid before common stock dividends are paid - (unpaid dividends accumulate)
Participating vs non pref stock =
participating pref stock receive extra dividends if the firm profits exceed a predetermined level (may receive a value greater than par if the pref stock is liquidated)
non participating pref stock have claim to par value in case of liquidation and will not receive any share in firm profits
note: smaller, riskier firms may issue pref stock as investors may be concerned about the firm’s future - thus they can share in the upside
Convertible pref stock =
can be exchaged for common stock at a determined conversion ratio
advantages:
- pref div is much higher than common dividend
- if the firm is profitable, the investor can share in profit by converting to common shares
- conversion option becomes more valuable when the common stock price increases
- pref stock have less risk than common shares because the dividend is stable and they are more senior than common stock
Private vs public equity =
usually placed with institutional investors
- less liquid (no public markets)
- negotiated share price, not market determined
- limited firm financial disclosure (no govt/exchange requirements)
- lower reporting costs
- potentially weaker corporate governance due to looser reporting reqs
- ability to focus on long term goals due to no public pressure for short term results
- potentially greater return for investors once the firm oges public
3 MAIN TYPES: VENTURE CAPITAL, LEVERAGED BUYOUTS, PRIVATE INVESTMENTS IN PULIC EQUITY
Venture capital =
capital provided to firms early in their life cycles to fund development and growth
can be SEED/START-UP, EARLY STAGE or MEZZANINE financing
very illiquid with a potentially long lock up until company IPOs or is sold to an established company
LBO =
investors buy all of the firm’s equity using debt financing (leverage)
MBO - management buyout if tha takeover is conducted by the firm’s current management
Firms in LBOs usually have cash flow to cover the debt service or undervalued assets to sell over time to pay debt
PIPE =
private investment in public equity
a public firm that needs capital quickly sells private equity to investors
firm may have growth opportunities, bein distress or have large amounts of debt
in this case, stock is usually sold at a sizeable discount to market price
Direct investing (in foreign securities) =
as opposed to GDRs, ADRs, GRSs and BLDRs, which are other methods for investing in foreign companies
refers to buying a foreign fim’s securities in foreign markets
Obstacles include
- investment and return are in foreign currency
- foreign stock exchange may be illiquid
- reporting requirements on foreign stock may be less strict, impeding analysis
- unfamiliarity with regulations/procedures of foreign markets
Depository Receipts (DRs) =
a bank deposits shares of the foreign firm and issues receipts representing ownership
although the receipt holder doesn’t have to convert to foreign currency, the DR is still affected by exchange rate changes
SPONSORED DR: the firm is involved with the issue - DR provides the investor with voting rights (and protection of increased disclosure requirements)
UNSPONSORED DR: depository bank retains the voting rights
Global DRs (GDRs) =
issued outside the US and the issuer’s country
typically traded on London and Lux exchanges
usually USD
can be sold to US investors
not subject to the capital flow restrictions imposed by governments, allowing investors and firms more opportunites for foreign investments
American DRs (ADRs) =
USD denominated
trade in the US
ADRs are based on the ADS (american depository share), which trades in the firm’s domestic market
SEC registration typically required, although some are privately placed (144A or Reg s)
CHEAT SHEET: Types of ADRs =
Global Registered Shares (GRS) =
traded indifferent currencies on stock exchanges around the world
BLDR: basket of listed depository receipts =
an ETF that is a collection DRs
Book Value of Equity =
primary goal of the firm management is to increase book value in order to increase market value
BOOK VALUE = value of the firm’s assets on the balance sheet minus its liabilities
book value increase when the firm has positive net income and retains earnings
Market value of equity =
total value of the firm’s outstanding shares based on market prices
reflects market expectations of the firm’s future performance
NOTE THAT BOOK VALUE AND MARKET VALUE ARE NOT EQUAL (FOR THE MOST PART)
ROE =
net income available to common shareholders (net income minus pref dividends)/average book value of common equity
(or sometimes just the beginning of the year value)
AVERAGE BV is more appropriate when it is industry convention or BV is volatile.
BEGINNING BV is more appropriate when BV is stable or we are looking over a number of years
Higher ROE is generally positive, although reasons for change in ROE should be investigated
Price-to-Book Ratio =
aka market to book ratio
market value/book value
the more optimistic investors are about a firm, the greater M2B ratio will be
(ie low M2B = value, while high M2B = growth)
RRR & Cost of Equity =
A firm’s cost of equity (expected equilibrium total return including dividends on its shares in the market) can be interpreted as the minimum rate of return required by investors (in aggregate) to compensate them for the risk of holding the stock
