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Equity Securities Overview Flashcards

1
Q

What are common shares?

A

The most common form of equity representing an ownership interest.

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2
Q

What rights do common shareholders have?

A

They have a residual claim on firm assets and govern the corporation through voting rights.

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3
Q

Are firms obligated to pay dividends on common equity?

A

No, firms are under no obligation to pay dividends.

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4
Q

What voting rights do common stockholders have?

A

They can vote for the board of directors, on merger decisions, and on the selection of auditors.

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5
Q

What is statutory voting?

A

Each share held is assigned one vote in the election of each board member.

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6
Q

What is cumulative voting?

A

Shareholders can allocate their votes to one or more candidates as they choose.

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7
Q

How many votes does a shareholder have under cumulative voting if they hold 100 shares?

A

300 votes, which can be distributed among candidates.

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8
Q

What are preference shares?

A

Shares that have features of both common stock and debt.

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9
Q

Do preferred stock dividends represent a contractual obligation?

A

No, they are not a contractual obligation.

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10
Q

What are callable preference shares?

A

Shares that give the firm the right to repurchase at a pre-specified price.

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11
Q

What are putable preference shares?

A

Shares that give the shareholder the right to sell back to the issuer at a specified price.

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12
Q

What is the difference between cumulative and non-cumulative preference shares?

A

Cumulative shares accumulate unpaid dividends; non-cumulative shares do not.

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13
Q

How is the dividend for preferred shares calculated?

A

Based on the stated par value of the shares.

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14
Q

What is a participating preference share?

A

Shares that receive extra dividends if firm profits exceed a certain level.

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15
Q

What is a non-participating preference share?

A

Shares that have a claim equal to par value in liquidation and do not share in profits.

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16
Q

What are convertible preference shares?

A

Shares that can be exchanged for common stock at a predetermined conversion ratio.

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17
Q

What is the advantage of convertible preference shares?

A

They offer a higher preferred dividend and the ability to convert to common stock.

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18
Q

What are the characteristics of different classes of common stock?

A

They may have different voting power, seniority in liquidation, and treatment in dividends.

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19
Q

What is private equity?

A

Equity issued to institutional investors via private placements.

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20
Q

What is a key characteristic of private equity compared to public equity?

A

Less liquidity due to no public market for the shares.

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21
Q

What are the three main types of private equity investments?

A
  • Venture capital
  • Leveraged buyouts
  • Private investments in public equity
22
Q

What is venture capital?

A

Capital provided to firms early in their life cycles to fund development and growth.

23
Q

What is a leveraged buyout (LBO)?

A

Investors buy all of a firm’s equity using debt financing.

24
Q

What is a management buyout (MBO)?

A

An LBO where the buyers are the firm’s current management.

25
What is a private investment in public equity (PIPE)?
A public firm sells private equity to investors for quick capital.
26
True or False: Private equity markets are larger than public markets.
False, private equity markets are smaller but growing rapidly.
27
28
What does it mean when markets are said to be integrated?
When capital flows freely across borders
29
What has contributed to the increased integration of the world's financial markets?
Improved communications and trading technologies
30
What are some reasons countries may restrict foreign ownership of domestic stocks?
* To prevent foreign control of domestic companies * To reduce variability of capital flows
31
What effect does reducing capital barriers have on equity market performance?
It improves equity market performance
32
What are the benefits of a firm listing on foreign stock exchanges?
* Increased publicity for the firm's products * Increased liquidity of the firm's shares * Increased firm transparency
33
What does direct investing in foreign securities refer to?
Buying a foreign firm's securities in foreign markets
34
What are some obstacles to direct foreign investment?
* Investment and return denominated in a foreign currency * Illiquidity of the foreign stock exchange * Less strict reporting requirements * Need to understand local regulations
35
What are depository receipts (DRs)?
Ownership in a foreign firm traded in local market currencies
36
What is a sponsored depository receipt?
A DR where the firm is involved, providing voting rights and greater disclosure
37
What is the difference between global depository receipts (GDRs) and American depository receipts (ADRs)?
* GDRs are issued outside the U.S. and usually denominated in U.S. dollars * ADRs are denominated in U.S. dollars and trade in the U.S.
38
What are the four types of American depository receipts (ADRs)?
* Level I * Level II * Level III * Rule 144A
39
How does preferred stock differ from common stock in terms of risk?
Preferred stock is less risky due to fixed dividends and priority in liquidation
40
What are cumulative preferred shares?
Shares that retain the right to receive missed dividends
41
In terms of risk, how do putable shares compare to callable shares?
Putable shares are less risky; callable shares are more risky
42
What is the primary use of equity capital?
To purchase long-term assets, equipment, and for expansion
43
What is the book value of equity?
Value of the firm's assets minus its liabilities
44
What is the market value of equity based on?
Market prices reflecting investor expectations about future performance
45
What does a high price-to-book ratio indicate?
Investor optimism about the firm's future growth
46
How is the accounting return on equity (ROE) calculated?
Net income available to common divided by average book value of common equity
47
What implications does a decrease in book value have on ROE?
ROE can increase, but it may not be a positive sign for the firm
48
What is the DuPont formula used for?
To analyze changes in ROE
49
What is the cost of equity?
The expected total return on a firm's shares in the market
50
What happens to intrinsic value if the required return increases?
Intrinsic value decreases
51
What is the relationship between expected return and required rate of return?
If expected return is greater than required return, the shares are attractive

Equity Investments (7 decks)

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