LM 4: Overview of Equity Securities Flashcards

1
Q

What are 2 ways companies can finance operations?

A

issuing debt or equity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are common shares?

A

Common shares: represents an ownership position, get residual claim

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is the difference between statutory voting and cumulative voting?

A

statutory voting grants one vote for each share owned

cumulative voting allows shareholders to get more than one vote, vote amount based on how many board directors they’re voting for.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is cumulative preference shares?

A

any dividend payments that have been missed in the past, must be paid out to cumulative preference shareholders first.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is non-cumulative preference shares?

A

type of preferred stock that doesn’t pay stockholders any unpaid or omitted dividends.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is participating preference shares?

A

receive dividends, surplus profits if profits exceed a specified amount, and receive additional distributions over face value in event of liquidation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is non-participating preference shares?

A

no compensation beyond fixed dividend payments and claim for face value in event of liquidation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a convertible preference share?

A

a type of preferred share that pays a dividend and can be converted into common stock at a fixed conversion ratio after a specified time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are 3 types of private equity investments, describe them? VLP

A
  1. venture capital (provide start-up capital)
  2. leveraged buyouts ( investors raise large amounts of debt to purchase all of a public company’s outstanding common stock.)
  3. private investments in public equity. (the purchase of publicly traded stock at a price below the current market value (CMV) per share.)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

LBO and MBO work well for companies that have…

A

undervalued assets and high cash flows to support debt obligations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are 2 methods to invest in non-domestic equity securities?

A
  1. direct investing
  2. depository receipts (DR)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What is the difference between sponsored DR & unsponsored DR?

A

Sponsored DR: Issued directly by the foreign company and investors receive the same dividends and voting rights as other common shareholders.

Unsponsored DR:foreign company no involvement. depository bank purchases company’s shares, issues DRs, and retains the voting rights.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What are global depository receipts (GDR’s)?

A

issued outside the company’s home country, usually on exchanges in London or through private placements but not US exchanges (but in US denomination)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is an American depository receipts (ADR’s)?

A

receipts in foreign companies that are held by US depositary banks and can be traded in the US, including on US major exchanges

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are American Depository Shares (ADS’s)

A

the underlying securities for American depository receipts, traded in company’s domestic market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is global registered shares (GRS’s)?

A

ownership shares traded on different stock exchanges around the world in different currencies, which eliminates the need for currency conversions.

17
Q

What are the 4 types of ADR’s, describe them.

A

Level 1: trade OTC market
Level 2 & 3: trade on US exchanges (have high listing fees)
Level 4: sold to qualified investors through private placements

18
Q

What is a Basket of Listed Depository Receipts?

A

exchange-traded fund that represents a portfolio of depository receipts.

19
Q

What are three potential sources of equity returns?

A
  1. Price change
  2. Dividend income
  3. Currency exchange gains or losses
20
Q

How is risk measured for equity securities?

A

often measured by the standard deviation

21
Q

What data is used as a proxy for expected volatility?

A

historical data

22
Q

What are 2 disadvantages of direct investing in non-domestic equities?

A
  1. more volatility
  2. less transparency
23
Q

What are 2 reasons companies issue equity?

A
  1. raise capital
  2. increase liquidity
24
Q

What is accounting return on equity formula and use?

A

measures management’s efficiency in using capital.

ROE = net income to ordinary shareholders/ average total book value equity

ROE = NI / Average BVE (Ending BVE- Begin BVE / 2)

25
Q

What is WACC, and what does it tell us?

A

weighted average cost of capital

tells us minimum required rate of return a company needs to earn on its long-term investments

26
Q

What is book value of company formula?

A

Book value = total assets - total liabilities

27
Q

Cost of equity is used as a proxy for the… in terms of return?

A

Minimum required rate of return

28
Q

What’s the difference between callable common shares and putable common shares?

A

Callable common shares give issuer right to buy back share

Putable common share gives shareholder right to sell share back to the issuer

29
Q

Do stocks that have an embedded call option increase value or decrease value for the investor?

A

Decrease value to investors since embedded call option gives issuer not investor right to exercise early.

30
Q

Why is ROE calculated with book value to equity instead of market value?

A

since management doesn’t have control over market value but they have control over book value to equity.