Module 39.1: Types of Equity Investments

Question 1

What are common shares?

Answer 1

most typical form of equity investments.

Question 2

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

Answer 2

participating - receive extra dividends if firm profits exceed a predetermined level.

non participating - have a claim equal to par value in the event of liquidation.

Question 3

What are the four advantages of convertible preferred stock?

Answer 3

1) The preferred dividend is higher than a common dividend
2) if the firm is profitable the investor can share in the profits by converting his shares into common stock
3) the conversion option becomes more valuable when common price increases
4) preferred shares have less risk that common.

Question 4

What are the seven differences between public and private equity investments?

Answer 4

1) less liquidity
2) share price is negotiated between firm and investors
3) more limited firm financial disclosure
4) lower reporting costs
5) potentailyl weaker governance
6) greater ability to focus long term
7) potentially greater return once firm goes public

Question 5

What is venture capital?

Answer 5

refers to capital provided to firms early in their life cycles.

Question 6

what is a leverage buyout?

Answer 6

investors buy all of a firms equity using debt financing.