Overview of Equity Securities

Question 1

Statutory voting

Answer 1

• Sh.h can vote with the number of shares they have for each position being voted for.
• if the voter holds 100 sh and there are 3 board seats, they can vote 100 for each chair.

Question 2

Cumulative voting

Answer 2

• if there are three board seats for votes, the sh.h can direct all his voting to one candidate
• has 100 shares with three seats, he can vote 300 for one seat

Question 3

____ voting is beneficial to minority shareholders

Answer 3

• Cumulative

Question 4

Cumulative pref shares

Answer 4

• if dividends are not paid out for a number of years, the sum of unpaid dividends will be paid when the next round is paid

Question 5

Non-cumulative pref shares

Answer 5

• if dividends are not paid out for a number of years, the next round of payments will not include unpaid dividneds

Question 6

Participating v non-participating pref shares

Answer 6

• participating pref shareholders receive extra dividends than the pre-specified rate
• non-participating shareholders receive only the pre-specified rate

Question 7

Depository Receipts

Answer 7

• a security that trades like an ordinary share on a local exchange and represents an economic interest in a foreign company

Question 8

If a company pays no dividend and retains the earnings, then the book value of the firm _____

Answer 8

increases

Question 9

Book value =

Answer 9

= assets - liabilities

Question 10

Book value v market value

Answer 10

• BV is based on historical data (A & L)

- MV is based on what investors think will happen (intrinsic value)

Question 11

Price to book formula

Answer 11

= Price of stock / Book value

*relationship between BV and MV

Question 12

ROE formula

Answer 12

ROE = NI / Avg BV of equity

= NI / ( BVE t - BVE t-1) /2

Question 13

ROE can increase for the following reasons:

Answer 13

1. increase in business profitability that increases NI relative to the increase in BVE
2. Rapid decline in BV, NI declines at a slower rate
   ie. not good
3. issues debt to increase NI
   ie issue debt to buy back stock

Question 14

Cost of equity def

Answer 14

• the minimum expected rate of return a firm must offer its investors
• not easily determined
• might be different than investors required ROR
• used as a proxy for the investor’s min required ROR