Volume 1- Chapter 8 Flashcards
Who are common shareholders?
Common shareholders can be an individual investor, a business, or an institutional investor.
What do common shareholders benefit from?
They benefit from the growth in value of their original investment and from the flow of dividend income.
What is a risk associated with common share ownership?
Common shareholders may lose their entire investment if the business fails.
What is the position of common shares on asset claims in bankruptcy?
Common shares have a relatively weak position on asset claims, falling behind senior creditors, bondholders, and preferred shareholders.
Are dividends on common shares guaranteed?
No, dividends on common shares are payable at the discretion of the board of directors.
What is evidence of ownership for common shares usually in?
Shares are most often registered in street certificate form.
What does CDS stand for in the context of securities transactions?
CDS stands for Clearing and Depository Services Inc.
What is a standard trading unit for most stocks?
The usual unit of trading for most stocks is 100 shares.
What is one benefit of common share ownership?
Potential for capital appreciation.
What is another benefit of common share ownership?
Voting privileges, including the right to elect directors.
What is a risk of investing in common shares?
Common shareholders generally have very little influence over the day-to-day operations of the company.
What is capital appreciation?
Any increase in the value of a company’s assets, including the value of its common shares.
What influences a company’s dividend policy?
The company’s size, goals, financial position, and the industry in which it participates.
What are regular dividends?
A specified amount to be paid each year, indicating that payments will be maintained barring major earnings collapse.
What are extra dividends?
Bonus payments paid in addition to the regular dividend, which may not be repeated the following year.
What is the ex-dividend date?
The date on which shares begin to trade without the right to receive the upcoming dividend.
What is a dividend reinvestment plan?
A plan that allows shareholders to reinvest dividends into additional shares of the company.
What are stock dividends?
Dividends paid in the form of additional stock rather than cash.
What is the voting privilege associated with common shares?
Each common shareholder typically has one vote for each share owned.
What are restricted shares?
Shares that give the shareholder rights to earnings and assets but do not carry full voting rights.
Name one category of restricted shares.
Non-voting shares.
What is responsible investment?
Investment that incorporates environmental, social, and governance (ESG) factors into selection and management.
What must be given to holders of restricted shares regarding shareholders’ meetings?
Notice of shareholders’ meetings and an invitation to attend and speak
This is a protection measure for restricted shareholders.
What is required for any corporate action that would create new restricted shares?
Minority approval
This ensures that the interests of existing restricted shareholders are considered.
Define responsible investment.
Incorporation of environmental, social, and governance (ESG) factors into investment decisions
Responsible investment aims to reduce risk and improve long-term financial returns.
What were responsible investing practices commonly known as in Canada during the 1970s and 1980s?
Ethical or socially responsible investing
This reflects the historical context of responsible investment in Canada.
List some strategies available for responsible investing.
- ESG integration
- Shareholder engagement
- Screening
- Thematic investing
- Impact investing
These strategies cater to the diverse needs of responsible investors.
What are some examples of environmental issues in ESG?
- Climate change
- Conservation of natural resources
- Waste management
- Water scarcity
These issues are critical economic concerns with significant implications for businesses.
What are some examples of social issues in ESG?
- Diversity and inclusion
- Human capital management
- Human rights
- Indigenous and community relations
Social issues impact corporate reputation and operational performance.
What are some examples of governance issues in ESG?
- Corruption and bribery
- Executive compensation
- Risk and crisis management
- Supply chain management
Governance issues can affect investor trust and corporate integrity.
Name at least three investment vehicles available for responsible investing.
- Community bonds
- Green bonds
- Mutual funds
- Pooled products
- Social bonds
These vehicles help investors align their investments with their values.
What is a stock split?
An increase in the number of shares outstanding, reducing the stock price
This is done to make shares more affordable for investors.
In a four-for-one stock split, how many shares does a shareholder receive for each share held?
Three additional shares
This increases the total number of shares owned by the shareholder.
What is a reverse stock split?
A reduction in the number of shares outstanding, increasing the stock price
This is used to raise the share price when it is too low.
When might a company implement a reverse stock split?
When the share price is too low and risks delisting from a stock exchange
This can improve the company’s market position.
What are Canadian Depositary Receipts (CDRs)?
Securities that give Canadians access to U.S. and global companies listed in Canadian dollars
CDRs mitigate the impact of exchange rate fluctuations.
What is the CDR Ratio?
The method used to adjust the number of underlying shares based on exchange rate changes
This helps maintain the investment value despite currency fluctuations.
How does owning CDRs affect dividend payments?
CDR investors are paid dividends from underlying shares in Canadian dollars
This provides a consistent income stream for CDR investors.
What is one key advantage of CDRs for retail investors?
Access to fractional ownership of high-priced stocks
This makes investing in large companies more accessible.
What are common shares?
Securities representing ownership in a company, with voting rights
Common shares typically come with higher risk and potential for dividends.
What is a key feature of preferred shares?
Entitlement to regular dividend payments, subject to board discretion
Preferred shares are often treated like fixed-income securities.
What does it mean when preferred shares rank pari passu?
They rank equally in terms of asset and dividend entitlement
This ensures all holders of that class receive equal treatment.
What is the relationship between preferred shareholders and creditors?
Preferred shareholders rank behind creditors but ahead of common shareholders
This affects their claims in the event of bankruptcy.
What does the term ‘responsible investment’ encompass?
Incorporation of ESG factors into investment selection and management
It reflects a growing trend towards sustainable and ethical investing.
What is the par value of the preferred shares mentioned?
$25 per share
How do preferred shareholders rank in relation to common shareholders?
Preferred shareholders rank ahead of common shareholders but behind creditors and debtholders.
What is the typical entitlement of preferred shares regarding dividends?
Preferred shares are usually entitled to a fixed or floating dividend.
In the example provided, what is the annual dividend for DEF Inc.’s Series E Fixed Rate preferred shares?
$0.875 per share
What happens if the board of directors omits the payment of a preferred dividend?
Preferred shareholders have very little recourse, but typically no dividends are paid to common shareholders until preferred dividends are paid.
True or False: Dividends on preferred shares are obligatory payments.
False
What feature allows preferred shares to accumulate unpaid dividends?
Cumulative dividends
What is the term used for unpaid dividends that must be paid before common share dividends are distributed?
Arrears
What is a callable feature in preferred shares?
A feature that allows the issuer to redeem the shares at a stated time and price.
What are the two types of features that can enhance the security of preferred shares for investors?
- Cumulative dividends
- Non-cumulative dividends
What is the primary reason companies issue preferred shares despite higher costs compared to debt?
The advantages may justify the issuance.
What happens to the market price of fixed-rate perpetual preferred shares if interest rates rise?
The market price will fall.
What are floating-rate preferred shares linked to?
A percentage of the Canadian Bank Prime Rate or the yield on Government of Canada Treasury bills.
What is the unique feature of fixed-reset preferred shares?
They have fixed dividend rates that periodically change based on a specified formula.
What does the term ‘non-cumulative’ mean in the context of preferred dividends?
Arrears do not accrue, and the shareholder is not entitled to catch-up payments.
What is the typical payment frequency for dividends on fixed-rate perpetual preferred shares?
Quarterly
Fill in the blank: Preferred shares rank _______ with each other.
pari passu
What happens at the end of the initial five-year term for rate-reset preferred shares?
The issuer can call the shares for redemption, or the dividend rate can be reset.
What is the typical call price for fixed-rate perpetual preferred shares after five years?
Equal to the issue price
What is a ‘retraction feature’ in preferred shares?
It gives shareholders the right to force the company to buy back the shares at a specified price.
What is the impact of good corporate earnings on preferred shares?
Good corporate earnings do not affect a preferred share’s dividend or claim to assets.
What type of preferred shares are most commonly issued in Canada?
Non-cumulative preferred shares
What is the dividend payment amount for holders of ABC Corporation Limited’s Class A preferred shares?
$1.3125 per share per year
What is the significance of the yield to maturity on the 5-year benchmark Government of Canada bond in rate-reset preferred shares?
It determines the fixed dividend rate.
True or False: Preferred shares typically offer the same potential for capital appreciation as common shares.
False
What is a ‘soft retraction feature’?
It allows the company to pay the redemption value in cash or common shares.
What has surpassed traditional preferred shares in Canada?
Rate-reset preferred shares due to the extra degree of certainty associated with the calculation of the reset rate.
Why are preferred shares usually more expensive for a company than debt?
Dividends paid on preferred shares are not tax-deductible expenses.
What is a key advantage of issuing preferred shares from a company’s viewpoint?
Preferred shares do not generally create the demands that a debt issue creates.
Under what circumstances might a corporation choose to issue preferred shares instead of debt?
- Existing assets are heavily mortgaged
- Market conditions are unreceptive to new debt issues
- High debt-to-equity ratio
- Reluctance to assume legal obligations to pay interest and principal
- Preferred share dividends are not considered onerously expensive.
What advantage do preferred shares have over common shares during unfavorable market conditions?
Preferred shares avoid the dilution of equity that results from a new issue of common shares.
Why do investors buy preferred shares?
- Higher yields than bond yields
- Preferential tax treatment
- Portfolio diversification.
What is the tax treatment advantage of Canadian preferred shares?
Dividends received benefit from the dividend tax credit.
What is a risk associated with investing in preferred shares?
Interest rate risk.
How do rising interest rates affect fixed-rate preferred shares?
The prices of fixed-rate preferred shares tend to fall.
What is credit risk in the context of preferred shares?
The sensitivity of preferred share prices to changes in the perceived creditworthiness of the issuer.
What is call risk?
The risk that investors will be forced to give up their preferred shares when it is not in their best interest.
What is extension risk?
The risk that an issuer can extend the repayment date by not calling the preferred share for redemption.
What is liquidity risk in the context of preferred shares?
The difficulty in executing large orders without impacting the price due to lower trading volumes.
What are non-viability contingent capital (NVCC) preferred shares?
Preferred shares structured to qualify as Tier 1 Capital that can be converted into common shares under certain conditions.
What is the purpose of stock indexes?
- Gauge overall performance and directional moves in the stock market
- Measure portfolio performance against a benchmark
- Create index mutual funds
- Serve as underlying interests for options, futures, and exchange-traded funds.
What is a stock index?
A time series of numbers used to calculate a percentage change of a representative grouping of stocks over time.
What does a value-weighted index mean?
An index where companies with large market capitalizations dominate changes in value over time.
What is the difference between a stock index and a stock average?
A stock index is value-weighted while a stock average is arithmetic and price-weighted.
What criteria must a stock meet to be included in the S&P/TSX Composite Index?
- Price
- Length of time listed
- Trading volume
- Capitalization
- Liquidity.
What sectors are included in the S&P/TSX Composite Index?
- Consumer Discretionary
- Consumer Staples
- Energy
- Financials
- Health Care
- Industrials
- Information Technology
- Materials
- Real Estate
- Communication Services
- Utilities.
What do Financials and Energy sectors account for in the S&P/TSX Composite Index?
More than half of the weight on the index.
True or False: The total market value of preferred shares in Canada is greater than that of common shares and bonds.
False.
What are the main sectors in the S&P/TSX Composite Index?
Consumer Discretionary, Information Technology, Consumer Staples, Materials, Energy, Real Estate, Financials, Communication Services, Health Care, Utilities, Industrials
Financials and Energy account for more than half of the weight on the index, while Health Care, Utilities, and Information Technology account for approximately 5% combined.
How is a 1% change in an index calculated?
1% change = 0.01 × starting index level
For example, for an index starting at 250, a 1% change is equivalent to 2.5 index points.
What is the S&P/TSX 60 Index?
An index that includes the 60 largest companies traded on the TSX, measured by market capitalization
All stocks listed on this index must also be included in the S&P/TSX Composite Index.
What is the S&P/TSX Venture Composite Index?
A Canadian benchmark index for the public venture capital marketplace, managed by Standard & Poor’s
It is a market capitalization-based index that indicates performance for companies listed on the TSX Venture Exchange.
What is a significant criticism of the Dow Jones Industrial Average (DJIA)?
It includes only 30 issues, which may not represent broad market activity
The DJIA is also price-weighted, meaning higher-priced stocks can distort the average.
How is the DJIA calculated?
By adding the prices of each of the 30 issues and dividing by a specially calculated divisor
The divisor adjusts for stock splits to avoid distortion.
What is the S&P 500?
An index based on a large number of industrial, financial, utility, and transportation stocks, weighted by market capitalization
The S&P 500 is the main gauge for measuring investment performance of institutional investments in the U.S.
Which index includes all listed common equities on the New York Stock Exchange?
NYSE Composite Index
It is a market capitalization index.
What is the NASDAQ Composite Index?
A capitalization-weighted index of more than 3,000 issues
It represents about 80% of the NYSE market capitalization.
What does the Value Line Composite Index measure?
An average of the daily percentage change in over 1,600 stocks
It is an equal-weighted index created by Wilshire Associates.
What is the Nikkei Stock Average?
The Tokyo Stock Exchange average, updated every 15 seconds
It is calculated similarly to the Dow Jones average.
What is the FTSE 100 Index?
An index of the 100 largest listed companies on the London Stock Exchange
It is widely followed in the UK and recalculated minute-by-minute.
What is the DAX Performance Index?
An index consisting of 30 major blue-chip stocks on the Frankfurt Stock Exchange
It is weighted by market capitalization and reinvests dividends.
What is the purpose of Environmental, Social, and Governance (ESG) indexes?
To include companies with strong ESG performance as rated by third-party research firms
Examples include the MSCI Canada ESG Leaders Index and the MSCI World ESG Leaders Index.
What benefits do common shareholders receive?
Capital appreciation, dividend income, voting privileges, favourable tax treatment, easy marketability, access to the board of directors, limited liability
These benefits contribute to the overall value of common shares.
What are the risks associated with investing in preferred shares?
Interest rate risk, credit risk, call risk, extension risk, liquidity risk
Understanding these risks is crucial for investors considering preferred shares.
Fill in the blank: Preferred shareholders rank _____ creditors and _____ common shareholders.
below, above
This ranking is important in the event of liquidation.
What types of preferred shares exist?
Fixed-rate perpetual, floating-rate, fixed-reset
Each type has different characteristics regarding dividends and maturities.
