M4: Introduction to Equity Investment Flashcards
- Which of the following is not a characteristic of common equity?
A. It represents an ownership interest in the company.
B. Shareholders participate in the decision-making process.
C. The company is obligated to make periodic dividend payments.
- C is correct. The company is not obligated to make dividend payments. It is at the discretion of the company whether or not it chooses to pay dividends.
- The type of equity voting right that grants one vote for each share of equity owned is referred to as:
A. proxy voting.
B. statutory voting.
C. cumulative voting.
- B is correct. Statutory voting is the type of equity voting right that grants one vote per share owned.
- All of the following are characteristics of preference shares except:
A. They are either callable or putable.
B. They generally do not have voting rights.
C. They do not share in the operating performance of the company.
- A is correct. Preference shares do not have to be either callable or putable.
- Participating preference shares entitle shareholders to:
A. participate in the decision-making process of the company.
B. convert their shares into a specified number of common shares.
C. receive an additional dividend if the company’s profits exceed a pre-determined level.
- C is correct. Participating preference shares entitle shareholders to receive an additional dividend if the company’s profits exceed a pre-determined level.
- Which of the following statements about private equity securities is incorrect?
A. They cannot be sold on secondary markets.
B. They have market-determined quoted prices.
C. They are primarily issued to institutional investors.
- B is correct. Private equity securities do not have market-determined quoted prices.
- Venture capital investments:
A. can be publicly traded.
B. do not require a long-term commitment of funds.
C. provide mezzanine financing to early-stage companies.
- C is correct. Venture capital investments can be used to provide mezzanine financing to companies in their early stage of development.
- Which of the following statements most accurately describes one difference between private and public equity firms?
A. Private equity firms are focused more on short-term results than public firms.
B. Private equity firms’ regulatory and investor relations operations are less costly than those of public firms.
C. Private equity firms are incentivized to be more open with investors about governance and compensation than public firms.
- B is correct. Regulatory and investor relations costs are lower for private equity firms than for public firms. There are no stock exchange, regulatory, or share-holder involvements with private equity, whereas for public firms these costs can be high.
- Emerging markets have benefited from recent trends in international markets.
Which of the following has not been a benefit of these trends?
A. Emerging market companies do not have to worry about a lack of liquidity in their home equity markets.
B. Emerging market companies have found it easier to raise capital in the markets of developed countries.
C. Emerging market companies have benefited from the stability of foreign exchange markets.
- C is correct. The trends in emerging markets have not led to the stability of foreign exchange markets.
- When investing in unsponsored depository receipts, the voting rights to the shares in the trust belong to:
A. the depository bank.
B. the investors in the depository receipts.
C. the issuer of the shares held in the trust.
- A is correct. In an unsponsored DR, the depository bank owns the voting rights to the shares. The bank purchases the shares, places them into a trust, and then sells shares in the trust—not the underlying shares—in other markets.
- With respect to Level III sponsored ADRs, which of the following is least likely to be accurate? They:
A. have low listing fees.
B. are traded on the NYSE, NASDAQ, and AMEX.
C. are used to raise equity capital in US markets.
- A is correct. The listing fees on Level III sponsored ADRs are high.
- A basket of listed depository receipts, or an exchange-traded fund, would most likely be used for:
A. gaining exposure to a single equity.
B. hedging exposure to a single equity.
C. gaining exposure to multiple equities.
- C is correct. An ETF is used to gain exposure to a basket of securities (equity, fixed income, commodity futures, etc.).
- Calculate the total return on a share of equity using the following data:
- Purchase price: $50
- Sale price: $42
- Dividend paid during holding period: $2
A. –12.0%
B. –14.3%
C. –16.0%
- A is correct. The formula states Rt = (Pt – Pt–1 + Dt )/Pt–1.
Therefore, total return = (42 – 50 + 2)/50 = –12.0%.
- If a US-based investor purchases a euro-denominated ETF and the euro subse-quently depreciates in value relative to the dollar, the investor will have a total return that is:
A. lower than the ETF’s total return.
B. higher than the ETF’s total return.
C. the same as the ETF’s total return.
- A is correct. The depreciated value of the euro will create an additional loss in the form of currency return that is lower than the ETF’s return.
- Which of the following is incorrect about the risk of an equity security? The risk of an equity security is:
A. based on the uncertainty of its cash flows.
B. based on the uncertainty of its future price.
C. measured using the standard deviation of its dividends.
- C is correct. Some equity securities do not pay dividends, and therefore the standard deviation of dividends cannot be used to measure the risk of all equity securities.
- From an investor’s point of view, which of the following equity securities is the least risky?
A. Putable preference shares.
B. Callable preference shares.
C. Non-callable preference shares.
- A is correct. Putable shares, whether common or preference, give the investor the option to sell the shares back to the issuer at a pre-determined price. This pre-determined price creates a floor for the share’s price that reduces the uncertainty of future cash flows for the investor (i.e., lowers risk relative to the other two types of shares listed).
