Chapter 4 (3Qs)- Type And Characteristic Of Equity Securities

Question 1

Stockholders Equities

Answer 1

Assets-Liabilities= Stock holders equity

Question 2

Preferred stock

Answer 2

Usually has priority claim over common stock and is issued a fixed dividend

Preferred dividends are paid first before common

Question 3

Common Stock returns

Answer 3

Historically common stock has provided a higher return than inflation

Question 4

Property dividends

Answer 4

Shares in a subsidiary company

Question 5

Dividend yield

Answer 5

Yearly dividend / Stock price

Question 6

Rights of stockholders

Answer 6

Right to vote
Sell
Give away shares
Free transfer

Right to receive list of shareholders

May not be freely transferred if restricted stock or control stock

Question 7

Liquidation Order

Answer 7

Unpaid wages
IRS
Secured debt
Unsecured liabilities (includes debentures)
Subordinated debt
Preferred stock Above are senior securities
Common shareholders Residual rights

Question 8

Preferred Stock

Answer 8

Tends to fluctuate in price with interest rates (interest rate risk or money rate risk)

Mostly non voting

Dividend paid first

Dividend is stated as percent of par (6% preferred)

Usually has no redemption date

Main factor in purchasing should be company ability to pay dividend

Question 9

Types of preferred

Answer 9

Cumalitive, callable, convertible

Question 10

Emerging Markets

Answer 10

• Low level income measured by GDP
• Low level of equity capitalization
• questionable liquidity
• Potential restrictions on currency conversion
• high vol
• prospect of economic growth
• high taxes and commissions for foreign investors
• lower regulatory standards

Question 11

Developed markets

Answer 11

• Larger equity cap
• lower commissions rates
• few currency restrictions
• highly liquid markets
• well-defined regulatory schemes

Question 12

Country risk

Withholding fees and tax risk

Answer 12

Composite of all risk with investing in a particular country

Some foreign countries withhold capital gains and dividends for taxes

Question 13

Right

Answer 13

Allow current shareholders to maintain proportionate ownership

Question 14

Warrant

Answer 14

Usually a long term instrument of 5 years

Attached to debt to sweeten

Exercise price usually higher

Example of a derivative security

Question 15

Fundamental analysts

Answer 15

Evaluate broad based economic trends

Evaluate quality of a corporations business, finances and management

Within context of an industry and overall economy

Use dividend models (explained next card)

Technical analysts base predictions on charts without attention to current profitability

Question 16

Dividend models

Answer 16

Value based on dividend
2 different models

1. Dividend Discount model- Value should be equal to future dividends

Formula- Year dividend / expected return

2. Dividend growth model
   Formula- Dividend x 1+growth rate/ required ROR-growth rate

Growth results in a higher stock price projection

Question 17

Technical analysis

Answer 17

Used to measure market risk

Method of attempting to predict near term Stock strand of next 4-6 weeks

Uses volume to support theories

Trend lines- Straight line of where stock has been

Support level- Bottom of stock price where buyers begin to out way sellers

Resistance level- Where more sellers enter the market than buyers

Breakout- Must be 3% penetration to be a breakout, volume is also higher

Moving average- Take Friday of last 13 weeks and plot straight line

Change in trend would occur if moving below trend line

Question 18

Technical market theories

Answer 18

Short interest-Number of shares shorted (high is bullish)

Odd-lot theory- (less than 100 shares) if odd lots are bought, you should sell

Advance/Decline theory- Indicates market breadth, how market advances and declines

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