Equity securities

Question 1

What are the characteristics of common shares?

Answer 1

• It confers a share of ownership of the company.
• They have a residual claim on the company’s net income and net assets.
• They share the operating performance of the company.
• They have voting rights for M&A. activities and the election of the board of directors.

Question 2

What are the characteristics of preference shares?

Answer 2

• They do not confer voting rights.
• Dividends are received before common shareholders.
• Dividends are fixed and typically higher than common dividends.
• There is no obligation to have regular dividend distribution.
• In case of liquidation they are above common shareholders.

Question 3

What are cumulative preference shares?

Answer 3

Unpaid dividends accrue over time and must be paid in full before dividends on common shares can be paid.

Question 4

What are noncumulative preference shares?

Answer 4

Unpaid dividends for one or more periods are forfeited permanently.

Question 5

What are participating preferred shares?

Answer 5

They are entitled to preferred dividends plus additional dividends if the company’s profits exceed a pre-specific level.

Question 6

What are nonparticipating preference shares?

Answer 6

They are only entitled to a fixed preferred dividend and the par value of shares in the event of liquidation.

Question 7

What are convertible preference shares?

Answer 7

• Allow investors to earn a higher dividend than if they had invested in the company’s common shares.
• They offer investors the opportunity to share the profits of the company.
• They allow investors to benefit from a rise in the price of common shares through the conversion period.
• Their price is less volatile than the underlying common shares because their dividend payments are known and more stable.

Question 8

What are private equity securities?

Answer 8

• They are issued and traded in non-public equity markets.
• They are issued primarily to institutional investors in non-public offerings, including private placements.
• Highly liquid
• Issuers are not obliged to publish financial statements and certain disclosures.

Question 9

What is venture capital?

Answer 9

They invest in companies that are still in the early stages of development and require additional capital for expansion.

Question 10

What is a leverage buyout (LBO)?

Answer 10

It occurs when a group of investors uses det financing to purchase all of the outstanding common shares of a publicly traded company.

Question 11

What are private investments in public equity (PIPEs)?

Answer 11

They invest in a public company that is in need of additional capital quickly in return for a significant ownership position.

Question 12

What are the advantages of a private company?

Answer 12

• Long holding periods that allow private equity investors to address any underlying issues in the company and focus on long-term value creation.
• Management of public companies may feel pressured to focus on short-term performance targets.
• Avoid costs, including public filing requirements.
• Private equity firms are increasingly issuing convertible preference shares.

Question 13

What are the advantages of public companies?

Answer 13

• Markets are much larger than private equity networks and provide more opportunities for companies to raise capital at a lower cost.
• Publicly traded companies are encouraged to be transparent, which may enhance action in shareholders’ interests.

Question 14

What are the advantages of listing on an international exchange?

Answer 14

• It improves awareness of the company’s products and services.
• It enhances the liquidity of the company’s shares.
• It increases transparency due to additional market exposure and the need to satisfy more filing requirements.

Question 15

What is direct investing?

Answer 15

It is to buy and sell securities directly in foreign markets.

Question 16

What are the characteristics of direct investing?

Answer 16

• Transactions that are in the issuer’s domestic currency expose investors to foreign exchange risk.
• Investors must be familiar with the trading, clearing, and settlement regulations and procedures of the foreign market.
• It may lead to reduced transparency and increased volatility.

Question 17

What are depository receipts (DR)?

Answer 17

They trade like ordinary shares on a local exchange representing an economic interest in a foreign company.

Question 18

What is the creation process of deposit receipt?

Answer 18

• The foreign issuer deposits its shares at a bank in the country of the trading exchange.
• The bank issues a specific number of receipts representing the deposited shares based on a predetermined ratio.

Question 19

What are sponsored DR?

Answer 19

• The foreign issuer has a direct involvement in the issuance of receipts.
• Investors share the same rights as owners of the company’s common shares.

Question 20

What is unsponsored DR?

Answer 20

• Foreign issuer has no involvement in the issuance of receipts.
• The depository enjoys the same rights as owners of the company’s common shares.

Question 21

What are global depository receipts (GDRs)?

Answer 21

• They are issued by the depository bank outside of the issuer’s home country and the US.
• They are not subject to foreign ownership and capital flow restrictions that may be imposed by the issuer’s home country, as they are sold outside of the home country.

Question 22

What are American depository receipts (ADRs)?

Answer 22

• They are denominated in US dollars and trade like a common share on US exchanges.
• They are equivalent to a GDR that can be publicly traded in the US.

Question 23

What are global registered shares (GRS)?

Answer 23

• They are ordinary shares quoted and traded in different currencies on different stock exchanges worldwide.
• They offer more flexibility than DRs as the shares represent actual ownership in the issuing company, can be traded anywhere, and currency conversions are not required to trade in them.

Question 24

What is a basket of listed depositary receipts (BLDR)?

Answer 24

• It is an exchange-traded fund (ETF) that represents a portfolio of DRs.
• They trade throughout the day and can be bough, sold, or sold short.
• They may be purchased on margin and used in hedging and arbitrage strategies.

Question 25

What are the 2 main sources of an equity security’s total return?

Answer 25

• Capital gains from price appreciation
• Dividend income.

Question 26

By what are exposed investors in DR and non-domestic shares?

Answer 26

They are exposed to foreign exchange risks.

Question 27

Why do preferred shares carry less risk than common shares?

Answer 27

• Dividends are known and fixed.
• Investors receive distribution before common shareholders.
• The amount that investors are entitled to receive in the event of liquidation is known and fixed as the par value of the shares.
• The amount received by common share investors in the event of liquidation is the residual after all creditors and more senior investors have been paid.

Question 28

When is the market value of equity exceed the book value?

Answer 28

If investors believe that the company has significant CF.

Question 29

What is the formula to calculate the return on equity securities?

Answer 29

Question 30

What is the formula to calculate the accounting return on equity?

Answer 30

BVE=book value of equity