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R36 - Equity Investment - Coggle Diagram
R36 - Equity Investment
Type of Equity Investments
Common Share
Form of Equity
Represent ownership interest
Have vote rights for: BoD, merger decision, selection of auditors
Statutory voting: 1 share = 1 vote
Cumulative voting: 100 share = 100*3(candidates) = 300 votes
A holder of 30% firm's share ≈ choose 3 out of 10 directors with Cumulative voting, but could elect no directors under statutory voting
Preference Share
Have features of both common share & debt
Like common stock: dividend is not contractual obligation, share do not mature.
Like debt: preferred share make fixed periodic payments + Do not have voting rights
Preference share can be callable and putable
Cumulative vs Non-cumulative
Cumulative preference share will accumulate dividends, and company must pay it before common shareholder receive theirs.
Non-cumulative: vice versa
Participating vs
Non-participating
Investors in Participating will:
receive extra dividend if profits exceed a predetermined level
receive greater value than par value if firm is liquidated
Investors in Non-participating will NOT receive those
Convertible preference Share
Can be exchange for common stock at a conversion ratio
Advantages:
Preferred dividend > Common dividend
If firm profitable, investors convert into common stock
Conversion option is more valuable when stock price increase
Preferred share less risky than common share
Private equity
7 characteristics:
less LIQUIDITY
Negotiated
More LIMITED
Lower REPORTING cost
Weaker Corp Governance
No PUBLIC PRESSURE = Focus longterm
Greater RETURN
Foreign Equity & Equity risks
Method for foreign investing
Direct investing
Denominated in foreign currency
Foreign stock ex may be illiquid
Report requirements is too loosened
Regulations and procedures of home country
Depository receipts (DR)
Sponsored DR + Unsponsored DR
Global DR
American DR
Basket of listed DR
Global Registered Share
Risk & return of different types of equity securities
Components of returns
Price change
Dividend (reinvestment problem)
Exchange rate change
Risk
Risk = std deviation of return
Preferred stock LESS risky than common stock
Cumulative preferred share LESS risky than NON-cumulative ...
Putable shares are LESS risky than normal
Callable shares are MORE risky than normal
Market value vs Book value
Increase BV will increase MV
BV of equity = Asset - Liabilities
MV of equtiy = outstanding shares * market price
BV ≠ MV because it does not reflect future expectation
Compare a company
ROE
NI/(Avg(BV))
P/B
Cost of Equity (DDM or CAPM)