Equities lecture #2
an investor owns XYZ 5% preferred with a $100 par value. what dividend payments should the investor expect to receive each quarter
$1.25. (100X.05=5 in total so 1.25 evert quarter (5/4)) -When you think about preferred stock and the fixed payment stream, if firm XYZ has an amazing quarter, and blew through the forecast and expectations, should the preferred shareholders expect to share in any of that upside? NO!!!! that is the thing about preferred. they are promised 5% so that is what they get. IF this was a dividend paying company, maybe they would dividend it out to common stockholders.
What are American Depositary Receipts (ADRs)
-ADR permits the domestic (or US based trading) of foreign stock or exposure to a foreign stock. -so if we have a foreign company (air france), they would sell american depositary shares to a US based bank. The US bank sells american depositary receipts to US investors who trade those securities on exchanges and over the counter. -the ADR allows a US based investor to get the economic exposure to the foreign stock without having to actually buy those foreign shares. so if the air france stock goes up in value, those shares will appreciate, and holding the ADR, which is a derivitive of it, will also go up. -it is easy to facilitate these types of investments because these ADRs can trade on exchanges and over the counter in the U.S
what are warrants
-Warrants entitle the holder to buy the issuer's stock at a specified exercise price -->Investment characteristics: 1. Long-term instruments, often lasting 5+ years 2. Often issued in connection with other securities, sweetening a deal 3. Freely tradable in the secondary market -another equity security -often issued in connection with other securities-sweetening a deal -EX: "Emma, you can buy shares of XYZ for 50 dollars a share at any point int he next 5 years (or 10 or 20 or etc.)
differences between pre-emptive rights and warrants
-pre-emptive rights are short time -warrants re long term. entitles shareholder to buy issuer's stock at a specified excercise price IN THE FUTURE
what are the 2 main benefits of pre-emptive rights for shareholders?
1 avoid dilution 2. buy at a discount
A client is issued 10 ABC Corp warrants, with a $20 exercise price, that expire in 2025. Are the following statements true or false? 1. The client has the right to purchase shares of ABC for $20 per share. 2. The value of the warrant is tied to the price of the underlying shares. 3. The warrant was likely issued at an exercise price below the share price. 4. The client can sell the warrant instead of exercising it.
1. True: there will be a # of shares you are allowed to purchase per warrant. 2. true: very valuable to have a locked in purchase price of $20 per share if the stock is worth $50.00. but if the ABC stock is only worth $4.00, the right to buy those $4.00 shares for $20.00 is not worth very much 3. false: these are typically out of the oney at the time of issuance. so when i receive the 10 ABC corporate loans at excercise price, ABC stock was trading below 20 dollars. and te company is saying they will give me the chance to lock in the 20$ purchase price but the stock has to appreciate between now and then. 4. true: you can liquidate warrants rather than excercise them
if XYZ board resolves to skip a quarterly dividend payment to preferred shareholders, the next dividend payment would be:
1.25. -by default, unpaid dividends are lost with non-cumulative preferred stock. there is nothing to indicate that these shares re cumulative (you cumulate or bring togeter all of the dividends). this is straight preferred, so the dividend that was skipped is lost forever.
ADR and political risk
ANY international investment has heightened political risk because, as a US investor, you are not a participant in that foreign countries political process.
ADR and inflation risk
As time goes on, the cost of goods and services could go up and that would be somethign that you would face.
holders of ADRs are exposed to all of the following risks except: A. political risk B. Call risk C. Currency risk D. Inflation risk
B. Call risk ADR, just like common stock, are not callable. air france cannot call those shares back because you are just the owner of that company, so to speak, through the derivitive ADR that you hold -ADRs are equity securities (like common stocks), not debt securities
what is a callable preferred stock
Callable preferred stock is a type of preferred stock in which the issuer has the right to call in or redeem the stock at a pre-set price after a defined date. Callable preferred stock terms, such as the call price, the date after which it can be called, and the call premium (if any) are all defined in the prospectus. However, callable preferred share terms laid at the time of issuance cannot be changed later.
Does the following characteristic describe common stock (C) or preferred stock (P)? the right to vote for the board of directors
Common stock
what are the two primary takeways for a investor in the US investing in ADR
Investor gets foreign exposure without having to invest in foreign currency or foreign brokerage account and doesn't have to be subject to rules and regulations of the foreign country
is the following a penny stock: ABC Inc., a NYSE-listed company trading at $3.75 per share
NO because it is listed
do preferred stocks have voting rights?
NO. preferred stocks do not have voting rights. if you are a common shareholder then you are able to vote on the election of board directors and major corporate events (mergers/acquisitions), but not if you are a preferred stock holder.
what is a non-callable preferred stock
Non-callable preferred stock (also known as non-redeemable preferred stock) is a type of preferred stock shares that do not include a callable feature. In other words, the issuer of non-callable preferred shares does not have the option to buy back the issued shares (call) at some predetermined price after a certain date. In this sense, non-callable preferred shares are similar to non-callable bonds.
are foreign governments allowed to withhold tax for ADR?
Yes. foreign governments are able to withhold taxes
example of pre-emptive rights
a client owns 0.5% of ABC corp. the common stock grants investors pre-emptive rights. ABC corp plans to raise capital by selling 10,000,000 new shares. a client received pre-emptive rights to purchase 50,000 of the new shares (0.5% X 10,000,000). -there are then 3 possible outcomes, depending on what the client decides: 1. client exercises rights, buys new shares, and avoids dilution 2. client sells the rights in the market, generating a capital gain 3. the client allows the rights to expire (unlikely)
ADR and currency risk
as an investor in ADR, the price f the share, the ADR is denominated in US dollars and any dividends you recieve will come in US dollars. so why do you have currency risk? because even thugh the US bank pays you out in US dollars, they run a conversion at the time the dividend is paid. so the aUS bank who recieved those euros takes those and buys US dollars at the euro dollar rate. it impacts your return as an ADR holder. (not always bad). if you own air france and the euro is very strong against the dollar, those euro dividends are going to turn into a lot of dollars.
dividends on preferred stock must be paid: a. before bond interest payments b. before dividends to common stock c. with dividends to common tock d. after dividends on common stock
b. before dividends on common stock. -they have a preference in the receipt of dividend distribution so that they must come before the common stock received a dividend distribution
stocks of established, stable companies with a history of steady earnings and dividends are known as
blue-chips
an investor holding preferred stock would expect a return based on: a. market performance b. interest rates c. fixed quarterly payments d. capital gains
c. fixed quarterly payments -this is going to be set or fixed at the time the preferred stock is issues. so you might see 4% preferred, etc. and it is always intending to pay that percent of its par value over the course of the year in the form of the quarterly payment.
what are the characteristics of penny stocks?
characteristics: -speculative (very risky) -illiquid -volatile -greater concern for fraud
Does the following characteristic describe common stock (C) or preferred stock (P)? higher appreciation potential
common stock
Does the following characteristic describe common stock (C) or preferred stock (P)? provides a claim on all residual assets and earnings
common stock residual=after everybody else has been paid. anything that is left at the end of the day belongs to the common shareholders.
the entity responsible for holding assets and securities for the protection of investors, and also for maintaining certain investor records
custodian
what is preferred stock
equity security providing regular and steady income.
example of ADR
ex of another key test point: ex: the foreign company (air france) pays a dividend so they are going to look to their boks and records and they see that there is a US bank that owns a big share. they will pay the dividend in euros. what coudl that foreign company do when a french comapny pays a big divicned? the foreign company may withhold some of that dividend as taxation.
if i am an investor here in the US holding an ADR for Air France. so Air France paid the bank in euros. what currency am i, the US investor, holding the ADR, getting my dividend payment in?
i am getting it in US dollars. so i dont have to worry about converting euros into dollars in the event that i wanted to use that curreny. the ADR makes it easy for US investors to get exposure to foreign companies and remain in the US and have all of their investments denominated in US dollars.
what does it mean to be over the counter?
it means it is not traded over the NYSE, NASDAQ, or any other national exchange. in other words, it is unlisted.
do you have to buy the shares when you have a warrant?
no. you can trade them in the secondary market
after the foreign company pays a dividend to the US bank, what currency is the ADR in?
once the US bank received all of the euros in the form go a dividend payment, they are not going to keep them as euros. they are going to pass them to the US investors who hold the US depository receipt.
what is the major risk for ADR
political risk-the risk that political instability and uncertainty in a foreign country could negatively impact the issuer
what are pre-emptive rights
pre-emptive rights grant shareholders the ability to participate in an issuer's future offerings to avoid dilution -shareholder is given short-term opportunity to buy additional shares at a slight discount to current market price. -type of equity security
Does the following characteristic describe common stock (C) or preferred stock (P)? pays a regular, fixed dividend payment
preferred stock
Does the following characteristic describe common stock (C) or preferred stock (P)? may be cumulative
preferred stock if a dividend is skip, a cumulative preferred will carry strict dividend forward and the board iwl lhave to pay that plus the current dividend, vs straight, where they skip a dividend and never have to make it up.
transfer agent
the entity that issues and cancels stock certificated and processes investor mailing such as proxies is the transfer agent
what is it called when you offer a few different securities to sweeten a deal?
those securities are called a unit
what re 3 things a company may choose to do with treasury shares
treasury shares may be held by the company, reissued to the public, or cancelled
what are penny stocks
typically a common stock that has less than $5 per share value and are quoted over the counter (are unlisted)
when is the best time for a company to repurchase (buyback) their own shares, for achieving economic benefit
when the company believes its shares are undervalued by the market
when is the filing deadline for form 10-k
within 90 days of a company's fiscal year-end
is the following a penny stock: XYZ Inc., quoted over-the-counter at $4.50 per share
yes because it is unlisted and it is less than $5 per share
do penny stocks have voting rights
yes because penny stocks are typically common stock
what is the impact of a cash dividend on a common shareholders cost basis
zero. cash dividend do not impact share cost basis. they are taxable as ordinary income
