Equity Investments【Reading 50】Sample 100, system, 2012

hinsafdar

Two seats on a board of directors are to be elected. A voting system in which the owner of 100 shares may cast 100 votes in each of the board elections is a:

A) cumulative voting system.

B) proportional voting system.

C) statutory voting system.

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In a statutory voting system, a shareholder can vote in each separate board election based on the number of shares she owns. Under cumulative voting, the shareholder may choose to cast her total number of votes (200 in this example) for a candidate in one of the elections.

hinsafdar

An equity security that requires the firm to pay any scheduled dividends that have been missed, before paying any dividends to common equity holders, is a:

A) cumulative preference share.

B) participating preference share.

C) convertible preference share.

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Cumulative preference shares (cumulative preferred stock) must receive any dividends in arrears before the firm may pay any dividends to common shareholders.

hinsafdar

Dividends on non-participating preference shares are typically:

A) a contractual obligation of the company.

B) lower than the dividends on common shares.

C) a fixed percentage of par value.

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Similar to the interest payments on a debt security, dividends on non-participating preference shares (preferred stock) are typically fixed. Unlike the interest payments on a debt security, the company is not contractually obligated to pay preferred dividends. Preferred dividends are typically higher than a firm’s common dividends.

hinsafdar

Participating preference shares most likely:

A) can be exchanged for common stock at a ratio determined at issuance.

B) give the shareholder the right to sell the shares back to the firm at a specific price.

C) receive extra dividends if firm profits exceed a predetermined threshold.

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Participating preference shares receive extra dividends if firm profits exceed a predetermined threshold. Convertible preference shares can be exchanged for common stock at a conversion ratio determined at issuance. Putable common shares give the shareholder the right to sell the shares back to the firm at a specific price.

hinsafdar

Compared to a publicly traded firm, a private equity firm is most likely to:

A) be more concerned with short-term results.

B) exhibit stronger corporate governance.

C) disclose less information about its financial performance.

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Private equity firms are not held to the same financial reporting requirements as publicly traded firms. Less public scrutiny and limited financial disclosure may lead to weaker corporate governance. However, with less pressure from public shareholders, a private equity firm is typically more able to focus on long-term performance.

hinsafdar

Private equity securities most likely:

A) trade in over-the-counter dealer markets.

B) are illiquid and do not have quoted prices.

C) are issued to individual investors.

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Private equity securities are illiquid and do not trade in public securities markets. Holders of private equity must negotiate with other investors to sell the securities. Private equity securities are typically issued to qualified institutional investors.

hinsafdar

Hodges Fund provides mezzanine stage financing to private companies. In which type of private equity investing is Hodges Fund most likely involved?

A) Leveraged buyout.

B) Venture capital.

C) Private investment in public equity.

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Venture capital providers invest in firms that are early in their life cycles. Stages of venture capital financing include seed stage, early stage, and mezzanine financing. In a leveraged buyout, an investor purchases all of a public firm’s equity, taking the firm private. In a private investment in public equity (PIPE), an investor purchases private equity issued by a public firm.

hinsafdar

Liquidity of private equity is most likely:

A) greater than liquidity of public equity.

B) about equal to liquidity of public equity.

C) less than liquidity of public equity.

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Private equity securities are not registered to be traded in a public market, and therefore are less liquid that public equity.

hinsafdar

A security that represents an equity share in a foreign firm and for which the voting rights are retained by the depository bank, is a(n):

A) unsponsored depository receipt.

B) American depository share.

C) global registered share.

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In an unsponsored DR, the depository bank retains the voting rights of the equity shares of the foreign firm. In a sponsored DR, the investor in the DR has the voting rights. For an American depository receipt, an American depository share is the underlying security that trades in the issuing firm’s domestic market. A global registered share is an equity security that trades in the local currencies on stock exchanges around the world.

hinsafdar

Global depository receipts are most likely issued:

A) outside the issuer’s home country and denominated in the exchange’s home currency.

B) outside the issuer’s home country and denominated in U.S. dollars.

C) in the United States and denominated in U.S. dollars.

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Global depository receipts are issued outside the U.S. and the issuer’s home country and are most often denominated in U.S. dollars. Depository receipts issued in the United States and denominated in U.S. dollars are called American depository receipts. Global registered shares are denominated in the home currencies of the exchanges on which they trade