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CFA Level 1 - Equity Investments Questions and Answers 100% Solved
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CFA Level 1 - Equity Investments
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CFA Level 1 - Equity InvestmentsCommon Shares - answer ownership interest. Residual claim (what's left after debt
holders and preferred stockholders)
Proxy - answer having someone else vote as they direct them on their behalf
Statutory Voting - answer each share held is assigned one vote in the election of each
member of the board of directors.
Cumulative voting - answer shareholders can allocate their votes to one or more
candidates as they choose. Benefits shareholders.
Callable common shares - answer firm the right to repurchase the stock at a pre-
specified call price
Putable common shares - answer shareholder the right to sell the shares back to the
firm at a specific price. places a floor under the share value.
Preference Shares - answer no voting rights usually, fixed periodic payments.
Cumulative preferred - answer promised fixed dividends and any dividends that are not
paid must be made up before common shareholders can receive dividends.
Non-cumulative preferred - answer do not accumulate over time when they are not paid
but dividends for any period must be paid before common shareholders can recieve.
Participating preference shares - answer receive an extra dividend if firm profits exceed
a predetermined level and may receive a value greater than par of preferred stock if firm
is liquidated.
Non-participating shares - answer claim equal to par value in the event of liquidation
and do not share in firms profits.
Convertible preference shares - answercan be exchanged for common stock at a
conversion ratio determined when the shares are originally issued.
Convertible Preference Shares advantages - answer- Preferred dividend is higher than
common dividend
- firm is profitable, the investor can share in profits by converting their shares into
common stock
- Conversion option becomes more valuable when the common stock price increases
, - Preferred shares have less risk than common shares because the dividend is stable,
and they have priority over common stock in receiving dividends and in the event of
liquidation of the firm.
Private equity - answerusually issued to institutional investors via private placements.
-less liquidity, no public market
-share price negotiated between firm and investors
-More limited firm financial disclosure, no gov't exchange
-Lower reporting costs
-potentially weaker corporate governance
-greater ability to focus on long-term prospects, no public short term pressure
-potentially greater return once goes public
Venture Capital - answercapital provided to firms early in their life cycles to fund their
development and growth. Illiquid and investors often have to commit funds to three to
ten years before they can cash out.
Leveraged Buyout (LBO) - answerinvestors buy all of firms equity using debt financing
(leverage). If LBO is firms current management it's a management buyout. (MBO).
Private Investment in Public Equity (PIPE) - answerpublic firm that needs capital quickly
sells private equity to investors.
Direct Investing - answerin securities of foreign companies simply refers to buying a
foreign firms securities in foreign markets.
Direct Investing Obstacles - answer- investment and return are in foreign currency
- foreign stock illiquid
-reporting requirement of foreign stock less strict
-investors must be familiar with the regulations and procedures of each market in which
the invest.
Depository Receipts - answerrepresent ownership in a foreign firm and are traded in the
markets of other countries and local market currencies. Bank deposits shares of the
foreign firm and then issues receipts representing ownership of a specific number of the
foreign shares.
Depository banks - answeract as a custodian and manages dividends, stock splits, and
other events. Investor does not have to convert to the foreign currency, the value of the
DR is affected by exchange rate changes as well as firms fundamentals, economic
events and other factors
Sponsored DR - answerfirm is involved with the issue. Provides investor voting rights
and usually subject to greater disclosure requirements. Unsponsored, depository bank
retains voting rights
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