Equities

EquitiesPreferred Shares - CharacteristicsEquity - no maturity date, no voting privileges unless....Fixed dividend - price fluctuates as market yields fluctuatePreference as to assets - in dissolution - before common, after debtPreference as to dividends - paid before common dividendDividend tax credit - preferential tax treatmentBought by income oriented investorsNo maturity dateWhy company issue prefs?Types of preferredsStraight - fixed dividend- want - pass 4 tests of investment quality (discussed in Chapter 8)-cumulative dividend-adequate protective provisions-purchase/sinking fund to provide support-eligible for DTCConvertible -convert to common, at holders option,-at stated price for a stated time period- want -- positive outlook for common, reasonable conversion premium, longconversion life, far call dateRetractable - holder can force company to buy back-want -- long life for retraction privilege- price performance -- more stable if retraction date approachingFloating Rate - dividends fluctuate to reflect changes in interest rates-price -- more stable- want - floor on dividend, reasonable variable formulaParticipating - specified dividend - share in earnings according to formulaEg. $1 fixed dividend plus 50% of common dividend over $1Foreign pay - payable in foreign currency -- want strong currencyCOPrS - Canadian Originated Preferred Shares- long term junior subordinated debt- hybrid of debt & preferred - interest for tax purposes -- interest can be deferred upto 20 quartersSplit Shares - common shares split into 2 components -- dividends & capital gains Preferred Features∙Cumulative - unpaid dividends accumulate-must be paid before common dividend is paid-eg. Pref - 5% dividend, $25 par value, 1 million shares O/S, misseddividend for last 3 years -- What must the company pay prefshareholders before common can be paid?∙CallableEquities - 2∙Purchase fund∙Sinking fund∙Protective Provisions - Restrictions on common dividends- Right to vote in arrears- Further preferred issues- Sale of AssetsYield on a Retractable Preferred1)if Price of preferred > retraction price- investor will not retract because pref dividend > current pref yieldsYield = Annual Pref Dividend * 100Market Price of PrefEg. 6% dividend, market price = $26, retractable @ $252)if Price of preferred ≤ Retraction Price- capital gain if retract ∴ include capital gain in yield calculationYield = Annual dividend +/- (capital gain/loss ÷ # years) * 100(Pref price + Retraction price) ÷ 2eg. 5% dividend, market price = $24.50, retractable in 2 years @ $25Price of Convertible Preferred- has 2 values1)Value as preferred= current market price of preferred2)Value as Common= # common shares on conversion * market price of commonUsually, the convertible has a price premiumPremium = Price of Convertible (1) - Common Value (2) % Premium = (1) - (2)(2)Years to Payback = % Premium .Convertible yield - common yieldWant - low conversion premium - long conversion expiry- low years to payback - long call protection - good company prospectsEquities – 3PREFERRED QUESTIONS1)ABC wants to distribute total dividends of $500,000 in 2001 - there are 50,000 pref shareswith a $5 cumulative dividend & $100 par value - there are 100,000 common shares - last year's dividends were skippeda)What dividend does each common shareholder receive?b)What dividend does each common shareholder receive if $700,000 in dividends aredeclared?2)The formula for a participating pref dividend is $2 fixed plus 25% of common dividendsfor all dividends over $1.a)What is the pref dividend if the common dividend is $0.80?b)What is the pref dividend if the common dividend is $1.80?3) A company has the following preferreds:$1.25 Series A ($25 par, cumul, participating)$1.30 Series B ($25 par, cumul)5.5% Series C ($50 par, participating)5.8% Series D ($100 par)Explain the impact of these features on the costs of the various pref issues.4)What is one major advantage of a retractable pref?5)Name one disadvantage of a convertible pref.6)What is one factor to consider when evaluating a retractable pref?7)Name two advantages of preferred shares to investors.8)When is a floating rate (variable rate) pref advantageous to investors?9)When might it be advantageous for a company to issue preferreds?10)In addition to the 4 tests of Investment Quality of a pref, name 3 other factors that aninvestor should consider.11)Do prefs normally have voting rights?12)Name two protective provisions that might be included in a pref issue.Convertible Preferred Attractiveness1) Using handout #13 from the Bond notes, complete the following:Magna Convertible assume: common dividend yield = 1.3%Preferred dividend yield = 2.92%Price to buy common shares now =Conversion Premium =Years to payback =Noranda Convertible assume: common dividend yield = 4.2%Preferred dividend yield = 5.53%Callable Apr 2002Price to buy common shares now =Conversion Premium =Years to Payback =2)Evaluate the attractiveness of the 3 convertibles below using the calculations from 1) above to complete the tableMay 1997INCO NORANDA RIO ALGOM1) Conversion premium 21.91% 19.01%2) Payback 3.06 years 6.62 years3) Call March 2010 February 20034) Conversion life 19 years 10 years5) Company prospects nickel mining mining miningVoisey BayCOMMON SHARES- owners of company (discussed in Chapter 4)-authorized shares-outstanding shares-par value-treasury stock-fully diluted earnings per shareBenefits of Common Share Ownership▪capital gains potential▪receive dividends▪voting rights▪favourable tax treatment▪DTC▪Capital gains & losses▪management rights▪right to sellDIVIDENDS- regular dividends- extra dividends- dividends are not contractual - must be announced by Board of DirectorsDeclaring Dividends- declaration date- dividend record date- payment date-ex dividend-cum dividend-ex dividend date - 2nd business day before dividend record dateDividend payout considerations- payment to shareholders from corporate earnings -- the ultimate value of company to shareholder -earnings are major source of financing for companiesDividend stabilityDIVIDEND REINVESTMENT (DRIP)-shareholders option - dividend used to buy additional shares-reinvested at no commission- sometimes at a discount-easy way to invest & increase stock holdings - automatic savings plan-taxable as ordinary cash dividendSTOCK DIVIDEND- dividend paid as additional shares rather than cash --- taxed same as cash dividend- eg 10% stock dividend - 400,000 shares O/S & shareholder X owns 1,000 shares♦proportional ownership unchanged♦net worth of company unchanged- but distribution changed between capital stock & retained earningsWhy?Voting Privileges- voting- restricted shares-nonvoting-subordinated voting- restricted votingSTOCK SPLIT- usually in buoyant market- stock price high eg split 2:1 - receive 2 new shares for 1 old share-only Balance Sheet affect on # shares O/SWHY?CONSOLIDATION (Reverse Split)- stock price very low eg consolidate 1:10 - receive 1 new share for every 10 oldWHY?TRANSACTIONS-largely computer based-cash account-margin account-settlement days-Tbills-Debt maturing up to 3 years-All other securities-settlement procedure-confirmation-mostly through clearing corporation - computerized entries - certificates don't move - Chart 6.1 page 6-31- Chart 6.2 page 6-33cross - single ID matches buy & sell orders between 2 of its customersStock Indexes & AveragesIndex/Average - statistical tool to measure stock or economic performance- to easily analyze & compare change over time – frequently start from base of 100 or 1,000 Index -- market-value weighted; = (weight1 * price stock1) + (weight2 * price stock2) +(weight3 * price stock3)- egAverage - arithmetic sum of prices of stocks divided by # stocks in average-egS&P/TSX - index, 1977 = 1000-largest companies-largest sectorsS&P/TSX 60 - index, large stocksS&P/TSX Venture - junior, emerging companiesDJIA - Dow Jones Industrial Average - 30 stocks, average of price, New YorkS&P500 - largely industrial & financial stocks, some utility & transportation - index, New York NASDAQ - OTC, index, smaller cap companies, New YorkNikkei - average of 225 stocks, Tokyo- difference between point change & percentage changeMargin-broker is lending part of purchase price to client-margin = amount of funds investor must provide-margin & broker loan = purchase price of securityMaximum Loan ValueMarket Price Maximum Loan ValueEligible for reduced margin 70% of market value$2.00 & over 50% " "$1.75 -- $1.99 40% " "$1.50 --$1.74 20% " "under $1.50 no loan valueExample1a) Client buys 600 shares of Moosepasture Oil @ $17.00 on margin. Margin Req'd?b)The price increase to $21.00. What is account position?Short Selling-sale of securities which seller does not own-security is borrowed & sold - must be replaced-profitable if replacement price below sales price-expect that prices will fall-no limit on time that securities can be borrowed-order ticket must indicate that order is a short-short positions on securities published twice monthly- proceeds from short left in account & additional margin must be providedMINIMUM BALANCE REQ'DSelling Price Balance Req'dEligible for reduced margin 130% of market value@$2.00 & over 150% " "$1.50 -- $1.99 $3.00 per share$0.25 -- $1.49 200% of market valueunder $0.25 100% of market value & $0.25/share Example1a) Client shorts 3,000 shares of Gourmet Coffee @ $2.95/share. What margin is req'd?b)Share price drops to $1.75. What is the position of the account?c) Price drops to $1.50. The position is closed. What profit is made?MARGIN QUESTIONS1)You bought 10,000 shares of Millenium Networks @ $9.50 on margin (not eligible for reduced margin).a)What margin is required?b)The price increases to $12.75. What margin deficit/surplus is in the account? What action isrequired?c)The price drops to $4.25 overnight with the announcement of the loss of a major client? Whathappens to the margin position?d)You close the position @ $7.00. What profit/loss did you make?2)Jean bought 2,000 shares @ $1.65 on margin.a)What margin is required?b)The price increased to $3.50. What margin/surplus is there?c)The position is closed @ $4.75. What profit was earned?SHORT SELLING QUESTIONS3)An astute financial planner shorted 10,000 shares of BreX @ $17.a)What margin is required?b)What is the investment?c)The price dropped to $2.50. What happens in the account?d)She closes the position @ $0.05. What profit did she earn?4)Henry shorts 10,000 shares @ $2.50.a)What margin is required?b)The price drops to $1.75. What happens to the margin req’d?c)The price increases to $3.50. What margin is required?d)The price increases to $5.15. The position is closed. What loss is incurred?Buy & Sell Orders- use Equity handout #13 for illustrationsNote: The illustrations below are provided to help understand the order – you will nothave to identify orders in this manner for the CSC exam1)At the Market- buy/sell specified # shares - at best available priceeg. Nov 19th @ 10:05, buy order for CRN at market --- Fill price?Nov 20th @ 11:00, sell order for LWN at market ----Fill price?2) Limit order- at specific price or bettereg. Nov 20th , sell order for LWN @ $25.60 ---- When filled?Nov 21st, buy order for LWN @ $25.00 --- When filled?3) Day order- orders valid for day given4) Open or Good Til Cancelled (GTC) - at specific price-remains on brokers books until executed or cancelledeg. If had GTC on CRN to buy @ $2.50 from Nov 17th -- When filled?5) All or None- must execute total # shares specified6) Any Part- accept all stock up to full amount of order7) Good Through - good for specified # of days, cancelled if not filledeg. If sell order for CRN @ $3.45 good through Nov 21st -- When filled?8) Stop Loss- already own the stock- sell order - market order, if price declines to or belowa specified limit priceeg. CRN - bought @ $3.00 --- put a stop loss @ $2.00 to limit losses-will automatically sell if price touches $2.009) Stop Buy- have shorted a security - buy order-market order, if price rises to or above a specified limit priceeg. LWN - sold short @ $27 --- put stop buy @ $29.00-will automatically buy if price touches $29.00Note: Stop loss & stop buy are intended to 1) limit loss incurred and 2) protect part of profit 10) Preferential Trading- client orders have priority- pro, NC, emp ordersEquities – 10 Chapter 6 REVIEW1) A company has the following shareholders equity on its Balance Sheet:Common Stock (2,000,000 shares OS) $10 millionRetained Earnings 15$25 milliona)Show the revised Balance Sheet for a 20% stock dividend if the common share price is $10b)Show the revised Balance Sheet for a 3:1 split insteadc)What is the impact on retained earnings if there is a 30% stock dividend instead of the 3:1 split in b).d)What is the revised number of shares outstanding in c).2)Evaluate a convertible preferred using the following information:Price of Convertible $120Conversion Ratio 3.5 sharesPrice of Common $30Common yield 1.5%Preferred yield 4.5%Conversion expiry June 15, 2010Callable on or after June 30, 20043)Identify the type of order:a)Buy 1,000 shares of XYZ at $25.00 until order cancelled _______b)Order valid for day it is given _______c)Purchased shares @ $25.000 & put a sell order @ $22.50 _______d)Order form a brokerage firm employee _______e)Buy 5,000 shares of LWN at best price _______f)Sell 1,000 shares of TRP @ $21.50 _______g)Must execute total # of shares specified _______h)Order from an officer of a brokerage firm _______4) A company would undertake a stock split if the stock price is ____________________ in order to__________________. In a 3:1 split, the investor would receive ________ new shares for every _____ old share. A stock consolidation occurs when the stock price is _________________ and is undertaken to make the company look ______________________. In a 1:5 consolidation, an investor would receive _________ new share for every ___________ old shares.5) A stock dividend is treated the same as a __________________ for tax purposes. The major advantage tothe company of a stock dividend is that ___________________. If a company has a DividendReinvestment Plan, the investor has the option to receive their dividend as ___________________ rather than as ______________. Two advantages of these plans to an investor are _______________________ and ___________________________.6)If the company reported EPS of $1.25 and fully diluted EPS of $1.23, what is the difference between the twocalculations?7)Everything else equal, if a company had 3 preferred share series outstanding with the followingcharacteristics, how might the dividend yield vary between the 3 series?a)Straightb)Participatingc)convertibleEquities - 11Preferred Share Features QuestionsAnswer the following using Equity handout #121)What is the par value of the TransCanada Series R?2)What is the ticker symbol for the TransCanada series R?3)Describe the TransAlta Purchase fund.4)What is the dividend for the BCE pref?5)How often is the BCE dividend paid?6)How does the BCE dividend change in 2002?7)Who decides on the conversion of the TransCanada Series R?8)What is the formula for conversion for the TransCanada Series R?9)What explains the difference between the # of issued and O/S shares for the TransAlta pref?10)For the BMO pref, why are there two different conversion features?11)What is the DBRS rating for the BCE pref?12)When can the TransCanada COPrS be redeemed?13)What are the dividend details for the TransCanada COPrS?14)When can the TransCanada Series R be retracted?。