Chapter 19

Question 1

Common Shares

Answer 1

Represent ownership in the issuing corporation. Entitled to whatever is left over after preferred

Question 2

Restricted voting common shares

Answer 2

subject to some restriction on the number or percentage of shares that may be voted

Question 3

Subordinated voting common shares

Answer 3

fewer voting rights per share than the higher class of common shares

Question 4

Regular dividends

Answer 4

can expect on an ongoing basis unless significant reduction in earnings or large loss

Question 5

Stock dividends

Answer 5

paid in the form of common shares instead of cash and allow the company to preserve its cash for internal use

Question 6

Four market imperfections to consider when looking at company’s dividend payout policy:

Answer 6

1. Income tax efficiency
2. Investor efforts
3. Management incentives
4. Management signals

Question 7

Preferred Shares

Answer 7

Represent ownership interest in the issuing company and are characterized by their par value and dividend rate. Have a claim on the company’s assets equal to the share’s par value

Question 8

Cumulative Preferred Shares

Answer 8

dividends not paid out accrue and must be paid ahead of common shares

Question 9

Why are preferred shares considered more like a debt security?

Answer 9

Their value tends to fall when interest rates go up and rise when interest rates go down

Question 10

Alternative Trading Systems (ATSs)

Answer 10

off-exchange, private, electronic network that discreetly and directly matches buyers and sellers, requiring no intermediaries and avoiding market impact

Question 11

Industry Analysis

Answer 11

involves researching, analyzing, and forecasting the factors that contribute to or detract from the success of all companies within the industry

Question 12

Company Analysis

Answer 12

involves understanding a company’s business, analyzing its financial statements, and forecasting its future financial performance

Question 13

Equity Valuation

Answer 13

use models and certain valuation processes to estimate value of a company’s stock

Question 14

Quantitative Analysis

Answer 14

Combining historical and fundamental data with statistical analyses

Question 15

Technical Analysts

Answer 15

Follow a process of analyzing historical market action to determine probable future price trends

Question 16

What is the broadest level of research performed by equity analysts?

Answer 16

Industry/Sector analysis

Question 17

What are the three types of analysis that equity analysts perform?

Answer 17

1. industry analysis
2. company analysis
3. equity valuation

Question 18

Sector Rotation

Answer 18

Involves adjusting the portfolio weights of different economic sectors or industry categories in anticipation of stock market trends

Question 19

Management’s Discussion and Analysis

Answer 19

MD&A should be read in conjunction with the financial statements and notes because it may contain clues to the company’s health that do not appear in those documents

Question 20

Notes to financial statements

Answer 20

The notes explain the company’s accounting policies and provide more detailed information about individual items in the company’s financial statement

Question 21

Liquidity Ratios

Answer 21

Measure a company’s ability to meet its short-term obligations

Question 22

Risk Analysis Ratios

Answer 22

Used to determine how well the company deals with its debt obligations, measure the company’s ability to service required debt payments (i.e., debt coverage) and to assume more debt (i.e., capacity)

Question 23

Operating Performance Ratios

Answer 23

Help determine a company’s long-term growth and survival prospects

Question 24

Value Ratios

Answer 24

gauge the market’s perception of the value of a company’s shares relative to its dividends, earnings, or other measures, such as the equity value (or book value) per common share

Question 25

4 Areas of Focus for qualitative analysis of a company

Answer 25

1. Corporate issues 2. Products and markets 3. Production and distribution 4. Level of competition

Question 26

Passive vs. Active investors beliefs

Answer 26

- Passive investors believe that all information about a company’s stock is reflected in its current market price so valuation is not a concern - Active investors believe that a stock’s current market price might differ from its actual value

Question 27

Absolute Valuation Models

Answer 27

determine a precise value (called a point estimate) for the intrinsic value of a stock based on a set of forecast company fundamentals. If the market value of the stock is less than the model’s intrinsic value, the stock is undervalued; if it is greater, then the stock is overvalued

Question 28

Relative Value Models

Answer 28

determine intrinsic value by comparing one or more of the stock’s value ratios or price multiples to a benchmark value for the price multiple

Question 29

Three Assumptions of Technical Analysis

Answer 29

1. All known market influences are fully reflected in market prices 2. Prices move in trends, and those trends tend to persist for relatively long periods of time 3. The future can be found in the past

Question 30

Three types of technical analysis

Answer 30

1. Chart analysis 2. Statistical analysis 3. Sentiment analysis

Question 31

Chart Analysis

Answer 31

The study of graphical representations of stock or stock index price movements over a defined period

Question 32

Statistical Analysis

Answer 32

Form of technical analysis use several indicators to confirm the existence of trends identified in chart analysis

Question 33

Sentiment Analysis

Answer 33

Involves studying investor views or opinions, or data that reflect those opinions, to determine their degree of bullishness or bearishness about a particular stock or stock index

Question 34

Fundamental Analysts

Answer 34

try to understand all influences that drive the market and attach a price forecast based on that information

Question 35

Three Purposes for Technical Analysis

Answer 35

1. to improve market timing 2. to forecast price movements 3. to act as a leading indicator

Question 36

Bottom Up Approach

Answer 36

Begin with a focus on individual stocks based on forecasted risk and return

Question 37

Bottom Up Approach - Style based

Answer 37

focus on a particular set of stocks that have similar fundamental characteristics and performance patterns

Question 38

Bottom Up Approach - Non-style based

Answer 38

involve a search for stocks with the best chance of meeting particular objectives

Question 39

Value stocks

Answer 39

- investors focus on the company’s share price and look at stocks that are trading at a price that reflects a lower-than-justified PB ratio - lower PE and PB and high dividend yields

Question 40

Growth Stocks

Answer 40

- investors focus on company’s earnings and believe that higher earnings growth translates into a higher book value, which, assuming the company’s P/B ratio stays the same, will translate into a higher stock price - high PE and PB and low dividend yields

Question 41

Three Categories of Value Investors

Answer 41

1. Investors who focus solely on stocks with low P/B ratios, which typically include stocks of depressed cyclical companies and stocks of companies with low dividend yields and little or no current earnings 2. Investors who focus on low P/E ratios, which are typical of stocks in defensive, cyclical, or out-of-favour industries 3. Yield investors, who focus on stocks with above-average dividend yields

Question 42

Top Down Style Based approaches can be divided into:

Answer 42

1. value vs. growth stocks | 2. large cap vs. small cap stocks

Question 43

Bottom Up Approach Non-Style based can be divided into:

Answer 43

1. pure fundamental approach (look at fin. statements) 2. pure quantitative approach (look at historical data) 3. pure technical approach (nothing gained from analysis, already reflected so look at historical market action)

Question 44

Top Down Approach

Answer 44

- Macroeconomic approach (market trends and forecasts, look at sectors then stocks) - style based approach