Synthesis

This page is a recap, not a new lesson. Use it to confirm every rule from the last two lessons is still solid before moving on to equity valuation.

What Did This Unit Cover?

• Common stock (domestic): Ownership, key shareholder rights (voting, preemptive, inspect, transfer), voting methods (statutory vs. cumulative), proxy voting
• Common stock (foreign): Currency risk, political/sovereign risk, exchange controls, foreign tax withholding, foreign tax credit, and a low-correlation diversification benefit
• American Depositary Receipts (ADRs): U.S.-traded foreign stocks in dollars, sponsored vs. unsponsored, do NOT eliminate currency risk
• Preferred stock: Hybrid security with fixed dividends, par value significance, interest rate sensitivity, generally no voting rights
• Types of preferred: Straight (non-cumulative, missed dividends are lost), cumulative, participating, convertible (moderate interest rate risk), callable, floating rate
• Yield trade-off principle: Features benefiting investors allow lower dividend rates; features benefiting issuers require higher rates
• Capital structure and liquidation priority: All debt before any equity; secured before unsecured; preferred before common

What Should You Check on Exam Day?

• You can name every right a common stockholder has and explain why dividends are never guaranteed.
• You can tell statutory voting from cumulative voting and say which one favors a minority shareholder.
• You know foreign common stock and ADRs both carry currency risk, and that ADRs only remove the need for a foreign broker.
• You can state the yield trade-off principle: investor-friendly features lower the dividend rate, the callable feature raises it.
• You can list the liquidation order from secured debt down to common stock without hesitating.