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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: The CFA Institute Series
- Sprache: Englisch
Navigate equity investments and asset valuation with confidence Equity Asset Valuation, Fourth Edition blends theory and practice to paint an accurate, informative picture of the equity asset world. The most comprehensive resource on the market, this text supplements your studies for the third step in the three-level CFA certification program by integrating both accounting and finance concepts to explore a collection of valuation models and challenge you to determine which models are most appropriate for certain companies and circumstances. Detailed learning outcome statements help you navigate your way through the content, which covers a wide range of topics, including how an analyst approaches the equity valuation process, the basic DDM, the derivation of the required rate of return within the context of Markowitz and Sharpe's modern portfolio theory, and more.
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Seitenzahl: 1534
Veröffentlichungsjahr: 2020
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CFA Institute is the premier association for investment professionals around the world, with more than 150,000 CFA charterholders worldwide in 165+ countries and regions. Since 1963 the organization has developed and administered the renowned Chartered Financial Analyst® Program. With a rich history of leading the investment profession, CFA Institute has set the highest standards in ethics, education, and professional excellence within the global investment community and is the foremost authority on investment profession conduct and practice. Each book in the CFA Institute Investment Series is geared toward industry practitioners along with graduate-level finance students and covers the most important topics in the industry. The authors of these cutting-edge books are themselves industry professionals and academics and bring their wealth of knowledge and expertise to this series.
EQUITY ASSET VALUATION
Fourth Edition
Jerald E. Pinto, CFA
Elaine Henry, CFA
Thomas R. Robinson, CFA
John D. Stowe, CFA
with
Stephen E. Wilcox, CFA
Cover image: Background © runna10/Getty Images Cover design: Wiley
Copyright © 2004, 2007, 2015, 2020 by CFA Institute. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.
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Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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ISBN 978-1-119-62810-1 (Hardcover) ISBN 978-1-119-68044-4 (ePDF) ISBN 978-1-119-62819-4 (ePub)
CONTENTS
Cover
Preface
The CFA Program
Acknowledgments
About the CFA Institute Investment Series
The Texts
Chapter 1 Overview of Equity Securities
Learning Outcomes
1. Introduction
2. Equity Securities in Global Financial Markets
3. Types and Characteristics of Equity Securities
4. Private versus Public Equity Securities
5. Investing in Non-Domestic Equity Securities
6. Risk and Return Characteristics of Equity Securities
7. Equity Securities and Company Value
8. Summary
References
Practice Problems
Notes
Chapter 2 Introduction to Industry and Company Analysis
Learning Outcomes
1. Introduction
2. Uses of Industry Analysis
3. Approaches to Identifying Similar Companies
4. Industry Classification Systems
5. Describing and Analyzing an Industry
6. Company Analysis
7. Summary
References
Practice Problems
Notes
Chapter 3 Equity Valuation: Concepts and Basic Tools
Learning Outcomes
1. Introduction
2. Estimated Value and Market Price
3. Major Categories of Equity Valuation Models
4. Present Value Models: The Dividend Discount Model
5. Multiplier Models
6. Asset-Based Valuation
7. Summary
References
Practice Problems
Notes
Chapter 4 Equity Valuation: Applications and Processes
Learning Outcomes
1. Introduction
2. Value Definitions and Valuation Applications
3. The Valuation Process
4. Communicating Valuation Results
5. Summary
References
Practice Problems
Notes
Chapter 5 Return Concepts
Learning Outcomes
1. Introduction
2. Return Concepts
3. The Equity Risk Premium
4. The Required Return on Equity
5. The Weighted Average Cost of Capital
6. Discount Rate Selection in Relation to Cash Flows
7. Summary
References
Practice Problems
Notes
Chapter 6 Industry and Company Analysis
Learning Outcomes
1. Introduction
2. Financial Modeling: An Overview
3. The Impact of Competitive Factors on Prices and Costs
4. Inflation and Deflation
5. Technological Developments
6. Long-Term Forecasting
7. Building a Model
8. Summary
References
Practice Problems
Notes
Chapter 7 Discounted Dividend Valuation
Learning Outcomes
1. Introduction
2. Present Value Models
3. The Dividend Discount Model
4. The Gordon Growth Model
5. Multistage Dividend Discount Models
6. The Financial Determinants of Growth Rates
7. Summary
References
Practice Problems
Notes
Chapter 8 Free Cash Flow Valuation
Learning Outcomes
1. Introduction to Free Cash Flows
2. FCFF and FCFE Valuation Approaches
3. Forecasting Free Cash Flow
4. Free Cash Flow Model Variations
5. Nonoperating Assets and Firm Value
6. Summary
References
Practice Problems
Notes
Chapter 9 Market-Based Valuation: Price and Enterprise Value Multiples
Learning Outcomes
1. Introduction
2. Price and Enterprise Value Multiples in Valuation
3. Price Multiples
4. Enterprise Value Multiples
5. International Considerations When Using Multiples
6. Momentum Valuation Indicators
7. Valuation Indicators: Issues in Practice
8. Summary
References
Practice Problems
Notes
Chapter 10 Residual Income Valuation
Learning Outcomes
1. Introduction
2. Residual Income
3. The Residual Income Model
4. Residual Income Valuation in Relation to Other Approaches
5. Accounting and International Considerations
6. Summary
References
Practice Problems
Notes
Chapter 11 Private Company Valuation
Learning Outcomes
1. Introduction
2. The Scope of Private Company Valuation
3. Definitions (Standards) of Value
4. Private Company Valuation Approaches
5. Summary
References
Practice Problems
Notes
Glossary
About the Editors
About the CFA Program
Index
End User License Agreement
Guide
Cover
Table of Contents
Preface
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Preface
We are pleased to bring you Equity Asset Valuation, Fourth Edition. We believe this book serves as a particularly important resource for anyone involved in estimating the value of securities and understanding security pricing.
The content was developed in partnership by a team of distinguished academics and practitioners, chosen for their acknowledged expertise in the field, and guided by CFA Institute. It is written specifically with the investment practitioner in mind and is replete with examples and practice problems that reinforce the learning outcomes and demonstrate real-world applicability.
The CFA Program Curriculum, from which the content of this book was drawn, is subjected to a rigorous review process to assure that it is:
Faithful to the findings of our ongoing industry practice analysis
Valuable to members, employers, and investors
Globally relevant
Generalist (as opposed to specialist) in nature
Replete with sufficient examples and practice opportunities
Pedagogically sound
The accompanying workbook is a useful reference that provides Learning Outcome Statements, which describe exactly what readers will learn and be able to demonstrate after mastering the accompanying material. Additionally, the workbook has summary overviews and practice problems for each chapter.
We hope you will find this and other books in the CFA Institute Investment Series helpful in your efforts to grow your investment knowledge, whether you are a relatively new entrant or an experienced veteran striving to keep up to date in the ever-changing market environment. CFA Institute, as a long-term committed participant in the investment profession and a not-for-profit global membership association, is pleased to provide you with this opportunity.
The CFA Program
If the subject matter of this book interests you and you are not already a CFA Charterholder, we hope you will consider registering for the CFA Program and starting progress toward earning the Chartered Financial Analyst designation. The CFA designation is a globally recognized standard of excellence for measuring the competence and integrity of investment professionals. To earn the CFA charter, candidates must successfully complete the CFA Program, a global graduate-level self-study program that combines a broad curriculum with professional conduct requirements as preparation for a career as an investment professional.
Anchored by a practice-based curriculum, the CFA Program Body of Knowledge reflects the knowledge, skills, and abilities identified by professionals as essential to the investment decision-making process. This body of knowledge maintains its relevance through a regular, extensive survey of practicing CFA charterholders across the globe. The curriculum covers 10 general topic areas, ranging from equity and fixed-income analysis to portfolio management to corporate finance—all with a heavy emphasis on the application of ethics in professional practice. Known for its rigor and breadth, the CFA Program curriculum highlights principles common to every market so that professionals who earn the CFA designation have a thoroughly global investment perspective and a profound understanding of the global marketplace.
Acknowledgments
We would like to thank these distinguished practitioners for enriching the book with writing in their areas of expertise:
Matthew L. Coffina, CFA
Patrick W. Dorsey, CFA
Anthony M. Fiore, CFA
Ian Rossa O’Reilly, CFA
Raymond D. Rath, CFA
Antonius J. van Ooijen, CFA
Reviewers
Special thanks to all the reviewers, curriculum advisors, and question writers who helped to ensure high practical relevance, technical correctness, and understandability of the material presented here.
Production
We would like to thank the many others who played a role in the conception and production of this book: the Curriculum and Learning Experience team at CFA Institute, with special thanks to the Curriculum Directors, past and present, who worked with the authors and reviewers to produce the chapters in this book; the Practice Analysis team at CFA Institute; and the Credentialing Product Marketing team at CFA Institute.
About the CFA Institute Investment Series
CFA Institute is pleased to provide you with the CFA Institute Investment Series, which covers major areas in the field of investments. We provide this best-in-class series for the same reason we have been chartering investment professionals for more than 50 years: to lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence.
The books in the CFA Institute Investment Series contain practical, globally relevant material. They are intended both for those contemplating entry into the extremely competitive field of investment management as well as for those seeking a means of keeping their knowledge fresh and up to date. This series was designed to be user friendly and highly relevant.
We hope you find this series helpful in your efforts to grow your investment knowledge, whether you are a relatively new entrant or an experienced veteran ethically bound to keep up to date in the ever-changing market environment. As a long-term, committed participant in the investment profession and a not-for-profit global membership association, CFA Institute is pleased to provide you with this opportunity.
The Texts
Corporate Finance: A Practical Approach is a solid foundation for those looking to achieve lasting business growth. In today’s competitive business environment, companies must find innovative ways to enable rapid and sustainable growth. This text equips readers with the foundational knowledge and tools for making smart business decisions and formulating strategies to maximize company value. It covers everything from managing relationships between stakeholders to evaluating merger and acquisition bids, as well as the companies behind them. Through extensive use of real-world examples, readers will gain critical perspective into interpreting corporate financial data, evaluating projects, and allocating funds in ways that increase corporate value. Readers will gain insights into the tools and strategies used in modern corporate financial management.
Fixed Income Analysis has been at the forefront of new concepts in recent years, and this particular text offers some of the most recent material for the seasoned professional who is not a fixed-income specialist. The application of option and derivative technology to the once staid province of fixed income has helped contribute to an explosion of thought in this area. Professionals have been challenged to stay up to speed with credit derivatives, swaptions, collateralized mortgage securities, mortgage-backed securities, and other vehicles, and this plethora of products has strained the world’s financial markets and tested central banks to provide sufficient oversight. Armed with a thorough grasp of the new exposures, the professional investor is much better able to anticipate and understand the challenges our central bankers and markets face.
International Financial Statement Analysis is designed to address the ever-increasing need for investment professionals and students to think about financial statement analysis from a global perspective. The text is a practically oriented introduction to financial statement analysis that is distinguished by its combination of a true international orientation, a structured presentation style, and abundant illustrations and tools covering concepts as they are introduced in the text. The authors cover this discipline comprehensively and with an eye to ensuring the reader’s success at all levels in the complex world of financial statement analysis.
Investments: Principles of Portfolio and Equity Analysis provides an accessible yet rigorous introduction to portfolio and equity analysis. Portfolio planning and portfolio management are presented within a context of up-to-date, global coverage of security markets, trading, and market-related concepts and products. The essentials of equity analysis and valuation are explained in detail and profusely illustrated. The book includes coverage of practitioner-important but often neglected topics, such as industry analysis. Throughout, the focus is on the practical application of key concepts with examples drawn from both emerging and developed markets. Each chapter affords the reader many opportunities to self-check his or her understanding of topics.
One of the most prominent texts over the years in the investment management industry has been Maginn and Tuttle’s Managing Investment Portfolios: A Dynamic Process. The third edition updates key concepts from the 1990 second edition. Some of the more experienced members of our community own the prior two editions and will add the third edition to their libraries. Not only does this seminal work take the concepts from the other readings and put them in a portfolio context, but it also updates the concepts of alternative investments, performance presentation standards, portfolio execution, and, very importantly, individual investor portfolio management. Focusing attention away from institutional portfolios and toward the individual investor makes this edition an important and timely work.
Quantitative Investment Analysis focuses on some key tools that are needed by today’s professional investor. In addition to classic time value of money, discounted cash flow applications, and probability material, there are two aspects that can be of value over traditional thinking.
The New Wealth Management: The Financial Advisor’s Guide to Managing and Investing Client Assets is an updated version of Harold Evensky’s mainstay reference guide for wealth managers. Harold Evensky, Stephen Horan, and Thomas Robinson have updated the core text of the 1997 first edition and added an abundance of new material to fully reflect today’s investment challenges. The text provides authoritative coverage across the full spectrum of wealth management and serves as a comprehensive guide for financial advisors. The book expertly blends investment theory and real-world applications and is written in the same thorough but highly accessible style as the first edition. The first involves the chapters dealing with correlation and regression that ultimately figure into the formation of hypotheses for purposes of testing. This gets to a critical skill that challenges many professionals: the ability to distinguish useful information from the overwhelming quantity of available data. Second, the final chapter of Quantitative Investment Analysis covers portfolio concepts and takes the reader beyond the traditional capital asset pricing model (CAPM) type of tools and into the more practical world of multifactor models and arbitrage pricing theory.
All books in the CFA Institute Investment Series are available through all major booksellers. In addition, all titles are available on the Wiley Custom Select platform at http://customselect.wiley.com/ where individual chapters for all the books may be mixed and matched to create custom textbooks for the classroom.
CHAPTER 1Overview of Equity Securities
Ryan C. Fuhrmann, CFA
Asjeet S. Lamba, PhD, CFA
Learning Outcomes
After completing this chapter, you will be able to do the following:
describe characteristics of types of equity securities;
describe differences in voting rights and other ownership characteristics among different equity classes;
distinguish between public and private equity securities;
describe methods for investing in non-domestic equity securities;
compare the risk and return characteristics of different types of equity securities;
explain the role of equity securities in the financing of a company’s assets;
distinguish between the market value and book value of equity securities;
compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.
1. Introduction
Equity securities represent ownership claims on a company’s net assets. As an asset class, equity plays a fundamental role in investment analysis and portfolio management because it represents a significant portion of many individual and institutional investment portfolios.
The study of equity securities is important for many reasons. First, the decision on how much of a client’s portfolio to allocate to equities affects the risk and return characteristics of the entire portfolio. Second, different types of equity securities have different ownership claims on a company’s net assets, which affect their risk and return characteristics in different ways. Finally, variations in the features of equity securities are reflected in their market prices, so it is important to understand the valuation implications of these features.
This chapter provides an overview of equity securities and their different features and establishes the background required to analyze and value equity securities in a global context. It addresses the following questions:
What distinguishes common shares from preference shares, and what purposes do these securities serve in financing a company’s operations?
What are convertible preference shares, and why are they often used to raise equity for unseasoned or highly risky companies?
What are private equity securities, and how do they differ from public equity securities?
What are depository receipts and their various types, and what is the rationale for investing in them?
What are the risk factors involved in investing in equity securities?
How do equity securities create company value?
What is the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return?
The remainder of this chapter is organized as follows. Section 2 provides an overview of global equity markets and their historical performance. Section 3 examines the different types and characteristics of equity securities, and Section 4 outlines the differences between public and private equity securities. Section 5 provides an overview of the various types of equity securities listed and traded in global markets. Section 6 discusses the risk and return characteristics of equity securities. Section 7 examines the role of equity securities in creating company value and the relationship between a company’s cost of equity, its return on equity, and investors’ required rate of return. The final section summarizes the chapter.
2. Equity Securities in Global Financial Markets
This section highlights the relative importance and performance of equity securities as an asset class. We examine the total market capitalization and trading volume of global equity markets and the prevalence of equity ownership across various geographic regions. We also examine historical returns on equities and compare them to the returns on government bonds and bills.
Exhibit 1 summarizes the contributions of selected countries and geographic regions to global gross domestic product (GDP) and global equity market capitalization. Analysts may examine the relationship between equity market capitalization and GDP as a rough indicator of whether the global equity market (or a specific country’s or region’s equity market) is under-, over-, or fairly valued, particularly compared to its long-run average.
Exhibit 1 illustrates the significant value that investors attach to publicly traded equities relative to the sum of goods and services produced globally every year. It shows the continued significance, and the potential overrepresentation, of US equity markets relative to their contribution to global GDP. That is, while US equity markets contribute around 51 percent to the total capitalization of global equity markets, their contribution to the global GDP is only around 25 percent. Following the stock market turmoil in 2008, however, the market capitalization to GDP ratio of the United States fell to 59 percent, which is significantly lower than its long-run average of 79 percent.
As equity markets outside the United States develop and become increasingly global, their total capitalization levels are expected to grow closer to their respective world GDP contributions. Therefore, it is important to understand and analyze equity securities from a global perspective.
Exhibit 1 Country and Regional Contributions to Global GDP and Equity Market Capitalization (2017)
Source: The World Bank Databank 2017, and Dimson, Marsh, and Staunton (2018).
Exhibit 2 lists the top 10 equity markets at the end of 2017 based on total market capitalization (in billions of US dollars), trading volume, and the number of listed companies.1
Note that the rankings differ based on the criteria used. For example, the top three markets based on total market capitalization are the NYSE Euronext (US), NASDAQ OMX, and the Japan Exchange Group; however, the top three markets based on total US dollar trading volume are the Nasdaq OMX, NYSE Euronext (US), and the Shenzhen Stock Exchange, respectively.2
Rank
Name of Market
Total US Dollar Market Capitalization
Total US Dollar Trading Volume
Number of Listed Companies
1
NYSE Euronext (US)
$22,081.4
$16,140.1
2,286
2
NASDAQ OMX
$10,039.4
$33,407.1
2,949
3
Japan Exchange Group
a
$6,220.0
$6,612.1
3,604
4
Shanghai Stock Exchange
$5,084.4
$7,589.3
1,396
5
Euronext
b
$4,393.0
$1,981.6
1,255
6
Hong Kong Exchanges
$4,350.5
$1,958.8
2,118
7
Shenzhen Stock Exchanges
$3,617.9
$9,219.7
2,089
8
National Stock Exchange of India
$2,351.5
$1,013.3
1,897
9
BSE Limited
c
$2,331.6
$183.0
5,616
10
Deutsche Börse
$2,262.2
$1,497.9
499
Notes:
a Japan Exchange Group is the merged entity containing the Tokyo Stock Exchange and Osaka Securities Exchange.
b As of 2001, includes Netherlands, France, England, Belgium, and Portugal.
c Bombay Stock Exchange.
Exhibit 2 Equity Markets Ranked by Total Market Capitalization at the End of 2017 (Billions of US Dollars)
Source: Adapted from the World Federation of Exchanges 2017 Report (see http://www.world-exchanges.org). Note that market capitalization by company is calculated by multiplying its stock price by the number of shares outstanding. The market’s overall capitalization is the aggregate of the market capitalizations of all companies traded on that market. The number of listed companies includes both domestic and foreign companies whose shares trade on these markets.
Exhibit 3 compares the real (or inflation-adjusted) compounded returns on government bonds, government bills, and equity securities in 21 countries plus the world index (“Wld”), the world ex-US (“WxU”), and Europe (“Eur”) during the 118 years 1900–2017.3 In real terms, government bonds and bills have essentially kept pace with the inflation rate, earning annualized real returns of less than 2 percent in most countries.4 By comparison, real returns in equity markets have generally been around 3.5 percent per year in most markets—with a world average return of around 5.2 percent and a world average return excluding the United States just under 5 percent. During this period, South Africa and Australia were the best performing markets followed by the United States, New Zealand, and Sweden.
Exhibit 3 Real Returns on Global Equity Securities, Bonds, and Bills During 1900–2017
Source: Dimson, Marsh, and Staunton (2018).
Exhibit 4 shows the annualized real returns on major asset classes for the world index over 1900–2017.
Exhibit 4 Annualized Real Returns on Asset Classes for the World Index, 1900–2017
Source: Dimson, Marsh, and Staunton (2018).
The volatility in asset market returns is further highlighted in Exhibit 5, which shows the annualized risk premia for equity relative to bonds (EP Bonds), and equity relative to Treasury bills (EP Bills). Maturity premium for government bond returns relative to treasury bill returns (Mat Prem) is also shown.
These observations and historical data are consistent with the concept that the return on securities is directly related to risk level. That is, equity securities have higher risk levels when compared with government bonds and bills, they earn higher rates of return to compensate investors for these higher risk levels, and they also tend to be more volatile over time.
Given the high risk levels associated with equity securities, it is reasonable to expect that investors’ tolerance for risk will tend to differ across equity markets. This is illustrated in Exhibit 6, which shows the results of a series of studies conducted by the Australian Securities Exchange on international differences in equity ownership. During the 2004–2014 period, equity ownership as a percentage of the population was lowest in South Korea (averaging 9.0 percent), followed by Germany (14.5 percent) and Sweden (17.7 percent). In contrast, Australia and New Zealand had the highest equity ownership as a percentage of the population (averaging more than 20 percent). In addition, there has been a relative decline in share ownership in several countries over recent years, which is not surprising given the recent overall uncertainty in global economies and the volatility in equity markets that this uncertainty has created.
Exhibit 5 Annualized Real Returns on Asset Classes and Risk Premiums for the World Index, 1900–2017
Notes: Equities are total returns, including reinvested dividend income. Bonds are total return, including reinvested coupons, on long-term government bonds. Bills denotes the total return, including any income, from Treasury bills. All returns are adjusted for inflation and are expressed as geometric mean returns. EP bonds denotes the equity risk premium relative to long-term government bonds. EP Bills denotes the equity premium relative to Treasury bills. MatPrem denotes the maturity premium for government bond returns relative to bill returns. RealXRate denotes the real (inflation-adjusted) change in the exchange rate against the US dollar.
Source: Dimson, Marsh, and Staunton (2018).
2004
2006
2008
2010
2012
2014
Australia – Direct/Indirect
55%
46%
41%
43%
38%
36%
South Korea – Shares
8
7
10
10
10
N/A
Germany – Shares/Funds
16
16
14
13
15
13
Sweden – Shares
22
20
18
17
15
14
United Kingdom – Shares/Funds
22
20
18
N/A
17
N/A
New Zealand – Direct
23
26
N/A
22
23
26
Exhibit 6 International Comparisons of Stock Ownership: 2004−20145
Source: Adapted from the 2014 Australian Share Ownership Study conducted by the Australian Securities Exchange (see http://www.asx.com.au). For Australia and the United States, the data pertain to direct and indirect ownership in equity markets; for other countries, the data pertain to direct ownership in shares and share funds. Data not available in specific years are shown as “N/A.”
An important implication from the above discussion is that equity securities represent a key asset class for global investors because of their unique return and risk characteristics. We next examine the various types of equity securities traded on global markets and their salient characteristics.
3. Types and Characteristics of Equity Securities
Companies finance their operations by issuing either debt or equity securities. A key difference between these securities is that debt is a liability of the issuing company, whereas equity is not. This means that when a company issues debt, it is contractually obligated to repay the amount it borrows (i.e., the principal or face value of the debt) at a specified future date. The cost of using these funds is called interest, which the company is contractually obligated to pay until the debt matures or is retired.
When the company issues equity securities, it is not contractually obligated to repay the amount it receives from shareholders, nor is it contractually obligated to make periodic payments to shareholders for the use of their funds. Instead, shareholders have a claim on the company’s assets after all liabilities have been paid. Because of this residual claim, equity shareholders are considered to be owners of the company. Investors who purchase equity securities are seeking total return (i.e., capital or price appreciation and dividend income), whereas investors who purchase debt securities (and hold until maturity) are seeking interest income. As a result, equity investors expect the company’s management to act in their best interest by making operating decisions that will maximize the market price of their shares (i.e., shareholder wealth).
In addition to common shares (also known as ordinary shares or common stock), companies may also issue preference shares (also known as preferred stock), the other type of equity security. The following sections discuss the different types and characteristics of common and preference securities.
3.1. Common Shares
Common shares represent an ownership interest in a company and are the predominant type of equity security. As a result, investors share in the operating performance of the company, participate in the governance process through voting rights, and have a claim on the company’s net assets in the case of liquidation. Companies may choose to pay out some, or all, of their net income in the form of cash dividends to common shareholders, but they are not contractually obligated to do so.6
Voting rights provide shareholders with the opportunity to participate in major corporate governance decisions, including the election of its board of directors, the decision to merge with or take over another company, and the selection of outside auditors. Shareholder voting generally takes place during a company’s annual meeting. As a result of geographic limitations and the large number of shareholders, it is often not feasible for shareholders to attend the annual meeting in person. For this reason, shareholders may vote by proxy, which allows a designated party—such as another shareholder, a shareholder representative, or management—to vote on the shareholders’ behalf.
Regular shareholder voting, where each share represents one vote, is referred to as statutory voting. Although it is the common method of voting, it is not always the most appropriate one to use to elect a board of directors. To better serve shareholders who own a small number of shares, cumulative voting is often used. Cumulative voting allows shareholders to direct their total voting rights to specific candidates, as opposed to having to allocate their voting rights evenly among all candidates. Total voting rights are based on the number of shares owned multiplied by the number of board directors being elected. For example, under cumulative voting, if four board directors are to be elected, a shareholder who owns 100 shares is entitled to 400 votes and can either cast all 400 votes in favor of a single candidate or spread them across the candidates in any proportion. In contrast, under statutory voting, a shareholder would be able to cast only a maximum of 100 votes for each candidate.
The key benefit to cumulative voting is that it allows shareholders with a small number of shares to apply all of their votes to one candidate, thus providing the opportunity for a higher level of representation on the board than would be allowed under statutory voting.
Exhibit 7 describes the rights of Viacom Corporation’s shareholders. In this case, a dual-share arrangement allows the founding chairman and his family to control more than 70 percent of the voting rights through the ownership of Class A shares. This arrangement gives them the ability to exert control over the board of directors election process, corporate decision making, and other important aspects of managing the company. A cumulative voting arrangement for any minority shareholders of Class A shares would improve their board representation.
Viacom has two classes of common stock: Class A, which is the voting stock, and Class B, which is the non-voting stock. There is no difference between the two classes except for voting rights; they generally trade within a close price range of each other. There are, however, far more shares of Class B outstanding, so most of the trading occurs in that class.
Voting Rights
—Holders of Class A common stock are entitled to one vote per share. Holders of Class B common stock do not have any voting rights, except as required by Delaware law. Generally, all matters to be voted on by Viacom stockholders must be approved by a majority of the aggregate voting power of the shares of Class A common stock present in person or represented by proxy, except as required by Delaware law.
Dividends
—Stockholders of Class A common stock and Class B common stock will share ratably in any cash dividend declared by the board of directors, subject to any preferential rights of any outstanding preferred stock. Viacom does not currently pay a cash dividend, and any decision to pay a cash dividend in the future will be at the discretion of the board of directors and will depend on many factors.
Conversion
—So long as there are 5,000 shares of Class A common stock outstanding, each share of Class A common stock will be convertible at the option of the holder of such share into one share of Class B common stock.
Liquidation Rights
—In the event of liquidation, dissolution, or winding-up of Viacom, all stockholders of common stock, regardless of class, will be entitled to share ratably in any assets available for distribution to stockholders of shares of Viacom common stock subject to the preferential rights of any outstanding preferred stock.
Split, Subdivision, or Combination
—In the event of a split, subdivision, or combination of the outstanding shares of Class A common stock or Class B common stock, the outstanding shares of the other class of common stock will be divided proportionally.
Preemptive Rights
—Shares of Class A common stock and Class B common stock do not entitle a stockholder to any preemptive rights enabling a stockholder to subscribe for or receive shares of stock of any class or any other securities convertible into shares of stock of any class of Viacom.
Exhibit 7 Share Class Arrangements at Viacom Corporation7
As seen in Exhibit 7, companies can issue different classes of common shares (Class A and Class B shares), with each class offering different ownership rights.8 For example, as shown in Exhibit 8, the Ford Motor Company has Class A shares (“Common Stock”), which are owned by the investing public. It also has Class B shares, which are owned only by the Ford family. The exhibit contains an excerpt from Ford’s 2017 Annual Report (p. 144). Class A shareholders have 60 percent voting rights, whereas Class B shareholders have 40 percent. In the case of liquidation, however, Class B shareholders will not only receive the first US$0.50 per share that is available for distribution (as will Class A shareholders), but they will also receive the next US$1.00 per share that is available for distribution before Class A shareholders receive anything else. Thus, Class B shareholders have an opportunity to receive a larger proportion of distributions upon liquidation than do Class A shareholders.9
CAPITAL STOCK AND AMOUNTS PER SHARE
All general voting power is vested in the holders of Common Stock and Class B Stock. Holders of our Common Stock have 60% of the general voting power and holders of our Class B Stock are entitled to such number of votes per share as will give them the remaining 40%. Shares of Common Stock and Class B Stock share equally in dividends when and as paid, with stock dividends payable in shares of stock of the class held.
If liquidated, each share of Common Stock is entitled to the first $0.50 available for distribution to holders of Common Stock and Class B Stock, each share of Class B Stock is entitled to the next $1.00 so available, each share of Common Stock is entitled to the next $0.50 so available, and each share of Common and Class B Stock is entitled to an equal amount thereafter.
Exhibit 8 Share Class Arrangements at Ford Motor Company10
3.2. Preference Shares
Preference shares (or preferred stock) rank above common shares with respect to the payment of dividends and the distribution of the company’s net assets upon liquidation.11 However, preference shareholders generally do not share in the operating performance of the company and do not have any voting rights, unless explicitly allowed for at issuance. Preference shares have characteristics of both debt securities and common shares. Similar to interest payments on debt securities, the dividends on preference shares are fixed and are generally higher than the dividends on common shares. However, unlike interest payments, preference dividends are not contractual obligations of the company. Similar to common shares, preference shares can be perpetual (i.e., no fixed maturity date), can pay dividends indefinitely, and can be callable or putable.
Exhibit 9 provides an example of callable preference shares issued by the GDL Fund to raise capital to redeem the remaining outstanding Series B Preferred shares. In this case, the purchaser of the shares will receive an ongoing dividend from the GDL Fund. If the GDL Fund chooses to buy back the shares, it must do so at the $50 a share liquidation preference price. The purchasers of the shares also have the right to put back the shares to GDL at the $50 a share price.
