Module 4 · Equity

Overview of Equity Securities

EN: Common & preferred shares, depository receipts, equity-related risk and return.
VN: Cổ phiếu thường, ưu đãi, depository receipts, rủi ro và lợi suất.

1. Common vs Preferred Stock Concept

Common Voting rights, residual claim, variable dividends.
Preferred Fixed dividends (often), priority over common in liquidation, usually no voting.
Cumulative pref. Missed dividends accumulate.
Convertible Convertible into common shares.
Callable Issuer can redeem at preset price.
Putable Holder can sell back to issuer.

2. Depository Receipts Concept

ADR American depository receipt — foreign shares trading on US exchanges.
GDR Global depository receipt — typically traded outside the US (London).
Sponsored Issuer cooperates — shareholder rights preserved.
Unsponsored Created by depositary bank without issuer involvement.

3. Equity Cost of Capital — Required Return Core

\[ r_E = R_f + \beta \cdot (R_m - R_f) \quad \text{(CAPM)} \]

See PM module for full derivation. Also see DDM-implied return: \(r_E = D_1/P_0 + g\).

Practice problem

Rf = 3%, β = 1.2, market premium = 6%. Compute required return via CAPM.

Show solution

rE = 3 + 1.2(6) = 3 + 7.2

= 10.2%

Practice problem Practice

Practice problem

An investor wants exposure to Toyota (Japan) but only trades on US exchanges. Which security would they buy?

Show solution

ADR: foreign shares packaged for US trading via a US depositary bank.

Sponsored ADR preferred — issuer cooperates.

ADR (American Depositary Receipt) on Toyota