CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

If an issuing company is considered to be high-risk and it may be years before the issuing company goes public, it is likely to issue ______ preferred shares.
A. cumulative
B. participating
C. convertible
Explanation: Convertibles are particularly attractive to those investors who want to participate in the rise of hot growth companies while being insulated from a drop in price should the stocks not live up to expectations.

User Contributed Comments 8

User Comment
dream007 slightly confused. What do you convert convertible shares to??
phillyj convert preferred shares to common shares
gtt240 I think you missed the point of Dream's question (or the one I have). How do you convert convertible shares into a stock that won't exist for years?
alles If it may be years before the company issues common shares and it is considered to be of high risk, wouldn't it make more sense to issue participating preferred shares to attract investors?
Inaganti6 I think we're supposed to presume

1. It's high risk meaning its financially not doing well, so dividends are questionable in any case
2. There's an IPO coming up, giving convertible preference shares allows the investors to make money on the IPO via selling of common shares, which they would have done as the company didn't do well financially and didn't pay dividends.

Given high risk and an IPO coming up, logical hierarchy seems to be
Covertible pref > Cumulative (as they pay dividends in any case, but dividends are questionable > participating (they pay extraordinarily only when there is extraordinary performance)
psahni85 Participating preferreds are often used by PE which would , in my opinion, fit the scenario described.
edrei7 An IPO is not needed for the issuance of common shares.
edrei7 The context here is how would you compensate the investors for them to want to invest in your company. If the company does great, I, as the investor, would want to have a bite at the common stock. If the company does bad, well I still have a steady stream of return from my original preference stock.
You need to log in first to add your comment.