Which of the following statements is most accurate?
- Putable common shares provide benefits to both the issuing company and investors.
- Convertible preference shares are more volatile and riskier than the underlying common shares.
- Investors owning a small number of common shares would prefer statutory voting to cumulative voting.
Solution
A is correct. The put option feature facilitates raising capital because the shares are more appealing to investors. As such, it provides a benefit to the issuing company. It also helps investors limit their potential losses because they can sell the shares back to the issuing company if the market price falls below the pre-specified put price. Therefore, putable common shares are beneficial to both the issuing company and the investors.
B is incorrect. Convertible preference shares are less volatile and less risky than the underlying common shares because the dividend payments are known and more stable.
C is incorrect. Investors owning a small number of common shares would prefer cumulative voting, not statutory voting. Cumulative voting allows the investor to cast all votes in favor of a single candidate thereby increasing the chance of having her preferred candidate elected.
