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Series 7 > Ch. 6 Corporate Ownership > Flashcards

Ch. 6 Corporate Ownership Flashcards

1
Q

What is the purpose of issuing common stock?

A

To raise business capital

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2
Q

Rights of Common Stockholder

A

Preemptive Rights
Right to receive dividends
Right to review the corporate books
Right to vote
Right to residual claim on corporate assets

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3
Q

What are the two types of voting structures for common stockholders voting rights?

A

Statutory Voting
Cumulative Voting

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4
Q

What is Statutory Voting?

A

The Regular Way
1 share = 1 vote
1 vote per open position
Investors have to split the vote evenly (cannot pool) for each issue on the ballot.

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5
Q

What is Cumulative Voting?

A

Pooled votign
1 share = 1 vote
BUT - you can pool you votes to have more power to get someone specific on the board.
Helps smaller investers

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6
Q

What are the Types of shares a corporation has or can sell?

A

Authorized Shares
Issued Shares
Outstanding Shares
Treasury Shares

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7
Q

What are Authorized Shares?

A

The total possible number of shares of stock a corporation can issue as defined by the issuer’s bylaws or Corporate Charter

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8
Q

What are Issued Shares?

A

The portion of Authorized Shares the issuer has sold to the public to raise money

Issued = Outstanding + Treasury

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9
Q

What are Unissued Shares?

A

The portion of authorized shares that haven’t been issued to the public .

May be kept unissued for up to 2 or 3 years (shelf registration) for future use

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10
Q

What are Outstanding Shares?

A

The number of shares that are in investor’s hands

Outstanding shares = Issued - Treasury

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11
Q

What are Treasury Shares?

A

Shares repurchased by the company

Often done to increase EPS, increase demand for shares and/or avoid a hostile takeover

Treasury = Issued - Outstanding

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12
Q

Par Value of Common stock is mostly used for what?

A

Accounting purposes.

Par value is not as important to investors and is typically priced at $1

It has no relation to the market price of the stock

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13
Q

What is Additional Paid-In Capital, Paid-In Surplus or Capital In Excess Of Par?

A

Paid-In Capital = Market Price - Par Value

The amount over par that an issuer receives for selling stock

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14
Q

What is the Stated Par Value?

A

Printed on the stock certificate

Changes if the issuer splits its stock

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15
Q

How do Forward Stock Splits impact…
1. par value?
2. market value?
3. # of shares held by existing stock holders?

A

Forward Stock Splits
1. LOWER PAR VALUE
2. LOWER MARKET VALUE
3. INCREASE The number of shares held by existing stockholders

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16
Q

How do Reverse Stock Splits impact…
1. Par Value?
2. Market Value?
3. # of shares held by existing stock holders?

A

Reverse Stock Splits
1. Increase Par Value
2. Increase Market Value
3. Decrease the number of shares held by existing stock holders

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17
Q

What kinds of dividends can an investor receive?

A
  1. Cash
  2. Stock
  3. Property
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18
Q

When given a dividend, how do you determine how much every shareholder receives?

A

Dividends are distributed on a PRO RATA basis

Every shareholder receives an equal proportion of each share that she owns.

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19
Q

Do common stock investors vote on dividends?

A

No.
The BOD decides dividend payouts

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20
Q

What are cash dividends?

A

A way for a corporation to share its profits with shareholders

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21
Q

When shareholders receive cash dividends, is it a taxable event?

A

Yes - cash dividends are a taxable event

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22
Q

What happens after a cash dividend is provided to common stock holders?

A

The market price of the stock falls on the ex-dividend date to reflect the dividend paid.

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23
Q

What is the formula to determine the price of the stock on the ex-dividend date?

A

Stock price - dividend = stock price on ex-dividend date

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24
Q

What is a stock dividend?

A

Given in a percentage

the investor receives more shares of stock

Are NOT a taxable event

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25
Q

What is the primary reason to give a stock dividend to investors?

A

To make the market price more attractive to investors.

Reduces the market price and increases the number of outstanding shares.

Adds liquidity (ease of trading) to the stock

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26
Q

In a stock dividend, what happens to the market price per share and the number of shares the investor holds?

A

In a stock dividend,
- the price per share goes down
- and the number of shares increases.

27
Q

What is a Corporate Spinoff?

A

When a company decides to spin off a portion of their company to create two distinct companies

28
Q

Why would a company do a spin off?

A

B/C the company thinks they will be stronger as two separate companies

29
Q

How is stock reallocated to existing investors in a spin-off?

A

Investors who are holding shares of the parent company prior to the spin-off would receive shares of the new company equal to their percentage ownership of the parent company.

30
Q

What is a Consolidation?

A

When two or more companies combine to form a new company or entity.

It is not a merger, which is where one company absorbs another company

31
Q

What is the goal of a Consolidation?

A

To have the new company to be able to gain more market share and possibly have more buying power.

32
Q

How is stock reallocated or realigned during a consolidation?

A

Existing stock holders will receive shares of the new company based of of their (but not in direct proportion to) percentage ownership of one of the companies prior to the consolidation.

33
Q

What are Penny Stocks?

A

Low-priced equity securities issued by corporations

Non NASDAQ equity securities that trade OTC at less than $5 / share

Highly speculative

Suitability required

Illegal to cold call customers about Penny Stocks

34
Q

What does the BD have to do w/ Customers re: Penny Stocks

A
  1. Provide a Penny STock Disclosure Document (outlines risk)
  2. BD must receive a signed and dated acknowledgement of receipt of the document from the customer.
  3. BD must wait at least 2 Biz Days after sending the document to thecustomer prior to any penny-stock transaction
  4. BD must maintain the signed document on file
  5. When requested by customer, the BD must provide the Penny Stock info provided at the SEC’s website
35
Q

What does the BD need to share w/ the Customer before effecting a Penny Stock transaction?

A

Associate dpersons must disclose the amount of cash compensation they will receive as a result of the transaction

IT must be sent tot he customer in writing at or prior to the time the confirmation of trade is sent

36
Q

What are the reporting requirements for Penny Stocks?

A

Penny Stock holders must receive a MONTHLY account statement.

It must show
- market value
- number of shares
- issuer’s name

37
Q

Penny Stocks Considered Exempt for Registration w/ SEC

A

Under Rule 15g-1, the following Penny-stock transactions are exempt:

  1. Transactions by a BD whose earnings from Penny Stocks did not exceed 5% of its total commissions in the preceding 3 months AND during 11 or more of the preceding 12 months

OR

The preceding 6 months and who hasn’t been a market maker in that particular penny stock in the preceding 12 months

  1. Transactions that meet the requirements of REg D
  2. Transactions w/ Institutional Accredited Investors
  3. Transactions not recommended by the BD
  4. Transactions in which the customer is a Control Person of more than 5% of any class of equity security of the issuer of the penny stock
  5. Any other transaction deemed to be exempt by the SEC that is consistent with the protection of investors and is in the public’s interest
38
Q

What is Preferred Stock

A

An equity security because it represents ownership of the issuing corporation

39
Q

What are the Characteristics of Preferred Stock

A
  1. Pays consistent cash dividends
  2. Par Value of $100/share and tends to have a market price close to that value

3 .The price will fluctuate based on changes in prevailing interest rates

  1. Paid out before common stock but after bondholders in case of bankruptcy
40
Q

What are some drawbacks to preferred stock?

A
  1. No voting rights (unless they fail to receive their expected dividends)
  2. Higher Cost Per Share (sometimes)
  3. Limited growth
41
Q

If an issuer can’t make a dividend payment to holders of preferred stock, what usually happens?

A

Usually, the owners of preferred stock are still owed the missing dividend payments and the company will need to catch up at some point.

42
Q

How to calculate the ANNUAL DIVIDEND on preferred stock?

A

Annual Dividend = dividend % X par value

ie. Annual Dividend = 8% X $100
= 0.08 X $100
= $8 per year

Quarterly Dividends = $8 / 4 = $2 per quarter

43
Q

What are 7 types of Preferred Stock

A
  1. Noncumulative (Straight) Preferred
  2. Cumulative Preferred
  3. Convertible Preferred
  4. Callable Preferred
  5. Participating Preferred
  6. Prior (Senior) Preferred
  7. Adjustable (Variable or Floating Rate) Preferred
44
Q

What is Convertible Preferred Stock

A

Allows investors to trade their preferredstock in for common stock of the same company at any time.

+ for investor, so lower dividend offered

45
Q

What is “The Conversion Price” re: preferred stock?

A

The dollar price at which a convertible preferred stock par value can be exchanged into a share of common stock.

Established at issuance and based on par value.

If you have the Par Value and the Conversion Ratio, Conversion Price is…

Conv Price = Par Value / Conv Ratio

46
Q

What is “The Conversion Ratio” re: preferred stock?

A

Tells you the number of shares of common stock that an investor receives for converting one share of preferred stock.

Conv Ratio = Par Value / Conversion price

The Conversion Ratio helps you determine a PARITY PRICE

47
Q

What is a PARITY PRICE?

A

When the convertible preferred stock and the common stock would be trading equally

48
Q

Example of Preferred Stock and Common Stock trading at Parity

A

At Conversion, the investor can get 4 common stocks for one preferred stock.

Pref stock current MP is $100
Common stock current MP is $25

4(25) = 100, so the pref stock and the common stock are at parity

49
Q

Example of Preferred stock and common stock NOT trading at Parity

A

At Conversion, the investor can get 4 common stocks for one preferred stock.

Pref stock current MP = $100
Common Stock Current MP = $28

4(28) = 112

50
Q

What is Callable Preferred Stock

A

Allows the ISSUER to buy back the preferred stock at any time at a price on the certificate

  • For investor: Higher risk for investor, so company will pay higher dividend

Call features can be added to other types of preferred stock, too

51
Q

What is a Sinking Fund Provision

A

Often connect with Callable Preferred Stock

Issuers set aside money in a custodial account to repurchase the shares sometime in the future

52
Q

What is Participating Preferred Stock?

A

Rarely issued

allows the investors to receive common dividends AND the usual preferred dividends up to a certain amount

Most preferred stock is non-participating, meaning that they don’t receive common dividends, only preferred dividends.

53
Q

What is Prior (Senior) Preferred Stock

A

In the case of bankruptcy, Prior (Senior) Preferred stock holders receive compensation before common stockholders AND other preferred stock holders.

Has a slightly lower dividend rate than other preferred stock due to the extra safety benefit

54
Q

What is Adjustable (Variable or Floating Rate) Preferred Stock

A

Receive a dividend that is resent every 3 months to match movements in the prevailing interest rates

b/c dividend rate changes w/ market, the stock price remains more stable

55
Q

What are American Depository Receipts (ADRs)

A

Negotiable certificates that represent a specific number of shares of a foreign stock.

Usually do not have voting privileges

Issued by US Banks, therefore, investors receive dividends in US dollars.

Stock Certs are held in a foreign branch of a US bank (custodian bank)

56
Q

What kinds of risk are holders of ADRs more likely to experience?

A
  1. Currency Risk (Strong dollar compared to foreign currency)
  2. Political Risk (wars, riots, etc.)
57
Q

What are Subscription or Preemptive Rights?

A

Offered to common stockholders to maintain their proportionate ownership of the corporation

Allow existing stockholder to purchase new shares at a discount directly from the issuer before shares are offered to the public.

One right for each share owned

Short Term (30 - 60 days)

Hold intrinsic value and may be sold.

58
Q

What happens when all of the stock is not purchased by existing stock holders in a rights offering ?

A

A Standby Underwrite purchases any stock that wasn’t sold and then resells the shares to other investors.

59
Q

Who decides the price of a rights offering and how many shares need to be sold?

A

Board of Directors

60
Q

CUM RIGHTS
To determine the value of a right BEFORE THE EX-DATE while shares are still trading w/ rights attached, what formula can you use?

A
  1. Cum Rights Formula
                 (MP - Subscription Price) value =   -----------------------------------------------
        N (# of rights to buy 1 share) + 1

The 1 in the denominator accounts for the later drop in the market price

61
Q

EX RIGHTS
To determine the value of a right ON OR AFTER THE EX-DATE (First day the stock trades w/o the rights)

A

Ex-Rights Formula

                (MP - Subscription Price) value =   -----------------------------------------------
                N (# of rights to buy 1 share)
62
Q

What are Warrants?

A

Long term certificates that entitle the holer to buy a specific amount of stock at a fixed price.

Strike price is much higher than market price at issuance

Often attached to bonds to “sweeten” the deal in “units”.

Holders have no voting rights and receive no dividends

Warrants are marketable and can be sold separately on the market

63
Q

What are Anti-Dilution Agreements or Provision in the Corporate Charter?

A

Anti-dilution Agreement states that if the issuer offers new securities to the public, it must offer the to its current stockholders first.

Allows existing stockholders the ability to keep the same proportionate ownership of the issuing corporation.

Series 7 (4 decks)

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