Chapter 04: Equities

Question 1

A _________ is one that’s taxed separately from its owners and has an unlimited number of shareholders.

Answer 1

Standard Corporation (Subchapter C)

A C corporation is considered a separate legal entity from its owners (shareholders), which means it can enter into contracts, own assets, and be held liable for its actions independently of its owners

Question 2

______ Income is taxed twice - first at the corporate level and, if distributed as a dividend to shareholders, It’s then taxed to the shareholder.

Answer 2

C Corporation income.

Question 3

In many cases, certain senior executives of the corporation,such as the CEO and the president also serve on the board of directors, these. Persons are referred to as _______.

Answer 3

Affiliated directors

The opposite is true of non affiliated directs. These individuals are those who are not otherwise connected to the corporation.

Question 4

_________ and ________ Refers to the 2 basic methods used by corporations to raise money.

Answer 4

Debt financing an Equity financing.

Question 5

For _____ investors, their returns are limited to the interest that the corporation pays them for the use of their money

Answer 5

Bond investors

Question 6

Is (1) the basic unit of corporate ownership, (2) the most widely issued type of stock, and (3) the first type of stock that a corporation issues.

Answer 6

Common stock

Question 7

____ investor’s provide capital and in turn, receive:

• interest
• principal
• liquidation preference over stockholders
• creditor status

Answer 7

Bond investors

Question 8

The term _____ refers to the number of shares that have been issued to the public, less stock that has been reacquired by the company (treasury stock)

Answer 8

Outstanding stock

Question 9

Calculate market capitalization

Answer 9

CMP x #outstanding shares

Question 10

As specified in a corporation’s Charter and bylaws, all shareholders are provided with certain rights which may include the following

Answer 10

• right to evidence of ownership
• right of transfer
• right of inspection
• right to vote
• right to receive dividends

Question 11

As with a check, a _____ must be endorsed by the owner when sold to be considered in good delivery form

Answer 11

Stock certificate

Question 12

Some companies have recently issued classified shares that are referred to as ________ which give key company insiders greater control through the receipt of more than one vote per share

Answer 12

Super-voting stock

For example. This style of stock may have 10, 100, or even 1,000 votes per share.

Question 13

True or false. The specific number of shares represented by super-voting stock is negotiated between the corporate Insider who receives the share and the board of directors

Answer 13

True.

Keep in mind. The issuance of super-voting shares must be approved by shareholders

Question 14

What is a tender offer

Answer 14

When an entity offers to buy a corporation’s shares, typically for the purpose of acquiring control of the company

Question 15

A _________ is defined as the acquisition of a company by primarily using debt to finance the purchase.

Answer 15

Leveraged buyout (LBO)

Question 16

This type of acquisition allows the __________, which is referred to as a __________, to make the purchase without using much of its own equity.

How?

The assets of the acquired company are generally used as collateral for the borrowed funds

In many circumstances, since a large amount of borrowed funds are used to make the purchase, they’re usually non-investment-grade

Answer 16

(1.) Acquiring company (2.) Private Equity (PE) Firm

Question 17

Investors who purchase _______ are able to, at their discretion, convert the par value of the preferred stock into a predetermined number of common shares at a specific price - which is the stated conversion price.

Answer 17

Convertible preferred stock

Question 18

These shares begin with a fixed rate, but after a certain amount of time ( approximately 5 years), they switched to a floating or adjustable rate.

Answer 18

Series K shares

Question 19

What type of shares have the following characteristics

• they’re depository shares and represent a larger basket of an issuers preferred stock
• they have a wide range of par values
• they generally have no voting rights
• their Dividends are non-cumulative, but are qualified for tax purposes ( text at a maximum rate of 20%)

Answer 19

Series K preferred stock

Question 20

What is offered to current shareholders so that they may retain their proportion of ownership in a company

Answer 20

Preemptive rights

Question 21

What is a subscription price

Answer 21

A preset exercise price usually below the current market price in a rights offering

Question 22

What are the differences between rights and warrants

Answer 22

Rights are issued to existing common stockholders whereas warrants are issued to purchasers of the issuers preferred stock or bonds. Rights are offered during the subscription period usually between 30 and 45 days whereas warrants or long-term and often do not mature for years.

Question 23

The _____ system is considered a negotiated dealer market.

Answer 23

The NASDAQ system

Question 24

An ________________ is a type of financial instrument that is not listed on a formal stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. Instead, OTC equity securities are traded through a network of dealers who negotiate directly with one another, typically using electronic platforms or telephone communication

Answer 24

An OTC (Over-the-Counter) equity security is a type of financial instrument that is not listed on a formal stock exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. Instead, OTC equity securities are traded through a network of dealers who negotiate directly with one another, typically using electronic platforms or telephone communication

Question 25

Prices of OTC equities may be obtained from two sources - the __________ and the ____________

Answer 25

Prices of OTC equities may be obtained from two sources - the OTC Bulletin Board (OTCBB) and the Financial Industry Regulatory Authority (FINRA) OTC Trade Reporting Facility (OTC TRF).

Question 26

How are non-qualified dividends taxed

Answer 26

Non-qualified Dividends are taxed at the investors ordinary tax rate

Question 27

What defines a dividend as qualified

Answer 27

An investor must hold the shares for more than 60 days

Also, these shares must be un-hedged. This means no puts, short calls, or short sales may be associated with the shares during the holding period

Question 28

True or false. The corporate exclusion is available for cash dividends paid on common and preferred stock

Answer 28

True

Question 29

In general, if a corporation owns less than ____ % of the distrubting corporation, ___% of the dividend income will excluded from corporate income.

If the corporation owns ___% or more of the distributing corporation, the exclusion is ____% of the total Dividends received.

Answer 29

20, 50.

20, 65.

Question 30

Calculate the new cost basis per share

Answer 30

Total cost basis - total number or shares (shares before stock split + new shares)

Question 31

Explain “ versus purchase of”

Answer 31

When an investor closes a position and designates which shares are being sold in order to take a gain or a loss, the brokerage firm will mark the confirmation as “versus purchase of”.

Think of this

On May 1, he bought 100 shares of XYZ at $60

on September 1, he bought 100 shares of XYZ at $90

on October 15, he sold 100 shares of XYZ at $89

Question 32

Explain a wash sale

Answer 32

A transaction in which an investor sells or trades a security at a loss and then purchases a “substantially similar” security within 30 days before or after the sale.

Question 33

If the receiving corporation owns less than ___ of the paying corporation’s stock, it can generally deduct ___ of the dividend received

Answer 33

If the receiving corporation owns less than 20% of the paying Corporation stock, it can generally deduct 50% of the dividend received

Question 34

According to the corporate dividend exclusion rule, corporations are able to exclude from taxation a portion of the dividends they receive from the common and / or preferred stocks that they own of other corporations.

If a corporation owns ___ or more of the distributing company, it’s able to exclude ___ of eligible dividends from taxation

Answer 34

If a corporation owns 20% or more of the Distributing company, it’s able to exclude 65% of eligible dividends from taxation

Question 35

___________ stock begin at a fixed rate, but then switch to a floating rate, AND the dividend is non-cumulative

• they’re depository shares (fractional shares of stock) and
• represent a larger basket of an issuer’s preferred stock.
• have a wide range of pars
• generally have no voting rights
• taxed at a maximum of 20% (qualified dividends)

Answer 35

Series K preferred stock

Question 36

True or false. Short-term losses are used first as deductions against ordinary income.

Answer 36

True.