Chapter 1 Flashcards
1
Q
A new bond issue will include warrants to:
A
Increase attractiveness of the issue to the public.
By including warrants with debt issues, issuers increase marketability of bonds. Warrants offer long-term opportunity to buy the underlying stock at a fixed price. In addition to increasing marketability, the issuer can offer the bonds with a lower coupon rate and as a result, reduce fixed costs.
2
Q
All other factors equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate?
A
Callable.
3
Q
Ex-date for NYSE-listed issues is set by:
A
The NYSE
Ex-date is set by the market where the security principally trades.
4
Q
A change in earnings would affect the price of which of the following securities the most?
- treasury stock
- common stock
- 10% debentures maturing in 10 years
- 6% preferred stock
A
10% debentures maturing in 10 years.
Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm.
5
Q
Advantages of REITs
A
Liquidity
Diversification
Professional Management
REIT is a professionally managed company that invests in diversified portfolio of real estate holdings. They are traded on exchanges and OTC, which provides liquidity. IRS does not permit tax deferrals on REIT investments.
6
Q
A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats, the stockholder could cast the votes:
A
200 for each of the 3 directors.
Stockholder has one vote per seat for each share he owns. Under statutory voting, he must allocate an equal number to each seat.
7
Q
New Offering: 800,000 units at $6 per unit. Each unit has 2 shares of common stock and 1 warrant. Each warrant is to purchase 1/2 share of common stock. How many shares of stock will be sold and how many warrants?
A
1.6 million shares and 800,000 warrants.
Warrants can be distributed to stockholders in an underwriting as part of a unit. As a form of bonus to entice investors to purchase the unit.
8
Q
A company set up to invest in real estate, mortgages, construction and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called:
A
a Real Estate Investment Trust (REIT)
9
Q
A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into 5 shares of common stock. Conversion price of common stock is:
A
20
Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into 5 shares we need to know what number goes into $100 5 times.
10
Q
Advantages of investing in ADRs (American Depositary Receipts)
A
ADRs fall under oversight of the SEC
Transactions are done in US currency
Dividends are received in US currency
11
Q
Terms applicable to REITs
A
Dividends taxed at full ordinary income rates
Managed
Secondary Market
REITs trade in the secondary market and are not redeemable. They are actively managed, and dividends do not meet the requirements to be taxed as qualified dividends, so they are taxed as ordinary income.
12
Q
a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable?
- privately placed investment
- interest in a real estate limited partnership
- Real estate investment trust
- direct investment in a shopping center renting space
A
REIT - Real Estate Investment Trust
Market traded securities that provide an investor with a liquid market in which to invest in real estate.
13
Q
Which of the following is an equity security?
- REIT share
- mortgage secured bond
- GNMA pass-through certificate
- collateralized mortgage obligation
A
REIT share
Equity security that represents undivided ownership in a portfolio of real estate investments.
14
Q
Last day that stocks can be bought for cash and still receive the dividend is:
A
The Record Date
Cash trade settles the same day.
15
Q
ADRs
A
Issued by large domestic commercial banks to facilitate US investors who want to trade in foreign securities.
16
Q
Common stock of ABC currently earns $3 per share. If price-to-earnings ratio for this stock is 14, what is the current market price?
A
42
Price-to-earnings ratio equals the market price divided by the earnings per share. (14 x $3 = $42)
17
Q
Feature of preferred stock that allows the holder to reduce the risk of inflation:
A
Convertible.
Fixed dollar investments such as bonds and preferred stock are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.
18
Q
A company that has issued cumulative preferred stock:
A
pays past and current preferred dividends before paying dividends on common stock.
Bond interest is always paid before dividends. Dividends in arrears have the highest priority of dividends to be paid.
19
Q
If a corporation attaches warrants to a new issue of debt securities, a resulting benefit to the corporation would be:
A
Reduction of debt securities interest rate.
20
Q
In general, a corporation assumes the LEAST risk when it obtains funds from:
A
Sale of preferred stock.
Sale of preferred stock does not entail the assumption of debt and therefore is the least risky. It is ALWAYS riskier to borrow than to raise equity because equity does not have to be paid back.
21
Q
Which of the following statements regarding the effects of a stock dividend is TRUE?
- capital surplus is reduced
- net current assets are decreased
- market value of stock is decreased
- new capital is channeled to the company
A
Market Value of the stock is DECREASED.
A stock dividend results in an increased number of outstanding shares, each with a lower value per share. Total value of outstanding stock is unchanged. There is no new capital generated from a stock dividend. Current assets are unchanged because there is no increase or decrease to the company’s cash as a result of the stock dividend.
22
Q
Cash dividends from REITs are:
A
Taxed as ordinary income.
23
Q
ADRs are used to facilitate the:
A
Domestic trading of foreign securities.
ADR is a negotiable security that represents ownership interest in a non-US company. Because they trade in the US marketplace, they allow investors convenient access to foreign securities.
24
Q
ABCs stock has paid a regular dividend ever quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABCs:
A
Current Yield per share has increased.
Current yield is income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield. Stocks do not have a Yield to Maturity.
25
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?
24.
If the company is going to pay common stock dividend, it must pay preferred dividends first. Cumulative preferred must also receive all dividends in arrears.
26
While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q" If you owned 1000 shares, you could anticipate annual dividends of:
600.
The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share.
1000 shares x .60 = $600
27
If Flying Horse Corp splits 5:4, the presplit $.40 par value of the common stock would be adjusted to:
0.32.
Stock splits would change the par value of the stock, To calculate the new value, multiply the original par by the inverse split: 4/5 x $.40 = $.32
28
Which of the following securities typically carries the highest dividend rate?
* straight preferred
* convertible preferred
* participating preferred
* callable preferred
Callable Preferred.
Straight preferred is the benchmark rate. Compare to straight preferred, both convertible and participating preferred tent to carry lower dividend rates, as the investor has been given something extra in the right to convert to common at a fixed price or the right to earn more than the stated rate if the BOD elects to make an additional dividend payment. Callable preferred allows the issuer to call the securities away from the investor. From an investing point of view, this is not an incentive. Therefore callable preferred tends to pay higher rates.
29
All of the following are true of REITs EXCEPT:
* they must pass along losses to shareholders
* shares are publicly traded
* they must invest at least 75% of their assets in real estate related activities
* they must to qualify under Subchapter M, distribute at least 90% of their net investment income
they must pass along losses to shareholders.
REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to shareholders. While they can pass through income, they cannot pass through any losses.
30
GHI stock is at $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield is:
6.7%
Current yield is determined by dividing the annual dividend of $4 ($1 per quarter x 4 = $4) by the current stock price of $60 ($4 / $60 = 6.7%)
31
the issuer of an ADR is a:
Foreign branch of a domestic bank.
Everything is in English and in US dollars.
32
Shareholder approval is required for:
* issuance of convertible bonds.
* acceptance of a tender offer from a non-affiliated company.
* stock splits
Shareholder approval is NOT required for the payment of dividends.
33
If a stocks ex-dividend date is Tuesday, January 13, when is the record date?
Thursday, January 15.
The record date is TWO BUSINESS DAYS after the ex-dividend date.
34
Which of the following represent ownership in a corporation?
* debentures
* convertible bonds
* preferred stock
* common stock
Preferred Stock and Common Stock.
35
A company has reverse-split its common stock. The effect on the earnings per share will be:
An Increase.
When a reverse split takes place, the number of outstanding shares is reduced. Since the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.
36
A company's dividend on its common stock is determined by:
Its Board of Directors.
37
Which of the following statements regarding warrants are TRUE?
* they pay dividends
* represent ownership in the issuing corporation
* allow for purchase of common stock at fixed price
* they do not give holders voting rights
They allow for the purchase of common stock at a fixed price, and they DO NOT give holders voting rights.
Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. They do not pay dividends which are only paid to stockholders, nor do they give voting rights. The holder of the warrant does not own the stock until the warrant is exercised.
38
Treasury stock is:
Stock repurchased by the issuer.
Has no voting rights and does not receive dividends.
Treasury stock is not included when calculating shareholders equity or net worth.
39
Dividends from American Depositary Receipts (ADRs) held by US investors are declared in:
The foreign currency, but paid in US dollars.
*this is one reason why currency risk is a factor for ADR holders.
40
Which of the following securities carries the greatest amount of risk?
* common stock
* debentures
* corporate bonds
* preferred stock
Common Stock.
Common stockholders are always the last to receive payment in the event of a corporate liquidation and, therefore, have the most risk. However, common stockholders have the greatest potential reward of ownership if the corporation is successful.
41
ABC, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued with a $1000 PAR value has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all the warrants are exercised, ABC will receive:
$6.4 million.
There are a total of 40,000 warrants outstanding ($40 million of debentures / $1000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 x 40000) at $40 per share. 160,000 x $40 = $6.4 million.
42
If ABC declares a 5:4 stock split, an investor who owns 300 shares would receive how many additional shares?
75
a 5:4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares x 25% = 75 shares.
43
ABC has 5.5 million shares outstanding. They want to raise capital by selling 2 million shares through a rights offering and they engage an underwriter on a standby basis. By the expiration date ABC was only able to sell 1 million shares to existing shareholders. After expiration how many shares are outstanding?
7.5 million.
ABC engaged a standby underwriter who commits to purchase any unsold shares. Therefore regardless of the number of shares initially subscribed to, all 2 million shares will be sold.
44
ABC has 1 million shares of common stock outstanding ($10 par value) paid in surplus of $10 million and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2:1 stock split?
The par value would decrease to $5 per share.
A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not effected by a stock split.
45
Preferred Stock :
* dividend is fixed except in case of adjustable preferred
* preferred stock has no set maturity date
* because there is no set maturity value or redemption date, the holder of preferred stock has to sell his shares in the open market to close out his position.
* preferred stock does not generally have voting rights
46
If a common stock is currently selling for $75 per share with quarterly dividend of $.75 the current yield is:
4%
Current Yield formula = Annual Yield divided by Current Price. Ex ($.75 x 4) / $75 = 4%
47
Registrar Functions
Accounts for the number of shares and audits the transfer agent.
48
Common Stockholders rights and priviledges:
* right to vote on important affairs in the life of the company
* NO rights to vote on routine operational decisions. NO promise is offered with regard to stockholders initial investment, which might be lost, or dividends, which might not be declared.
49
ABC, a publicly held company, decides to issue shares in an additional public offering. If the APO is for an additional 1 million shares and 60% of shares are subscribed to in the preemptive rights offering, how many shares will the standby underwriter for this offering have available to sell to the public?
400,000.
If 60% of the additional shares are already subscribed to by existing shareholders, then 40% of the additional shares will be sold to the public through a standby (firm commitment) underwriting (1,000,000 x 40% = 400,000)
50
In a 3-for-2 stock split an investor will:
have 50% more shares at 2/3 the price.
If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by 1/3, but the total value of the position will stay the same.
51
your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date what will he own?
125 shares at a cost of $20 per share.
Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment.
52
Which of the following taxes does NOT impact the holder of an ADR?
* federal income tax
* state income tax
* foreign income tax
* excise tax
Excise Tax.
Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investors federal income tax return.
53
Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue?
Registrar.
The Registrar is responsible for keeping careful account of the number of shares a company is authorized to issue and ensuring that the number outstanding does not exceed this number.
54
If a company splits its stock 3 for 2 how many additional shares will be issued to an investor who owns 200 shares.
100.
To calculate multiply the existing number of shares by the split rates (200 shares x 3/2 = 300 shares) Because the investor owned 200 shares he will be issued 100 additional shares, bringing ownership to 300 shares.
55
Advantages and Disadvantages of Warrants
* exercise prices of stock rights are usually below CMV of the underlying security at the time of issue.
* exercise prices of warrants are usually above CMV of the underlying security at time of issue.
* Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value.
* warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.
56
For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is :
25 Round Lots.
For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading.
57
Smith and Co. Inc has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares?
200 rights, 5 per share.
Stockholders receive one right per share owned. Joe would receive 200 rights. The purpose is to maintain shareholders proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares.
58
OTC equity securities - 1 share equals 1 round lot for stocks trading at or above :
$175 per share.
In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.
59
The Record Date :
Is set by the issuing corporation to determine which stockholders will receive a declared dividend.
60
ABC Inc. will issue new stock through a rights offering. Terms of the offering are 10 rights plus $10 to purchase one new share of stock, with any fractional shares to be considered whole shares. ABC is currently trading at $13. If your customer owns 85 shares of ABC and wishes to subscribe to the new offering, how many shares can she purchase at the subscription price and how much money will be required?
9 shares; $90
Owning 85 shares, the customer would receive 85 rights allowing the purchase of 8.5 shares. Because fractional shares are rounded up, a total of 9 shares could be purchased. Each share requires an additional $10 to purchase, therefore if the customer wants to buy the 9 shares they would be required to pay a total of $90.
61
Which of the following statements regarding holders of common stock are TRUE?
* they must approve dividend payments
* entitled to declared dividend distributions in proportion to their ownership
* they have residual rights to corporate assets on dissolution.
* they have unlimited liability
* entitled to declared dividends
* they have residual rights to corporate assets on dissolution.
Common stockholders do NOT vote on dividend payments and they only have LIMITED liability.
62
A corporation must have stockholder approval to:
Issue convertible bonds.
Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders equity (shareholders proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the BOD and DO NOT require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend.
63
Which of the following statements regarding ADRs are TRUE?
* dividends payable in underlying foreign currency
* dividends payable in US dollars
* holders have voting rights
* holders do not have voting rights
* dividends payable in US dollars
* holders do NOT have voting rights
The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights.
64
A company is offering investors the opportunity to purchase shares for the next 5 years at a fixed price slightly above todays market price. The company is issuing?
Warrants.
65
A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is?
5%.
Current Yield formula is: Annual Dividends per share / current market price. ($36 million / 20 million shares = $1.80 per share. Current Yield is $1.80 / $36.00 = 5%)
66
The BOD of DMF, Inc. announces a 5:4 stock split. The market price of DMF after the split should decrease in value by ?
0.2.
The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5:4 stock split, the new price should be about 4/5 the old price. A 1/5 change equals 20% (100% / 5 = 20%)
67
Which of the following statements regarding Warrants is TRUE?
* they pay dividends
* represent ownership in issuing corp
* allow for purchase of common stock at fixed price
* do not give holder voting rights
* allow for purchase of common stock at fixed price
* do not give holder voting rights
Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. They do not pay dividends which are only paid to stockholders, nor do they give holders voting rights. The owner of the warrant does not own the stock until the warrant is exercised.
68
Dividends may be paid to holders of:
American Depositary Receipts (ADRs)
American depositary receipt (ADR) owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation and treasury stock is stock that has been issued by the corporation and then bought back. Neither rights, warrants or treasury stock holders have the right to receive dividends.
69
Shareholder approval is required for all of the following corporate events EXCEPT:
* stock splits
* dividends
* issuance of convertible bonds
* acceptance of a tender offer from a non-affiliated co.
*dividends
Shareholder approval is not required for the payment of dividends, but is normally required. for actions that increase-( or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.
70
A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the BOD of XYZ Corporation. Which of the following statements could he make?
* exercise prices of stock rights are usually below CMV of the underlying security at time of issue
* exercise prices of warrants are usually above CMV of the underlying security at time of issue
* both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value.
* warrants are often issued attached to a bond issue to reduce the interest cost to the issuer.
ALL are true statements.
71
When compared to statutory voting, cumulative voting gives an advantage to:
Minority Stockholders.
Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
72
The regular way ex-dividend date for cash dividends is the:
2nd business day preceding the record date.
Regular way ex-dividend date is 2 business days BEFORE the Record Date.
73
Stockholders preemptive rights include the right to:
maintain proportionate ownership interest in the corporation.
Preemptive rights allow stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. For example, if a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase 5% of the new shares.
74
A company has paid a dividend every quarter for the last 20 years. If the stocks price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that:
Current Dividend Yield has increased.
Current dividend yield is income dividend divided by price. If the price of a stock decreases and the dividend remains the same, dividend yield will increase.
75
If ABC Corp. declares a 5:4 stock split, an investor who owns 300 shares would receive how many additional shares?
75.
A 5:4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares x 25% = 75 shares.
76
Which of the following is an advantage of owning American Depositary Receipts (ADRs)?
* investor receives preemptive rights
* investor can buy, sell, and receive dividends in US dollars rather than a foreign currency.
* investor has right to vote at stockholder meetings
* investor avoids currency risk
*Investor can buy, sell and receive dividends in US dollars rather than foreign currency.
ADRs permit an American investor to purchase, not stock, but a certificate of deposit for stock in a foreign company. The advantage is that the transactions are done in dollars, but the ADR itself does not carry a vote or stock rights, and subjects the owner to currency risk.
77
Holder of common shares may generally vote on:
Whether the company should issue additional preferred stock.
*because additional preferred shares dilute the common shares residual assets under liquidation.
78
Which of the following statements regarding preferred stock is NOT true?
* because there is no set maturity value or redemption date the holder of preferred stock has to sell his shares in the open market to close out his position.
* voting rights of preferred shareholders take precedence over those of common shareholders
* unlike debt, preferred stock has no set maturity date
* the dividend is fixed except in the case of adjustable preferred.
*Voting rights of preferred shareholders take precedence over those of common shareholders.
Preferred shareholders do not generally have voting rights.
79
If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is:
5%
Current Yield is calculated by dividing the annual dividend by the current market value. ($1.75 / $35 = 5%)
80
If a stock undergoes a 1:5 reverse split, which of the following increases?
* market price per share
* number of shares outstanding
* earnings per share
* market capitalization of the company
Market Price per Share
Earnings per Share
After a reverse split there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, the market capitalization of the company will not change.
81
Which of the following must be paid before a corporation may pay its cumulative preferred stock arrearages?
* this years preferred dividends
* bond interest
* corporate taxes
* common stock dividends
Bond Interest
Corporate Taxes
Before paying any dividends, the corporation must pay wages, taxes and both interest and principal on debts that are due. Once the debt obligations have been satisfied, it may pay arrearages on cumulative preferred stock, then current fixed dividends on preferred stock, and finally common dividends.
82
GCI conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?
10.
The stock is trading cum-rights (before the ex-date). The formula to calculate the value of one right before the ex-date is: CMV - subscription price / # of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 - $50) /2 = $10.
83
CMC has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $17.50 and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after the conversion?
2.5 million.
1 million shares of preferred, each converted to 1/2 share of common, is 500,000 common shares. 500,000 shares after conversion added to 2 million shares of common previously outstanding equals 2.5 million common shares.
84
GCI is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right?
3.
Since the stock is selling ex (after ex-rights) the formula is ($70 - $55) / 5. ($70 - $55 = $15) ($15 / 5 = $3)
85
An ADR is used to:
Facilitate trading foreign securities in US markets by US citizens living in the United States.
86
The ex-dividend date is the:
Date on and after which the seller is entitled to the dividend. Which is the 2nd business day BEFORE the Record Date.
Stock sold on the ex-dividend date entitles the seller to the dividend; ex-date is two business days before teh record date.
87
A 2:1 split :
* Increases the number of outstanding shares.
* Decreases par value per share.
After a 2:1 stock split, the number of outstanding shares doubles and the par value per share decreases by half. Retained earnings are not affected.
88
A company may pay dividends in the form of :
* cash
* its own stock
* stock of another company
* its own product
89
When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above:
$175 per share.
In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.
90
As interest rates fall, prices of straight preferred stock will:
Rise.
Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.
91
ABC, a publicly held corporation decides to issue shares in an additional public offering. If the APO is for an additional 1 million shares and 60% of the shares are subscribed to in the preemptive rights offering, how many shares will the standby underwriter for this offering have available to sell to the public?
400,000.
If 60% of the additional shares are subscribed to by existing shareholders, then 40% of the additional shares will be available to be sold to the public through a standby (firm commitment) underwriting.
92
The Record Date:
Is set by the issuing corporation to determine which stockholders will receive a declared dividend.
93
A customer is considering adding a real estate investment trust (REIT) to their portfolio. What is a disadvantage of investing in REITs
Dividend Treatment.
While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified, and are taxable to the investor at their full ordinary income tax rate.
94
Which of the following characteristics are applicable to REITs?
* shares cannot be bought or sold in secondary market, making REITs illiquid.
* REITs have guaranteed minimum dividends
* any losses from the real estate portfolio flow through to the REIT shareholders
* dividends from REITs are taxed as ordinary income
*dividends from REITs are taxed as ordinary income.
While income flows through to REIT shareholders in the form of dividends, losses do not. When an REIT pays a dividend, it will be taxed as ordinary income, but there are no guaranteed minimum payouts. REITs trade on exchanges and OTC and are, therefore liquid investments.
95
ADR owners have the following rights EXCEPT:
* right to sell the ADR in the foreign market
* right to receive dividends in US dollars
* right to sell in the secondary market
* right to receive the underlying foreign security
*right to sell the ADR in the foreign market.
The purpose of the ADR is to facilitate trading in the US markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas.
96
Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue?
Registrar.
The Registrar is responsible for keeping careful account of the number of shares a company is authorized to issue and ensuring that the number outstanding does not exceed this number.
97
Which of the following have equity positions in a corporation?
* common stockholders
* preferred stockholders
* convertible bondholders
* mortgage bondholders
Common stockholders
Preferred stockholders
Common and preferred stockholders have equity, or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners.
98
Smith and Co has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares?
200 rights, 5 per share.
Stockholders receive 1 right per share owned. Hence, Joe receives 200 rights. The purpose is to maintain shareholders proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares. (200 / 40 = 5 rights per share).
99
If a customer holds certificates of beneficial interest in an REIT, each of the following statements regarding this investment is true EXCEPT:
* certificates are publicly traded
* issuer must redeem certificates on shareholder request
* investors receive dividends periodically.
* mortgage REITs represent pooled capital for real estate financing.
*issuer must redeem certificates on shareholder request.
REITs are not redeemed by the issuer. They are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.
100
Which of the following securities is subject to the greatest risk?
* XYZ common stock
* series EE bond
* A-rated municipal bond
* BAA-rated ABC convertible bond
*XYZ common stock
Common stock is a junior security. It is considered less safe than bonds because it has the lowest claim to assets in the event of the issuing firm's liquidation, and is paid dividends after bonds are paid interest.
101
All of the following statements describe stock rights EXCEPT:
* they are short-term instruments that become worthless after expiration date
* most commonly offered with debentures to make the offering more attractive
* issued by a corporation
* traded in secondary market
*most commonly offered with debentures to make the offering more attractive.
Rights are issued to existing shareholders to allow them to purchase enough stock, within a short period and at less than current market price, to maintain their proportionate interest in the company. Rights need not be exercised but may be traded in the secondary market.
102
A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is:
5%
Current Yield Formula is Annual dividends per share divided by current market price. ($36 million / 20 million shares = $1.80 per share.) (Current Yield is $1.80 / $36.00 = 5%)
103
The rate on an adjustable preferred stock may be indexed to the:
Treasury Bill rate.
The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark.
104
A client has 100 shares of GHI when the stock undergoes a split. After the split the client has:
no effective change in the value of the position.
Proportionate interest in the company remains the same.
105
A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield?
5%
Quarterly dividend is $.50, so the annual dividend is $2; $2 / $40 (market price) = 5% annual yield (current yield)
106
If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHIs market price is $35, the current yield is:
5%
Current Yield is calculated by dividing the annual dividend by the Current Market Value. ($1.75 / $35 = 5%)
107
If a common stock is currently selling for $75 per share with a quarterly dividend of $.75, the current yield for the stock is?
4%.
Current Yield formula is annual dividend divided by current price. ($.75 x 4) / $75 = 4%
108
A similarity between common and preferred stock is?
Dividend must be declared by the Board of Directors
All dividends, both common and preferred must be declared by the BOD. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt securities.
109
ABC has declared a record date of Thursday, May 17th for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend?
Monday, May 14th. (Tuesday, May 15th as of Sept. 5, 2017)
In order to receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 3 business days (2 on Sept. 5, 2017), the customer must purchase the stock no later than Monday, May 14th.
110
To qualify for favorable tax treatment, REITs must do all of the following :
* invest at least 75% if their assets in real estate related activities.
* be organized as trusts
* distribute at least 90% of their investment income to shareholders.
REITs can NOT pass through any losses to shareholders.
111
Which of the following securities CANNOT pay a dividend?
* warrant
* ADR
* convertible preferred stock
* class B common stock
*Warrant
Warrants represent long-term options to buy stock at a fixed price, and, like options, cannot pay dividends.
112
If a stock undergoes a 1:5 reverse split, which of the following increases?
* market price per share
* number of shares outstanding
* earnings per share
* market capitalization of the company
* market price per share
* earnings per share
After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, market capitalization of the company will not change.
113
For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is:
25 Round Lots.
OTC equity securities trading at or above $175 per share are considered 1 share = 1 round lot.
114
REITs can distribute all of the following to their shareholders EXCEPT:
* capital losses
* capital gains
* cash dividends
* stock dividends
*capital losses
REITs can distribute their income to shareholders but not their losses. Under subchapter M of the Internal Revenue Code, they must distribute at least 90% of their income to shareholders in the form of cash dividends.
115
Ex-dividend date is the:
* date on or after which the seller is entitled to the dividend.
* 2nd business day before the record date.
Stock sold on the ex-dividend date entitles the seller to the dividend. ex-date is 2 business days before the record date.
116
GHI stock is at $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield is:
6.7%
Current yield is determined by dividing the annual dividend of $4 by the current stock price of $60.
($4 / $60 = 6.7%)
117
Which of the following is an advantage of owning ADRs?
* investor receives preemptive rights should the issuer make an additional stock offering
* investor can buy, sell and receive dividends in US dollars rather than a foreign currency
* investor has right to vote at stockholder meetings
* investor avoids currency risk
*investor can buy, sell and receive dividends in US dollars rather than a foreign currency.
118
investors should always be aware of taxes applicable to investments they own. Which of the following taxes might be associated with income derived from ADRs but not income from other investments?
* federal income tax
* state income tax
* foreign income tax
* excise tax
*foreign income tax
In most countries, a withholding tax on dividends is taken at the source. To the holder of an ADR, this would be a foreign income tax.
The foreign income tax paid may be taken as a credit against US income taxes owed.
119
If a stock is sold on November 30th when the record date for a dividend distribution is December 1, the seller is:
* entitled to the dividend if the trade is done regular way
* NOT entitled to the dividend if the trade is done with cash settlement.
Anyone who owns the stock on the record date will receive the dividend. In a regular way trade, the seller will still be the owner of record on the record date, as the trade will not settle until after the record date. In a cash settlement transaction, the buyer will be the owner of record on the record date.
120
If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares?
100
to calculate additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares x 3/2 = 300 shares) Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares.
121
an ADR is used to:
facilitate trading foreign securities in US markets by US citizens living in the United States.
122
As interest rates fall, prices of straight preferred stock will:
RISE
Preferred stock is interest rate sensitive. As rates fall, prices of preferred stock tend to rise, and vice versa.
123
Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue?
Registrar
124
a 2:1 split causes :
* increase in number of outstanding shares
* decrease in par value per share
number of outstanding shares will double and par value will decrease by half. Retained earnings are not affected.
125
a tombstone for a new bond issue announces that 5-year warrants to purchase shares of the companys common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer?
*improve marketability of the bond issue.
Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues.
126
A corporation must have stockholder approval to:
issue any additional securities that would dilute shareholders equity (their proportionate interest)
127
Preemptive rights :
allow the stockholder to maintain their proportionate ownership when the corporation wants to issue more stock.
128
An informal network of market makers that offers to trade securities NOT listed on an exchange is called:
Over-the-Counter (OTC) Market.
OTC is an interdealer market linked by computer terminals to FINRA member firms across the country.
129
Minority stockholders are more likely to be able to elect directors through which form of voting?
Cumulative.
Small stockholders may cast all of their votes on 1 position rather than spread them out and thus dilute them over 2 or 3 positions.
130
A company is offering investors the opportunity to purchase shares for the next 5 years at a fixed price slightly above todays market price. The company is issuing:
Warrants.
A warrant is a security that allows the holder to purchase shares of the underlying issue at a fixed price (above the current market price when issued) for an extended period (typically 2 years or longer). Call options are similar, except they are short-term securities (9 months at issue)
131
A companys dividend on its common stock is determined by :
BOD.
dividend and payment amounts on common stock are determined by the Board of Directors.
132
GCI conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?
$10.
The formula to calculate the value of one right before the ex-date is: CMV - subscription price / # of rights to purchase 1 share +1. ($70 - $50) / 2 = $10
