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Series 7 Exam > Chapter 1 – Equity Securities > Flashcards

Chapter 1 – Equity Securities Flashcards

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Series 7 Top-off Exam flashcards
1
Q

Steps in regular way stock settlement and dividends

A

DERP - declaration day, ex dividend, date, record date, payment date. The ex dividend date is the day before the record date.

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2
Q

Steps in cash settlement for stock

A

DREP - declaration day, record date, ex dividend, date, payable day. Since cash settlements settle same day, the ex dividend date is the day after the record date.

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3
Q

Rights versus warrants

A

Rights are short term, such as 60 or 90 days. Warrants are long-term, usually for many years.

Rights allow a stockholder the opportunity to maintain proportional ownership. Warrants are an option to buy stock in the future.

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4
Q

The typical par value of preferred stock

A

$100

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5
Q

Participating preferred stock

A

For participating preferred stock, the stockholders receive dividends, in addition to the established amount. They also get a share of the common stockholders dividends. For example, a participating preferred stock that pays 3% will receive 3% plus a share of the common stockholders dividends.

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6
Q

Convertible preferred stock

A

Convertible preferred stock allows for preferred stock to be converted to common stock. There is a conversion price/ratio based on par.

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7
Q

Adjustable preferred stock

A

A type of preferred stock where the dividends issued will vary with the benchmark, most often the T-bill rate

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8
Q

Income statement

A

A financial statement that shows a company’s performance over specific accounting period. Also called a profit and loss statement. Demonstrates whether a business made or lost money during the reported period.

Equivalent to a BBVSummary Trend.

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9
Q

Balance sheet

A

A balance sheet summarizes, the company’s assets, liabilities, and shareholders equity at a specific point in time. These three components allow the investors and managers to see what the company owes and owns, as well as the amount invested by the shareholders.

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10
Q

Operating margin

A

A measure of a company’s ability to generate income from operating the business.

Operating margin = (Sales – Cost of Goods Sold – Selling, General & Administrative Costs) ÷ Sales

=Profit on sales / sales.

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11
Q

Net profit margin

A

Analyzes a company’s profitability over time.

Net Profit Margin = (Net Income after Taxes - Preferred Dividend) ÷ Sales

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12
Q

Net working capital

A
  • Current assets minus current liabilities.
  • Measures an entity’s liquidity or solvency; ability to pay debts.
  • Positive number means sufficient assets to pay debt, negative number indicates insolvency.
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13
Q

Working capital ratio, a.k.a. Current ratio.

A
  • Current assets divided by current liabilities.
  • A measure of liquidity and ability to pay short term debts.
  • A number greater than one means that company can pay its obligations with its current assets.
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14
Q

Quick ratio, a.k.a. the acid test ratio

A

Current assets - inventory / current liabilities.

A stricter measurement of ability to pay short term assets. Considers only cash in cash or equivalent as inventory is subtracted from other assets.

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15
Q

Common stock ratio

A

Common Stock Ratio = (Par Value of Common Stock + Retained Earnings + Paid-In Capital) ÷ Total Long-term Capitalization (Stockholders’ Equity + Bonds).

Measures a portion of total capitalization that is common stockholders equity. A higher ratio shows that an entity is not highly leveraged.

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16
Q

Bond ratio

A

Bond Ratio = Par Value of Bonds ÷ Total Long-term Capitalization.

Opposite of a stock ratio. Measures portion of total capitalization that is long-term debt (leverage). Lower ratio means less debt, ratio higher than 30 to 40% is concerning.

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17
Q

Earnings per common share (EPS)

A

Earnings per Common Share = (Net Income - Preferred Dividend) ÷ Common Shares Outstanding.

Measures earnings available to common stockholders after preferred stock has received its dividend

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18
Q

Fully diluted earnings per share

A

Fully diluted Earnings Per Share = (Net Income + convertible bond interest) ÷ (outstanding common shares + common shares resulting from conversion).

Is strictly theoretical. Measures the earnings available to common shareholders if all convertible securities were converted to common stock. Will always be lower than earnings per share.

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19
Q

Dividend payout ratio

A

Dividend Payout Ratio = Annual Dividend ÷ Earnings per Share.

What is a measure of the “generosity” of the Board of Directors. Measures the portion of earnings. What’s the board chooses to distribute to shareholders.

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20
Q

Price/earnings ratio

A

Price/Earnings Ratio = Market Price ÷ Earnings per Share.

Commonly used, can be used to compare value of similar stocks

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21
Q

Current yield

A

Current Yield = Annual Dividend ÷ Market Stock Price.

Measures the benefit realized by purchasing a stock at current market value

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22
Q

Debt/equity ratio

A

Debt/Equity Ratio = Total Liabilities ÷ Stockholders’ Equity

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23
Q

Inventory turnover ratio

A

Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory.

Measures how quickly inventory is sold. Higher number means faster, which is good.

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24
Q

Net profit margin

A

Net Profit Margin = (Net Profit - Preferred Dividend) ÷ Sales.

Net profit earned per dollar of revenue

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25
Q

Interest coverage ratio

A

Interest Coverage Ratio = Earnings Before Interest and Taxes ÷ Interest Expense.

Measures how easily the entity can pay interest on its outstanding bonds. Higher is better.

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26
Q

Book value per share

A

Book Value Per Share = (Total Shareholder Equity - Preferred Equity) ÷ Total Outstanding Common Shares.

Measures the book value per share left for common stockholders. If the company was a liquidators in all parties repaid according to priority.

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27
Q

Return on common equity

A

Return on Common Equity = Net Income After Preferred Dividend ÷ Common Stockholders’ Equity.

Measures a company’s return on common stockholders’ equity. Higher is better.

28
Q

Depreciation

A

The gradual reduction of the value of a tangible asset over the useful life of that asset

29
Q

Amortization

A

The gradual reduction in the value of an intangible asset

30
Q

Depletion

A

A reduction in the value of an asset as a result of the physical reduction of the asset, such as natural resources

31
Q

Goodwill

A

The difference between the price paid for an asset and it’s market price when the asset is purchased at a price that exceeds its fair market value

32
Q

Fundamental analysis

A

Evaluates a company over time, based on key financial metrics, to determine the future value of a company. Heavily dependent on financial statements.

33
Q

Footnote

A

Financial statement footnotes are supplemental and explanatory notes that accompany the financial statements issued by a corporation. Provide important details and expand upon information in the statement.

34
Q

Material risk disclosure

A

Disclosure by an auditor if there is a concern that a material event could affect the company or a misstatement that would materially change the company’s financial situation

35
Q

Order of bankruptcy priority

A
  1. Employee back wages
  2. IRS payment of taxes are penalties.
  3. Secured bondholders (mortgage, lien)
  4. Unsecured bond holders and general creditors
  5. Subordinated debentures
  6. Preferred stockholders
  7. Common stockholders
36
Q

Limited liability

A

The maximum potential loss is the price paid for the asset.

37
Q

Authorized shares

A

Total number of shares authorized in the corporate charter

38
Q

Issued shares

A

Portion of total authorized shares that are actually sold to investors

39
Q

Unissued shares

A

Authorized shares that have not yet been sold

40
Q

Treasury stock

A

Has been issued and subsequently bought back by the company. May be used to fund employee bonus plans, or may be distributed to stockholders in lieu of a cash dividend. May be re-issued to the public or retired.

41
Q

Outstanding stock

A

The number of shares in the hands of investors at any given time. Equal to issued shares minus treasury stock.

42
Q

Market cap (capitalization)

A

The number of outstanding common shares multiplied by the market price per share

43
Q

Rights of common stockholders

A

-Vote through proxy.
-Transfer ownership.
-Receive dividends once declared.
-Inspect the corporation’s books.
-Preemptive right
-Junior claims on Corporate assets in event of liquidation

44
Q

Issues voted on by common stockholders

A

-Election of the Board of Directors
-Decisions about changes in the operations of the company.
-Stock splits
-Issuance of additional securities.

45
Q

Stock certificates

A

Certify a stockholders ownership. Identifies issuing corporation, registered owner, transfer agent, registrar, number of shares and authorized signatures of the corporation’s officers.

Transfer agent changes the name of the owner.

Registrar oversees the transfer agent, ensuring number of shares changing hands is equal.

46
Q

Dividends and balance sheets

A

Once declared, a dividend becomes a current liability. Total dollar amount of the dividend moves from retained earnings to the current liabilities section of the balance sheet. It is classified as dividends payable. Thus, liabilities increase and working capital decreases.

47
Q

Dividends and taxes

A

Dividends are taxed as ordinary income for shareholders.

Corporations that own stock in another US corporation receive qualified dividends and are entitled to an exclusion that allows them to exclude 50% from corporate income. The corporation will only pay taxes on 50% of the dividend. To qualify for this exclusion, the holding corporation must own less than 20% of the dividend-paying corporation’s outstanding stock.

48
Q

Trade date

A

The date on which your customer gives a purchase order to a broker dealer, who enters into a trade agreement with another broker dealer to fill the customer’s order. Is it legally binding.

49
Q

Settlement date

A

The date a purchase agreement is consummated. Legally binding. Exchange securities and cash. Buyer becomes the legal owner on this date.

50
Q

T +2

A

Regular-way settlement. Applies to corporate securities, municipal bonds, and government agency bonds.

51
Q

T +1

A

Regular way settlement for government notes, and government bonds (i.e. treasury securities)

52
Q

Cash settlement

A

Trade date and settlement date are the same.

53
Q

Negotiated settlement

A

Sellers option to deliver the security during any time period ranging from 6 to 60 business days.

54
Q

Declaration date

A

The date on which the Board of Directors declare a dividend, which is also when it becomes a current liability

55
Q

Ex dividend date

A

The ex-date or ex-dividend date is the trading date on (and after) which the dividend is not owed to a new buyer of the stock. The ex-date is one business day before the date of record. The date of record is the day on which the company checks its records to identify shareholders of the company.

Also on this date the market value of an underlying stock declines by amount of the dividends and the stock is said to be trading ex dividend.

Set by self regulatory organization

56
Q

Record date

A

The date on which a stockholder must be on record as the owner to receive the dividend. Set by the Board of Directors.

57
Q

Payable date

A

The date on which the corporation actually pays dividends to shareholders of record. Set by the board of directors.

58
Q

Mutual funds and dividends

A

The declaration date, ex dividend date, record day, and payable date are all set by the board of directors. Ex dividend date is usually the first business day after the record date.

Mutual funds follow DREP for dividend payment.

59
Q

Dividend yield

A

= Annual dividend / current share price.

Remember that most dividends are paid quarterly, so you may need to multiply by four on the exam.

60
Q

Stock dividends

A

Usually issued by growth companies, additional stock is issued instead of cash.

The stockholders’ cost basis will remain the same, so the price per share decreases.

61
Q

Preemptive rights

A

The right to maintain the same percentage of ownership, when new shares are issued. Shares are purchased at a fixed price known as the subscription price, which is lower than a public offering price. Usually expire after 30 to 60 days. One rate is issued per share of outstanding stock.

The cost of a right is determined by the difference between current market value and the exercise price of the right, then, divided by the number of rights it takes to buy one new share at the exercise price.

Example: market value is $50, exercise price is $49. If it took 10 rights to purchase one new share, the cost basis of the rights would be $.10 each.

62
Q

Warrants

A

An opportunity to purchase securities at a specified price for a set period of time. Usually years. Set price is higher than the current market value of the stock. Act as a sweetener, making the security more marketable. Most commonly used to lower the interest rate on a new bond issue.

Warrants have intrinsic value if the subscription price is below the market price.

63
Q

American depository receipts

A

Issued by a US commercial bank and held in a branch located in the foreign country. Represent a certain number of shares of a foreign company on a foreign exchange. Dividends are converted to US dollars by the depository bank. Are vulnerable to currency risk. Are governed by US securities regulations.

Sponsored ADR’s largely comply with SEC information mandates and include shareholder voting rights and trade on exchanges. Unsponsored ADRs are held in a bank in the foreign country.

64
Q

Floating rate preferred stock

A

Preferred stock in which the dividend is reset at specified intervals according to a predetermined formula

65
Q

Callable preferred stock

A

Typically pays a higher dividend due to the issuer’s advantage of the call feature. The issuer may call the stock if interest rates decline because they have an opportunity to lend money at a lower interest rate.

66
Q

Convertible preferred stock

A

Permits owners to confer their preferred stock for a designated number of common shares. Conversion price and conversion ratio are determined at the time of the stock’s issue.

67
Q

Variable rate preferred stock

A

Pays a fixed dividend for a period of time until a specified date, after which the dividend will float. Typically pegged to a benchmark rate, such as LIBOR, fed funds or T-bills.

Series 7 Exam (14 decks)

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