Chapter 1: Equity Securities Flashcards
1
Q
The ______ requires prospectus and full disclosure filings for all non-exempt new issues of securities, such as corporate stock and bond offerings. This act is known as the “______” because of the volume of paperwork it mandates.
A
- Securities Act of 1933
2. Paper Act
2
Q
The ______ created the Securities and Exchange Commission (SEC). Known as the “______”, it was passed to establish fair and orderly markets for securities exchanges and trading.
A
- Securities Exchange Act of 1934
2. People Act
3
Q
The ______ established self-regulatory organizations, or SROs, to regulate the over-the-counter, or OTC, market.
A
Maloney Act of 1938
4
Q
The primary goal of all securities legislation is to ______.
A
Protect the Retail Public
5
Q
The ______ writes the laws that govern the securities industry while the ______ write rules and regulations to enforce those securities laws.
A
- Securities and Exchange Commission (SEC)
2. Self-Regulatory Organizations (SROs)
6
Q
______ must join SROs such as FINRA to charge commissions and mark-ups. As SRO members, or “______”, they must follow all SRO rules.
A
- Broker/Dealers
2. Member Firms
7
Q
To be considered a(n) ______, it must be easily transferable between parties, and its owner must be subject to the risk of loss of a portion of or the entire principal (money invested).
A
Security
8
Q
______ are subject to federal securities laws, whereas ______ are not subject to any of the federal securities laws. No one or no security is ever exempt from ______.
A
- Nonexempt Securities
- Exempt Securities
- Fraud
9
Q
A(n) ______ is a financial instrument that trades for value based on the expectation of profit from the efforts of third-party management.
A
Security
10
Q
Corporations issue two types of securities: ______ and ______. The sum of all issued securities of a corporation is referred to as the corporation’s ______.
A
- Stocks
- Bonds
- Capital Structure
11
Q
Stocks are called ______ because each share represents ownership in the corporation. Each stockholder is an owner of that corporation.
A
Equity Securities
12
Q
Bonds are called ______ or ______. Each bond represents a loan to the corporation and creates a(n) ______ for that corporation. Each bondholder has lent money to the corporation and is a(n) ______ of that corporation.
A
- Debt Instruments
- Leverage Instruments
- Liability
- Creditor
13
Q
A corporation has two ways to raise operating money. It can issue ______, which creates an ongoing ownership interest for the investor, or it can issue ______, which creates a temporary liability for a corporation.
A
- Stocks
2. Bonds
14
Q
Common stock is called the ______ because it is the last to be paid if the corporation is liquidated through bankruptcy. Common shareholders receive whatever remains after all other parties have been paid; this is known as a(n) ______.
A
- Junior Security
2. Residual Claim to Assets
15
Q
What is the equation?
Assets ______ Liabilities ______ Net Worth
A
Assets = Liabilities + Net Worth
OR
Assets - Liabilities = Net Worth
16
Q
A(n) ______ summarizes a company’s assets (what’s owned), liabilities (what’s owed), and shareholders’ equity (ownership interest) at a specific point in time (for example, at the end of a fiscal year).
A
Balance Sheet
17
Q
The corporation’s assets are on the ______ side of the balance sheet. Starting at the top are their most ______ assets. The lower-positioned assets are less ______, or more difficult to convert into cash.
A
- Left
- Current or Liquid
- Liquid
18
Q
On the ______ side of the balance sheet, the liabilities section starts with ______ liabilities at the top. These are obligations that the corporation must pay in the short term, usually ______. Next are ______ and ______ debt instruments, such as notes and bonds.
A
- Right
- Current
- 30 to 60 Days
- Mid-
- Long-Term
19
Q
Below the liabilities section of the balance sheet is the ______, or ______ section. It consists of preferred stock, common stock, paid in capital surplus, and retained earnings.
A
- Net Worth
2. Stockholders’ Equity Section
20
Q
A bookkeeping value, or “______,” is assigned each share of preferred and common stock.
A
Par Value
21
Q
Sometimes investors will pay more than par value for common stock. If so, “______” will appear in this equity section of the balance sheet. It is the total amount over par value that investors paid when purchasing the common shares from the corporation.
A
Paid In Capital Surplus
22
Q
______ is the value assigned to a corporation’s no-par stock on its financial statements. It is unrelated to the market value.
A
Stated Value
23
Q
Companies commonly assign a par value to stock at issue. However, in some states, there are tax advantages when value isn’t assigned, but is instead based on what is received for the stock. This stock is called “______” stock.
A
No-Par
24
Q
A(n) ______ is a financial statement that shows a company’s performance over a specific accounting period (such as a fiscal year). It is also called a(n) ______, and allows the investors and managers to see whether the business made or lost money during the reported period.
A
- Income Statement
2. Profit and Loss Statement
25
Important calculations derived from an income statement include:
______ - earnings before interest, taxes, depreciation, and amortization.
______ - earnings before interest and taxes.
______ - earnings before taxes.
______ - earnings after taxes.
These numbers can then be used to measure a company's ______.
1. EBITDA
2. EBIT
3. EBT
4. Net Profit
5. Profitability
26
______ = (Sales - Cost of Goods Sold - Selling, General, & Administrative Costs) / Sales
Operating Margin
27
______ compares operating income (earnings before interest and taxes, or ______) to sales. This is an indication of management's ability to generate income from operating the business. Trends in this formula are directly tied to management decisions.
1. Operating Margin
| 2. EBIT
28
______ = Net Income after Taxes / Sales
Net Profit Margin
29
______, sometimes referred to as the "______," takes into account interest and taxes. ______ compares net income to sales and is a useful tool for analyzing a company's profitability over time and allows for comparisons with competitors and the industry in general.
1. Net Profit
2. Bottom Line
3. Net Profit Margin
30
If market price is 54 and EPS is 9, what is the P/E ratio?
6
P/E Ratio = Price / Earnings per Share
P/E Ratio = 54 / 9 = 6
31
If P/E ratio is 6 and market price is 54, what is EPS?
9
P/E Ratio = Price / Earnings per Share
6 = 54 / EPS = EPS = 54 / 6 = 9
32
If P/E ratio as a divisor is 9 and EPS as a dividend is 6, what is the market price?
54
P/E Ratio = Price / Earnings per Share
9 = Price / 6 = 6 * 9 = Price = 54
33
______ is current assets minus current liabilities. The ______ or ______ is current assets divided by current liabilities. The ______ is the same as the ______, and is current assets less inventory divided by current liabilities, or the ability to pay short-term immediate obligations.
1. Working Capital
2. Working Capital Ratio or Current Ratio
3. Quick Ratio or Acid Test Ratio
34
______ = Current Assets - Current Liabilities
Net Working Capital
35
______ measures the entity's liquidity or solvency - its ability to pay its short-term obligations. A(n) ______ number indicates the company has sufficient current assets to pay current debts. A(n) ______ number indicates that the company is insolvent.
1. Working Capital
2. Positive
3. Negative
36
______ = Current Assets / Current Liabilities
Current Ratio or Working Capital Ratio
37
The ______ gauges the entity's ability to pay current liabilities. A number ______ than 1 means the company can pay its obligations with current assets. A number ______ than one means that the company has insufficient current assets to meet current liabilities.
1. Current Ratio
2. Greater
3. Less
38
______ = (Current Assets - Inventory) / Current Liabilities
Quick Ratio or Acid Test
39
The ______ or ______ is a stricter measurement of the entity to pay its short-term obligations because it considers only cash and cash equivalents. Inventory is subtracted from the other current assets.
1. Quick Ratio
| 2. Acid Test
40
______ = (Par Value of Common + Retained Earnings + Paid-In Capital) / Total Long-Term Capitalization (Stockholders' Equity + Bonds)
Common Stock Ratio
41
The ______ measures the portion of total capitalization that is common stockholders' equity. From a creditor's standpoint, a(n) ______ ratio is good, because it shows that the entity is not highly leveraged, or deeply in debt. Some analysts might view this negatively since the company is too conservative to maximize ______.
1. Common Stock Ratio
2. High
3. Profitability
42
_______ = Par Value of Bonds / Total Long-Term Capitalization (Stockholders'' Equity + Bonds)
Bond Ratio
43
The ______ measures the portion of total capitalization which is long-term debt, or leverage. A(n) ______ ratio indicates that the entity uses less leverage; it operates more conservatively. Generally speaking, a ratio which exceeds ______ to ______ concerns an analyst.
1. Bond Ratio
2. Lower
3. 30-40%
44
______ = (Net Income - Preferred Dividend) / Common Shares Outstanding
Earnings per Common Share (EPS)
45
______ measures the portion of earnings available to common stockholders after the preferred stock has received its dividend.
Earnings Per Common Share (EPS)
46
______ = (Net Income + Convertible Bond Interest) / (Outstanding Common Shares + Common Shares Resulting from Conversion)
Fully Diluted Earnings Per Share
47
______ is a theoretical number and measures the earnings available to common if all convertible securities were converted to common stock.
Fully Diluted Earnings Per Share
48
______ = Market Price / Earnings Per Share
Price / Earnings (P/E) Ratio
49
______ is one of the most commonly referenced ratios by analysists. It compares the common stock's price to its share of earnings this year. It indicates how fairly priced the stock is compared to comparable stocks.
Price / Earnings (P/E) Ratio
50
______ = Annual Dividend / Earnings per Share
Dividend Payout Ratio
51
The ______ measures the "generosity" of the board of directors. It measures the portion of earnings which the board chooses to distribute to the shares.
Dividend Payout Ratio
52
______ = Annual Dividend / Market Stock Price
Current Yield
53
______ measures the benefit realized by purchasing the stock at current market value.
Current Yield
54
______ = Net Income (or Loss) + Current Depreciation + Amortization
Cash Flow
55
______ is actual cash generated by operations, as opposed to net income reportable to the IRS. By adding back "noncash" deductions to net income, we calculate this actual cash figure.
Cash Flow
56
______ = Total Liabilities / Stockholders' Equity
Debt / Equity Ratio
57
______ = Cost of Goods Sold / Average Inventory
Inventory Turnover Ratio
58
______ measures how quickly inventory is sold. A(n) ______ number indicates faster speed, more efficient management, and lower inventory loss risk.
1. Inventory Turnover Ratio
| 2. Higher
59
______ = Net Profit / Net Sales
Net Profit Margin
60
______ is a measure of the net profit earned per dollar of revenue. A(n) ______ percentage is better.
1. Net Profit Margin
| 2. Higher
61
______ = Earnings Before Interest and Taxes (EBIT) / Interest Expense
Interest Coverage Ratio
62
______ measures how easily the entity can pay interest on its outstanding bonds. A(n) ______ number is better.
1. Interest Coverage Ratio
| 2. Higher
63
______ = (Total Shareholder Equity - Preferred Equity) / Total Outstanding Common Shares
Book Value Per Share
64
______ is the liquidating value per common stock share. In other words, if the company was liquidated and all parties were paid according to priority, ______ is the residual per share left for the common stock.
Book Value Per Share
65
______ = Net Income After Preferred Dividend / Common Stockholders'' Equity
Return on Common Equity (ROE)
66
______ measures the return which the corporation achieves on common stockholders' equity. A(n) ______ return indicates better management.
1. Return on Common Equity (ROE)
| 2. Higher
67
______ compromises a company's unsold products waiting to be sold, and can include finished products as well as raw materials used to produce the end product.
Inventory
68
Inventory is a key component in calculating ______ and an important driver of profit, total assets, and tax liability.
Cost of Goods Sold (COGS)
69
The two main methods are "______" (______) and "______" (______). Once the company chooses one, they must use that method constantly going forward.
1. Last-In, First-Out (LIFO)
| 2. First-In, First-Out (FIFO)
70
______ is the gradual reduction of the value of a tangible asset over the useful life of the asset.
Depreciation
71
______ is the gradual reduction in the value of an intangible asset.
Amortization
72
______ is a reduction in the value of an asset as the result of the physical reduction in the asset, such as natural resources.
Depletion
73
______ is the difference between the price paid for an asset and its market price when the asset is purchased at a price that exceeds its fair market value.
Goodwill
74
______ focuses on evaluating a company over time, based on key financial metrics to determine the future value of a company. It is heavily dependent on financial statements to assess a company's financial condition.
Fundamental Analysis
75
Financial statement ______ are supplemental and explanatory notes that accompany the financial statements issued by a corporation. They provide important details and allow a company to expand upon the information presented in the statements.
Footnotes
76
If an auditor has a concern that there may be a material event that could affect the company or a misstatement that would materially change the company's financial situation, a(n) ______ would be required.
Material Risk Disclosure Statement
77
If a corporation must liquidate its assets, the following is the order of the payout (1-7):
______: Common stockholders.
______: Employee back wages.
______: Preferred stockholders.
______: Secured bondholders (mortgages and lien holders that have specific claim to assets).
______: Subordinated debentures.
______: The Internal Revenue Service (IRS) for payment of any taxes and penalties due.
______: Unsecured bondholders (debentures) and general creditors.
1: Employee back wages.
2: The Internal Revenue Service (IRS) for payment of any taxes and penalties due.
3: Secured bondholders (mortgages and lien holders that have specific claim to assets).
4: Unsecured bondholders (debentures) and general creditors.
5: Subordinated debentures.
6: Preferred stockholders.
7: Common stockholders.
78
The maximum that stockholders can lose is the price they paid for the stock. This concept is known as ______.
Limited Liability
79
In its ______, a corporation determines the maximum number of shares it is authorized to issue over the life of the corporation. The ______ may authorize additional shares only with the majority approval of the current shareholders.
1. Original Charter
| 2. Board of Directors
80
______ - Total number of shares authorized in the corporate charter.
Authorized Shares
81
______ - Portion of total authorized shares that are actually sold to investors.
Issued Shares
82
______ - Authorized shares that have not yet been sold.
Unissued Shares
83
______ - Stock that has been issued (sold to the public) and subsequently bought back by the corporation.
Treasury Stock
84
Companies may use ______ to fund employee bonus plans, or it may be distributed to stockholders in lieu of a cash dividend. It might eventually be reissued to the public or simply "retired."
Treasury Stock
85
Note that shares of ______ have no voting rights and receive no dividends.
Treasury Stock
86
______ - The number of shares in the hands of investors at any given time.
Outstanding Stock
87
______ = Issued Shares - Treasury Stock
Outstanding Stock
88
______ - The number of outstanding common shares multiplied by the market price per share.
Market Cap (Capitalization)
89
______ is stock that has been issued and, subsequently, reacquired by the corporation.
Treasury Stock
90
A company has been authorized to issue 1000 shares and initially issued only 700. The company later decides to repurchase 200 shares previously issued.
```
Authorized = ______
Issued = ______
Unissued = ______
Treasury = ______
Outstanding = ______
```
```
Authorized = 1,000
Issued = 700
Unissued = 300
Treasury = 200
Outstanding = 500
```
91
As owners of the company, common stockholders have certain ownership rights, including the right to:
1. ______ through proxy.
2. Transfer ______.
3. Receive ______ once declared.
4. Inspect the corporation's ______.
5. ______.
6. ______ on corporate assets in the event of liquidation.
1. Vote
2. Ownership
3. Dividends
4. Books
5. Preemptive Right
6. Junior Claims
92
Each ______ share has the right to vote; the stockholders control the vote on each share they own. ______ shares usually do not have voting rights.
1. Common Stock
| 2. Preferred Stock
93
Among other issues, common stock shares vote on issues such as:
1. The election of the ______.
2. Decisions about changes in the ______ of the company.
3. Stock ______.
4. ______ of additional securities.
1. Board of Directors
2. Operations
3. Splits
4. Issuance
94
Because attendance is usually inconvenient, most stockholders will vote by ______. This is a limited power of attorney that the stockholder grants to someone else who gets the authority to vote the stock either at their discretion or at the instruction of the stockholder.
Proxy
95
There are two different voting processes used by corporations: ______ and ______.
1. Statutory Voting
| 2. Cumulative Voting
96
With ______, shareholders are permitted one vote for each share they own for each vacancy.
Statutory Voting
97
Under ______, you cast the same number of votes for each vacancy. That number of votes equals the number of shares you own.
Statutory Voting
98
With ______, the shareholder may divide their votes among the vacancies in any way he or she desires.
Cumulative Voting
99
The ______ method is designed to benefit the small shareholder. By concentrating the votes on one vacancy, the shareholder has a stronger voice in the election process.
Cumulative Voting
100
One reason investors buy stock is for ______. In other words, they want to "buy low and sell high." If a stock is sold at a profit, the investor realizes a(n) ______. If the stock is sold at a loss, the investor realizes a(n) ______.
1. Price Appreciation
2. Capital Gain
3. Capital Loss
101
______ are legal documents that certify the stockholder's share ownership.
Stock Certificates
102
Stock certificates identify the issuing ______, the registered ______, the ______ and ______, the number of ______ represented by the certificate, and the authorized signatures of the ______.
1. Corporation
2. Owner
3. Transfer Agent
4. Registrar
5. Shares
6. Corporation's Officers
103
When an investor sells shares, two entities are involved in processing the certificates. The ______ changes the stock certificate registration from the seller's name to the buyer's name. The ______ oversees the transfer, ensuring that the number of shares registered to owners is equal to the number of shares outstanding.
1. Transfer Agent
| 2. Registrar
104
As owners, common stockholders have the right to participate in the earnings of the issuing company in the form of ______. These are usually paid quarterly; as the issuer's earnings fluctuate, so does the ______.
1. Dividends
| 2. Dividend
105
Dividends are only paid when and if ______ by the ______. Dividends are paid from the corporation's profits.
1. Declared
| 2. Board of Directors
106
Once a corporation declares the dividend, it becomes a(n) ______ of that corporation and must be paid. The total dollar amount of the dividend moves from ______ up to the ______ section of the corporation's balance sheet. There, it is classified as ______.
1. Current Liability
2. Retained Earnings
3. Current Liabilities
4. Dividends Payable
107
When a dividend is declared by a corporation, the ______ balance decreases and total ______ increases by the same amount. This results in the amount of working capital the corporation has available to ______.
1. Retained Earnings
2. Current Liabilities
3. Decrease
108
______ for individual shareholder are taxed at ordinary income tax rates whether they are received or reinvested. However, if ______ are qualified based on the individual's holding period of the stock, they may have preferential tax treatment.
Dividends
109
Corporations that own stock, including common and preferred stock, of another U.S. corporation receive qualified dividends and are entitled to an exclusion that allows them to exclude ______ from corporate income.
50%
110
To qualify for the ______ corporate dividend exclusion, the shareholding corporation must own less than ______ of the dividend-paying corporation's outstanding stock.
1. 50%
| 2. 20%
111
Dividends are normally paid in ______.
Cash
112
There may be periods when the board of directors wishes to pay a dividend but prefers to conserve ______. At such times, the investors might receive additional company shares, or a(n) ______. Dividends may be distributed of the stock of a(n) ______.
1. Cash
2. Stock Dividend
3. Related Corporation
113
Dividends have to be ______.
Declared
114
On the ______, the customer gives a purchase order to his broker/dealer. The broker/dealer enters into a trade agreement with another broker/dealer to fill the customer's order. In this ______, the two broker/dealers agree on a share quantity and price.
1. Trade Date
| 2. Legally Binding Agreement
115
On the ______, the broker/dealer consummate the terms of their agreement, which is a a legally binding contract. They exchange ______ and ______. On this date, the buyer becomes the legal owner of the securities. The buyer's name is recorded in the corporation's stockholder record and the seller's name is removed.
1. Settlement Date
2. Securities
3. Cash
116
Corporate securities, municipal bonds, and government agency bonds settlement date is normally ______ after trade date, or ______.
1. 2 Business Days
| 2. T+2
117
The standard, or "regular," settlement date practice is ______ after trade date, or ______. It is called ______ and is required between broker/dealers who ask their customers to comply.
1. 2 Business Days
2. T+2
3. Regular-Way Settlement
118
If a corporate security, municipal bond, or government agency bond trades on Monday, June 12th, what is the settlement date?
Wednesday, June 14th
119
Government notes and bonds settlement date is ______, or the ______ following the trade date.
1. T+2
| 2. Next Business Day
120
Occasionally, broker/dealers will agree on ______, where the brokers/dealers consummate the trade on the same day, or ______, that they enter the agreement.
1. Cash Settlement
| 2. T
121
A(n) ______ gives the seller the option to deliver the security during any time period ranging from ______ to ______ business days. This is called a(n) ______. It also locks in the right to buy and sell the security at a specific price.
1. Seller's Option
2. 6 to 60
3. Negotiated Settlement
122
Treasury bonds settle on the ______ or ______ , which is regular-way settlement for government bonds and notes. This is different from corporate securities, municipal bonds, and government agencies, which settle ______.
1. Next Business Day
2. T+1
3. T+2
123
The ______ is the date on which the board of directors declares the dividend and it becomes a current liability.
Declaration Date
124
The ______ is the first trade date on which the stock purchaser is not legally entitled to receive the dividend. Also on this date, the ______ declines by the amount of the dividend and the stock is said to be trading ______.
1. Ex-Dividend Date
2. Current Market Value
3. Ex-Dividend
125
The ______ is the date on which the corporation consults the stockholder record. Only those owners recorded in the stockholder record receive the dividend.
Record Date
126
The ______ is the date on which the corporation actually distributes dividends to those shareholders of record (as of the record date).
Payable Date
127
The ______ chooses the declaration date, record date, and payable date. The ______ sets the ex-dividend date. The ex-dividend for a regular-way transaction will be ______ prior to the record date.
1. Board of Directors
2. Self-Regulatory Organization (SRO)
3. 1 Business Day
128
When a stock trade is done for cash settlement, remember that the ______ and the ______ are the same; the purchaser becomes the owner of record on that date.
1. Trade Date
| 2. Settlement Date
129
The ex-dividend date for a cash transaction is the ______ the record date.
Day After
130
When a mutual fund declares a dividend, all four dates are chosen by the ______.
Board of Directors
131
The board of directors almost always designates the ex-date as the day ______ the record date. This is because mutual funds are purchased by ______, and the buyer's name is recorded the day on which the application is received by the fund.
1. After
| 2. Application
132
If the investor purchases the stock just before the ______, the investor experiences two negative events.
1. The investor suffers a(n) ______ on the stock when the price drops.
2. The investor generates a(n) ______, since the dividend is taxable income.
1. Ex-Date
2. Unrealized Loss
3. Tax Liability
133
The prohibited practice known as "______" is when a registered representative advises an investor to purchase a stock for the sole purpose of receiving the dividend.
Selling Dividends
134
The ______, also known as ______, is a method for measuring a stockholder's return on investment.
1. Dividend Yield
| 2. Current Yield
135
______ = Annual Dividend / Current Share Price
Dividend Yield
136
ABC company shares are currently trading at $10.00 a share and ABC declares a quarterly dividend of $0.10 per share. What is the dividend yield?
4%
$0.10 x 4 payments per year = $0.40 per year
$0.40 / $10.00 = 4% dividend yield
137
______ are an alternative to cash dividends used primarily by growth companies who wish to conserve cash for future growth.
Stock Dividends
138
When a stock dividend is issued, the number of outstanding shares will ______ while the price per share, or ______, will go ______. However, the aggregate or total value of the stock position will ______.
1. Increase
2. Cost Basis
3. Down
4. Remain the Same
139
An investor owns 100 shares of stock at $50 a share and there is a 10% stock dividend. How many shares at what price will the investor now own?
110 shares at $45.45/share
100 * 110% = 110 shares
$50 / 110% = $45.45
140
A company declares a(n)______, which involves increasing the amount of outstanding shares with a corresponding decrease in the value of each share.
Stock Split
141
While stock ______ are declared by the board of directors, stock ______ are voted on by the shares.
1. Dividends
| 2. Splits
142
As owners of the corporation, common stockholders have the right to ______. This means that common shareholders are entitled to regularly review the corporation's balance sheet and income statement.
Inspect the Corporation's Books
143
Publicly traded companies are required to file financial statements with the ______. These financial statements are filed both in the annual ______ form and in the quarterly ______.
1. Securities and Exchange Commission (SEC)
2. 10K
3. 10Q
144
A stockholder's ______ is the right to maintain the same percentage of ownership in a corporation when new shares are issued.
Preemptive Right
145
When common stock is purchased under a preemptive right, the shares are purchased at a fixed price known as the ______, which is lower than the ______.
1. Subscription Price
| 2. Public Offering Price (POP)
146
When new shares are issued, the corporation issues ______ to the existing shareholders. For every share outstanding, the corporation will issue one ______. These can be used to purchase stock, can be sold for value in the marketplace, or can be left to lapse or expire.
1. Stock Rights
| 2. Right
147
Rights are typically ______, expiring ______ to ______ after they are issued.
1. Short Term
| 2. 30 to 60 Days
148
______ = (CMV - Exercise Price) / (# Rights to Buy One Share at Exercise Price)
Rights Cost Basis
149
When a corporation issues ______, it is giving its shareholders the privilege of obtaining shares at a fixed price.
Rights
150
A(n) ______ is similar to a right in that it represents an opportunity to purchase securities at a specified price (the ______ or ______), for a set period of time.
1. Warrant
2. Subscription Price
3. Exercise Price
151
______ are long-term instruments lasting several years (sometimes perpetual), and are initially issued with an exercise price above the current market value of a stock. ______ are short-term and allow purchase below the public offering price.
1. Warrants
| 2. Rights
152
______ act like a "sweetener" when attached to other securities, meaning they make the other security more marketable.
Warrants
153
______ can be used to lower the interest rate on a bond issued by a corporation.
Warrants
154
Warrants are usually attached to ______ (but may also be issued with ______). When two or more securities are trading together, they are said to be trading in a(n) ______.
1. Bonds
2. Stock
3. Unit
155
______ are usually detachable, meaning they can be traded in the marketplace separately from the security with which they were issued.
Warrants
156
______ are long-term instruments, while ______ are short-term. An easy way to remember this is that the word "warrants" is ______ than the word "rights".
1. Warrants
2. Rights
3. Longer
157
The value of a warrant is the difference between its ______ and the ______ of the underlying stock.
1. Subscription or Exercise Price
| 2. Market Price
158
If the subscription price is below the market price, the warrant has ______. Warrants initially have no ______ because they are issued at a price above market value of the stock.
Intrinsic Value
159
______ are certificates issued by a United States commercial bank which represent ownership of a foreign company's shares listed on a foreign exchange.
American Depositary Receipts (ADRs)
160
______ offer the opportunity for American investors to purchase shares of a foreign company on an American exchange. They are denominated in U.S. dollars and produce a return in U.S. dollars.
American Depositary Receipts (ADRs)
161
The actual shares of the foreign companies in an ADR are held in an American bank called the ______.
Depository Bank
162
ADRs carry ______ risk to the investor.
Currency
163
______ allow investors to avoid many of the problems associated with investing in foreign securities, such as currency conversion, certificate registration, and trade administration. Since ______ are governed by U.S. securities regulations, they also enjoy the same protection as other domestic securities.
American Depositary Receipts (ADRs)
164
ADRs can be ______ or ______.
1. Sponsored
| 2. Unsponsored
165
With ______ ADRs, the issuer provides nearly all SEC mandated information to the investor and dividends are paid through transfer agents in U.S. dollars. These often trade on national exchanges and shareholders usually enjoy all the rights associated with ownership of stock, including voting rights.
Sponsored
166
With ______ ADRs, the shares are simply held in a bank (usually an American branch bank) located in the foreign country. Because the foreign corporation does not follow SEC recordkeeping and reporting rules, these often trade over-the-counter and do not usually have voting rights.
Unsponsored
167
Preferred stock is preferred over common stock at two times:
1. ______
2. ______
1. Dividend Payment
| 2. Liquidation
168
Preferred stock is ______ than common stock. However, because it is an equity security, it is ______ than bonds, which are debt instruments.
1. Safer
| 2. Riskier
169
Oftentimes, a corporation will establish a(n) ______ to insure payment of the preferred stock dividend.
Sinking Fund
170
The annual dividend is expressed either as a percentage of par value (typically ______ for preferred stock) or as a dollar amount.
$100
171
All dividends must be declared by the ______ before they are paid to either preferred stock or common stock.
Board of Directors
172
Preferred shares have a par value of ______ unless stated otherwise. The par value represents the face amount of the security.
$100
173
______ were created to yield a fixed, stated return comparable to bonds. They have no voting privilege.
Preferred Stocks
174
The value of both preferred stocks and bonds is affected by fluctuation in ______. Preferred stock, like a bond, is ______.
1. Interest Rates
| 2. Interest Rate Sensitive
175
By structuring its preferred stock with an attractive optional feature, the corporation enhances the stock's ______. This reduces the corporation's capital cost because the preferred stock can be issued with a lower stated ______.
1. Marketability
| 2. Dividend
176
Some preferred stock may be identified as "______," meaning it can be called from the stockholder by the issuer at the issuer's discretion. When such shares are called, the stockholders are paid either par or a specified premium over par for each share.
Callable
177
Unlike the other optional features, a(n) ______ is NOT attractive to preferred stock investors. It adds risk and uncertainty. Therefore, investors demand a higher stated premium to compensate for the added risk.
Call Provision
178
The issuer will pay a higher dividend for the advantage of the ______, which entitles the issuer to buy the stock back from the investors at a specified future price and date.
Call Feature
179
The ______ feature allows the preferred shares to participate with the common shares in the earnings of an exceptional year.
Participating
180
The ______ provision permits owners to convert, or exchange, their preferred stock for a designated number of common shares.
Convertible
181
______ preferred is attractive to investors because it offers investors the immediate benefits associated with the dividend and bankruptcy priority, as well as the potential price appreciation of the common stock in the future.
Convertible
182
The ______ and ______ are determined at the convertible preferred stock's issuance.
1. Conversion Price
| 2. Conversion Ratio
183
The ______ represents the price at which the shareholder may convert to common shares. The ______ determines the number of shares that will be received for each share of preferred stock, and can be calculated by dividing the ______ of the preferred stock by the ______.
1. Conversion Price
2. Conversion Ratio
3. Par Value
4. Conversion Price
184
A convertible preferred stock is convertible into common at $20 per share. What is the conversion ratio?
1:5
Par Value / Conversion Price = Conversion Ratio
$100 / $20 = 5
185
In any given year, dividends cannot be paid to ______ until the full stated dividend to the ______ has been paid.
1. Common Shareholders
| 2. Preferred
186
With ______ preferred stock (______), dividend payment history in prior years is irrelevant to dividend payments in the present year. The ______ feature gives the preferred stock greater assurance that its dividend will be paid. No dividends can be paid to common stockholders if any cumulative preferred dividends are in arrears.
1. Straight
2. Non-Cumulative
3. Cumulative
187
If ABC Company's 5% cumulative preferred stock has not paid a dividend in 2 years, how much must preferred shareholders be paid before any common stockholders are paid a dividend?
$15
Par Value = $100, resulting in a 5% or $5 annual dividend. Two years past dividends ($5 + $5) plus this year dividends $5 = $15.
188
______ preferred stock has a dividend that changes based on the performance of a benchmark security, which is often a U.S. Treasury Bill. Changes in the dividend are usually based on a pre-established formula, and typically occur ______. Because the dividend adjusts, or "floats", the ______ stays stable.
1. Adjustable Rate
2. Quarterly
3. Stock Price
189
______ preferred stock pays a fixed dividend for a period of time until a specified date, after which the dividend will float. The dividend is typically pegged to a(n) ______, such as the LIBOR, Fed Funds, or T-bill rate, typically.
1. Variable-Rate
2. Benchmark Rate
London Inter-Bank Offered Rate (LIBOR)
190
Types of Equities: ______ or ______.
1. Common
| 2. Preferred
191
Common equities:
1. ______ shares.
2. Full rights of ______, right to ______, right to ______ (if declared), ______ rights.
3. Common shareholders have a right to ______ (annual or quarterly reports).
4. Common shareholders do NOT have the right to ______.
1. Voting
2. Ownership
3. Vote
4. Dividends
5. Preemptive
6. Information
7. Manage
192
Shares ______: maximum number of shares a company may ultimately issue.
Authorized
193
Shares ______: number of shares either publicly or privately to shareholders.
Issued
194
______: previously outstanding; stored in the corporate treasury without voting or dividend rights. These shares can be sold by the corporation or used for stock dividends or employee stock options.
Treasury Stock
195
Shares ______ = Shares Issued - Treasury Stock
Outstanding
196
Preferred Equities:
1. Preferred over common in the event of ______.
2. ______ preferred - most frequently issued. If the stated dividend is not paid in full or in part, the unpaid portion of the dividend is still a legal obligation to the issuer before ______ is paid.
3. Preferred shares do not generally include the right to ______.
1. Liquidation
2. Cumulative
3. Common
4. Vote
197
______ Preferred Shares: convertible into common stock.
Convertible
198
Warrants:
1. ______ or ______ time horizon.
2. At issue, subscription price is ______ than the current market price of the stock.
3. Will have ______ only if stock price appreciates above the subscription price.
4. Debt "______" (often attached to bonds).
1. Long-Term
2. Perpetual
3. Higher
4. Value
5. Sweeteners
199
Preemptive Rights:
1. Attached to ______.
2. Enable holder to purchase additional stock at a(n) ______ to current market value.
3. Can trade separately from the ______.
4. Rights are very ______ (______ to ______).
1. Stock
2. Discount
3. Stock
4. Short-Term
5. 30 to 60 Days
200
If a corporation wanted to raise additional capital to build a new plant, it could do so by selling ______ or issuing a(n) ______.
1. First Mortgage Bonds
| 2. Rights Offering
201
Common stock cannot be ______ by the issuing corporation.
Called
202
If a corporation decides to buy back its own outstanding shares or "______," the decision is usually made by the ______.
1. Treasury Stock
| 2. Board of Directors
203
If a corporation has a(n) ______, shareholders cannot redeem ______ for cash from the corporation.
1. Rights Offering
| 2. Rights
204
When a corporation has ______ and issues new shares of stock, each stockholder receives ______ per share of stock. This entitles the shareholder to purchase a(n) ______ number of new shares.
1. Preemptive Rights
2. One Right
3. Purportionate
205
When a corporation repurchases its own stock, it DOES / DOES NOT increase the voting power of the Board of Directors.
DOES NOT
206
Rights are valid for ______ to ______; warrants are ______.
1. 30 to 90 days
| 2. Long-Term
207
______ do not determine dividend policy.
Stockholders
208
A(n) ______ shareholder does not have the right to vote directly on the salaries of senior management.
Common
209
Preferred stock usually does not have a(n) ______.
Maturity Date
210
If preferred stock is converted into common stock, there will be ______ common shares outstanding and ______ earnings per share.
1. More
| 2. Lower
211
The first date that shares can be sold regular way without a due bill is the ______ or ______.
1. Ex-Date
| 2. Ex-Dividend Date
