Chapter 1: Equity Securities

Question 1

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.

Answer 1

1. Securities Act of 1933

2. Paper Act

Question 2

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.

Answer 2

1. Securities Exchange Act of 1934

2. People Act

Question 3

The ______ established self-regulatory organizations, or SROs, to regulate the over-the-counter, or OTC, market.

Answer 3

Maloney Act of 1938

Question 4

The primary goal of all securities legislation is to ______.

Answer 4

Protect the Retail Public

Question 5

The ______ writes the laws that govern the securities industry while the ______ write rules and regulations to enforce those securities laws.

Answer 5

1. Securities and Exchange Commission (SEC)

2. Self-Regulatory Organizations (SROs)

Question 6

______ must join SROs such as FINRA to charge commissions and mark-ups. As SRO members, or “______”, they must follow all SRO rules.

Answer 6

1. Broker/Dealers

2. Member Firms

Question 7

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).

Answer 7

Security

Question 8

______ 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 ______.

Answer 8

1. Nonexempt Securities
2. Exempt Securities
3. Fraud

Question 9

A(n) ______ is a financial instrument that trades for value based on the expectation of profit from the efforts of third-party management.

Answer 9

Security

Question 10

Corporations issue two types of securities: ______ and ______. The sum of all issued securities of a corporation is referred to as the corporation’s ______.

Answer 10

1. Stocks
2. Bonds
3. Capital Structure

Question 11

Stocks are called ______ because each share represents ownership in the corporation. Each stockholder is an owner of that corporation.

Answer 11

Equity Securities

Question 12

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.

Answer 12

1. Debt Instruments
2. Leverage Instruments
3. Liability
4. Creditor

Question 13

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.

Answer 13

1. Stocks

2. Bonds

Question 14

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) ______.

Answer 14

1. Junior Security

2. Residual Claim to Assets

Question 15

What is the equation?

Assets ______ Liabilities ______ Net Worth

Answer 15

Assets = Liabilities + Net Worth
OR
Assets - Liabilities = Net Worth

Question 16

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).

Answer 16

Balance Sheet

Question 17

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.

Answer 17

1. Left
2. Current or Liquid
3. Liquid

Question 18

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.

Answer 18

1. Right
2. Current
3. 30 to 60 Days
4. Mid-
5. Long-Term

Question 19

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.

Answer 19

1. Net Worth

2. Stockholders’ Equity Section

Question 20

A bookkeeping value, or “______,” is assigned each share of preferred and common stock.

Answer 20

Par Value

Question 21

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.

Answer 21

Paid In Capital Surplus

Question 22

______ is the value assigned to a corporation’s no-par stock on its financial statements. It is unrelated to the market value.

Answer 22

Stated Value

Question 23

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.

Answer 23

No-Par

Question 24

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.

Answer 24

1. Income Statement

2. Profit and Loss Statement

Question 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 ______.

Answer 25

1. EBITDA
2. EBIT
3. EBT
4. Net Profit
5. Profitability

Question 26

______ = (Sales - Cost of Goods Sold - Selling, General, & Administrative Costs) / Sales

Answer 26

Operating Margin

Question 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.

Answer 27

1. Operating Margin

2. EBIT

Question 28

______ = Net Income after Taxes / Sales

Answer 28

Net Profit Margin

Question 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.

Answer 29

1. Net Profit
2. Bottom Line
3. Net Profit Margin

Question 30

If market price is 54 and EPS is 9, what is the P/E ratio?

Answer 30

6

P/E Ratio = Price / Earnings per Share
P/E Ratio = 54 / 9 = 6

Question 31

If P/E ratio is 6 and market price is 54, what is EPS?

Answer 31

9

P/E Ratio = Price / Earnings per Share
6 = 54 / EPS = EPS = 54 / 6 = 9

Question 32

If P/E ratio as a divisor is 9 and EPS as a dividend is 6, what is the market price?

Answer 32

54

P/E Ratio = Price / Earnings per Share
9 = Price / 6 = 6 * 9 = Price = 54

Question 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.

Answer 33

1. Working Capital
2. Working Capital Ratio or Current Ratio
3. Quick Ratio or Acid Test Ratio

Question 34

______ = Current Assets - Current Liabilities

Answer 34

Net Working Capital

Question 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.

Answer 35

1. Working Capital
2. Positive
3. Negative

Question 36

______ = Current Assets / Current Liabilities

Answer 36

Current Ratio or Working Capital Ratio

Question 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.

Answer 37

1. Current Ratio
2. Greater
3. Less

Question 38

______ = (Current Assets - Inventory) / Current Liabilities

Answer 38

Quick Ratio or Acid Test

Question 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.

Answer 39

1. Quick Ratio

2. Acid Test

Question 40

______ = (Par Value of Common + Retained Earnings + Paid-In Capital) / Total Long-Term Capitalization (Stockholders’ Equity + Bonds)

Answer 40

Common Stock Ratio

Question 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 ______.

Answer 41

1. Common Stock Ratio
2. High
3. Profitability

Question 42

_______ = Par Value of Bonds / Total Long-Term Capitalization (Stockholders’’ Equity + Bonds)

Answer 42

Bond Ratio

Question 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.

Answer 43

1. Bond Ratio
2. Lower
3. 30-40%

Question 44

______ = (Net Income - Preferred Dividend) / Common Shares Outstanding

Answer 44

Earnings per Common Share (EPS)

Question 45

______ measures the portion of earnings available to common stockholders after the preferred stock has received its dividend.

Answer 45

Earnings Per Common Share (EPS)

Question 46

______ = (Net Income + Convertible Bond Interest) / (Outstanding Common Shares + Common Shares Resulting from Conversion)

Answer 46

Fully Diluted Earnings Per Share

Question 47

______ is a theoretical number and measures the earnings available to common if all convertible securities were converted to common stock.

Answer 47

Fully Diluted Earnings Per Share

Question 48

______ = Market Price / Earnings Per Share

Answer 48

Price / Earnings (P/E) Ratio

Question 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.

Answer 49

Price / Earnings (P/E) Ratio

Question 50

______ = Annual Dividend / Earnings per Share

Answer 50

Dividend Payout Ratio

Question 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.

Answer 51

Dividend Payout Ratio

Question 52

______ = Annual Dividend / Market Stock Price

Answer 52

Current Yield

Question 53

______ measures the benefit realized by purchasing the stock at current market value.

Answer 53

Current Yield

Question 54

______ = Net Income (or Loss) + Current Depreciation + Amortization

Answer 54

Cash Flow

Question 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.

Answer 55

Cash Flow

Question 56

______ = Total Liabilities / Stockholders’ Equity

Answer 56

Debt / Equity Ratio

Question 57

______ = Cost of Goods Sold / Average Inventory

Answer 57

Inventory Turnover Ratio

Question 58

______ measures how quickly inventory is sold. A(n) ______ number indicates faster speed, more efficient management, and lower inventory loss risk.

Answer 58

1. Inventory Turnover Ratio

2. Higher

Question 59

______ = Net Profit / Net Sales

Answer 59

Net Profit Margin

Question 60

______ is a measure of the net profit earned per dollar of revenue. A(n) ______ percentage is better.

Answer 60

1. Net Profit Margin

2. Higher

Question 61

______ = Earnings Before Interest and Taxes (EBIT) / Interest Expense

Answer 61

Interest Coverage Ratio

Question 62

______ measures how easily the entity can pay interest on its outstanding bonds. A(n) ______ number is better.

Answer 62

1. Interest Coverage Ratio

2. Higher

Question 63

______ = (Total Shareholder Equity - Preferred Equity) / Total Outstanding Common Shares

Answer 63

Book Value Per Share

Question 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.

Answer 64

Book Value Per Share

Question 65

______ = Net Income After Preferred Dividend / Common Stockholders’’ Equity

Answer 65

Return on Common Equity (ROE)

Question 66

______ measures the return which the corporation achieves on common stockholders’ equity. A(n) ______ return indicates better management.

Answer 66

1. Return on Common Equity (ROE)

2. Higher

Question 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.

Answer 67

Inventory

Question 68

Inventory is a key component in calculating ______ and an important driver of profit, total assets, and tax liability.

Answer 68

Cost of Goods Sold (COGS)

Question 69

The two main methods are “______” (______) and “______” (______). Once the company chooses one, they must use that method constantly going forward.

Answer 69

1. Last-In, First-Out (LIFO)

2. First-In, First-Out (FIFO)

Question 70

______ is the gradual reduction of the value of a tangible asset over the useful life of the asset.

Answer 70

Depreciation

Question 71

______ is the gradual reduction in the value of an intangible asset.

Answer 71

Amortization

Question 72

______ is a reduction in the value of an asset as the result of the physical reduction in the asset, such as natural resources.

Answer 72

Depletion

Question 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.

Answer 73

Goodwill

Question 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.

Answer 74

Fundamental Analysis

Question 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.

Answer 75

Footnotes

Question 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.

Answer 76

Material Risk Disclosure Statement

Question 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.

Answer 77

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.

Question 78

The maximum that stockholders can lose is the price they paid for the stock. This concept is known as ______.

Answer 78

Limited Liability

Question 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.

Answer 79

1. Original Charter

2. Board of Directors

Question 80

______ - Total number of shares authorized in the corporate charter.

Answer 80

Authorized Shares

Question 81

______ - Portion of total authorized shares that are actually sold to investors.

Answer 81

Issued Shares

Question 82

______ - Authorized shares that have not yet been sold.

Answer 82

Unissued Shares

Question 83

______ - Stock that has been issued (sold to the public) and subsequently bought back by the corporation.

Answer 83

Treasury Stock

Question 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.”

Answer 84

Treasury Stock

Question 85

Note that shares of ______ have no voting rights and receive no dividends.

Answer 85

Treasury Stock

Question 86

______ - The number of shares in the hands of investors at any given time.

Answer 86

Outstanding Stock

Question 87

______ = Issued Shares - Treasury Stock

Answer 87

Outstanding Stock

Question 88

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

Answer 88

Market Cap (Capitalization)

Question 89

______ is stock that has been issued and, subsequently, reacquired by the corporation.

Answer 89

Treasury Stock

Question 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 = \_\_\_\_\_\_

Answer 90

Authorized = 1,000
Issued = 700
Unissued = 300
Treasury = 200
Outstanding = 500

Question 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.

Answer 91

1. Vote
2. Ownership
3. Dividends
4. Books
5. Preemptive Right
6. Junior Claims

Question 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.

Answer 92

1. Common Stock

2. Preferred Stock

Question 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.

Answer 93

1. Board of Directors
2. Operations
3. Splits
4. Issuance

Question 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.

Answer 94

Proxy

Question 95

There are two different voting processes used by corporations: ______ and ______.

Answer 95

1. Statutory Voting

2. Cumulative Voting

Question 96

With ______, shareholders are permitted one vote for each share they own for each vacancy.

Answer 96

Statutory Voting

Question 97

Under ______, you cast the same number of votes for each vacancy. That number of votes equals the number of shares you own.

Answer 97

Statutory Voting

Question 98

With ______, the shareholder may divide their votes among the vacancies in any way he or she desires.

Answer 98

Cumulative Voting

Question 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.

Answer 99

Cumulative Voting

Question 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) ______.

Answer 100

1. Price Appreciation
2. Capital Gain
3. Capital Loss

Question 101

______ are legal documents that certify the stockholder’s share ownership.

Answer 101

Stock Certificates

Question 102

Stock certificates identify the issuing ______, the registered ______, the ______ and ______, the number of ______ represented by the certificate, and the authorized signatures of the ______.

Answer 102

1. Corporation
2. Owner
3. Transfer Agent
4. Registrar
5. Shares
6. Corporation’s Officers

Question 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.

Answer 103

1. Transfer Agent

2. Registrar

Question 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 ______.

Answer 104

1. Dividends

2. Dividend

Question 105

Dividends are only paid when and if ______ by the ______. Dividends are paid from the corporation’s profits.

Answer 105

1. Declared

2. Board of Directors

Question 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 ______.

Answer 106

1. Current Liability
2. Retained Earnings
3. Current Liabilities
4. Dividends Payable

Question 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 ______.

Answer 107

1. Retained Earnings
2. Current Liabilities
3. Decrease

Question 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.

Answer 108

Dividends

Question 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.

Answer 109

50%

Question 110

To qualify for the ______ corporate dividend exclusion, the shareholding corporation must own less than ______ of the dividend-paying corporation’s outstanding stock.

Answer 110

1. 50%

2. 20%

Question 111

Dividends are normally paid in ______.

Answer 111

Cash

Question 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) ______.

Answer 112

1. Cash
2. Stock Dividend
3. Related Corporation

Question 113

Dividends have to be ______.

Answer 113

Declared

Question 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.

Answer 114

1. Trade Date

2. Legally Binding Agreement

Question 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.

Answer 115

1. Settlement Date
2. Securities
3. Cash

Question 116

Corporate securities, municipal bonds, and government agency bonds settlement date is normally ______ after trade date, or ______.

Answer 116

1. 2 Business Days

2. T+2

Question 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.

Answer 117

1. 2 Business Days
2. T+2
3. Regular-Way Settlement

Question 118

If a corporate security, municipal bond, or government agency bond trades on Monday, June 12th, what is the settlement date?

Answer 118

Wednesday, June 14th

Question 119

Government notes and bonds settlement date is ______, or the ______ following the trade date.

Answer 119

1. T+2

2. Next Business Day

Question 120

Occasionally, broker/dealers will agree on ______, where the brokers/dealers consummate the trade on the same day, or ______, that they enter the agreement.

Answer 120

1. Cash Settlement

2. T

Question 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.

Answer 121

1. Seller’s Option
2. 6 to 60
3. Negotiated Settlement

Question 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 ______.

Answer 122

1. Next Business Day
2. T+1
3. T+2

Question 123

The ______ is the date on which the board of directors declares the dividend and it becomes a current liability.

Answer 123

Declaration Date

Question 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 ______.

Answer 124

1. Ex-Dividend Date
2. Current Market Value
3. Ex-Dividend

Question 125

The ______ is the date on which the corporation consults the stockholder record. Only those owners recorded in the stockholder record receive the dividend.

Answer 125

Record Date

Question 126

The ______ is the date on which the corporation actually distributes dividends to those shareholders of record (as of the record date).

Answer 126

Payable Date

Question 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.

Answer 127

1. Board of Directors
2. Self-Regulatory Organization (SRO)
3. 1 Business Day

Question 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.

Answer 128

1. Trade Date

2. Settlement Date

Question 129

The ex-dividend date for a cash transaction is the ______ the record date.

Answer 129

Day After

Question 130

When a mutual fund declares a dividend, all four dates are chosen by the ______.

Answer 130

Board of Directors

Question 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.

Answer 131

1. After

2. Application

Question 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.

Answer 132

1. Ex-Date
2. Unrealized Loss
3. Tax Liability

Question 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.

Answer 133

Selling Dividends

Question 134

The ______, also known as ______, is a method for measuring a stockholder’s return on investment.

Answer 134

1. Dividend Yield

2. Current Yield

Question 135

______ = Annual Dividend / Current Share Price

Answer 135

Dividend Yield

Question 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?

Answer 136

4%

$0.10 x 4 payments per year = $0.40 per year
$0.40 / $10.00 = 4% dividend yield

Question 137

______ are an alternative to cash dividends used primarily by growth companies who wish to conserve cash for future growth.

Answer 137

Stock Dividends

Question 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 ______.

Answer 138

1. Increase
2. Cost Basis
3. Down
4. Remain the Same

Question 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?

Answer 139

110 shares at $45.45/share

100 * 110% = 110 shares
$50 / 110% = $45.45

Question 140

A company declares a(n)______, which involves increasing the amount of outstanding shares with a corresponding decrease in the value of each share.

Answer 140

Stock Split

Question 141

While stock ______ are declared by the board of directors, stock ______ are voted on by the shares.

Answer 141

1. Dividends

2. Splits

Question 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.

Answer 142

Inspect the Corporation’s Books

Question 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 ______.

Answer 143

1. Securities and Exchange Commission (SEC)
2. 10K
3. 10Q

Question 144

A stockholder’s ______ is the right to maintain the same percentage of ownership in a corporation when new shares are issued.

Answer 144

Preemptive Right

Question 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 ______.

Answer 145

1. Subscription Price

2. Public Offering Price (POP)

Question 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.

Answer 146

1. Stock Rights

2. Right

Question 147

Rights are typically ______, expiring ______ to ______ after they are issued.

Answer 147

1. Short Term

2. 30 to 60 Days

Question 148

______ = (CMV - Exercise Price) / (# Rights to Buy One Share at Exercise Price)

Answer 148

Rights Cost Basis

Question 149

When a corporation issues ______, it is giving its shareholders the privilege of obtaining shares at a fixed price.

Answer 149

Rights

Question 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.

Answer 150

1. Warrant
2. Subscription Price
3. Exercise Price

Question 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.

Answer 151

1. Warrants

2. Rights

Question 152

______ act like a “sweetener” when attached to other securities, meaning they make the other security more marketable.

Answer 152

Warrants

Question 153

______ can be used to lower the interest rate on a bond issued by a corporation.

Answer 153

Warrants

Question 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) ______.

Answer 154

1. Bonds
2. Stock
3. Unit

Question 155

______ are usually detachable, meaning they can be traded in the marketplace separately from the security with which they were issued.

Answer 155

Warrants

Question 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”.

Answer 156

1. Warrants
2. Rights
3. Longer

Question 157

The value of a warrant is the difference between its ______ and the ______ of the underlying stock.

Answer 157

1. Subscription or Exercise Price

2. Market Price

Question 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.

Answer 158

Intrinsic Value

Question 159

______ are certificates issued by a United States commercial bank which represent ownership of a foreign company’s shares listed on a foreign exchange.

Answer 159

American Depositary Receipts (ADRs)

Question 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.

Answer 160

American Depositary Receipts (ADRs)

Question 161

The actual shares of the foreign companies in an ADR are held in an American bank called the ______.

Answer 161

Depository Bank

Question 162

ADRs carry ______ risk to the investor.

Answer 162

Currency

Question 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.

Answer 163

American Depositary Receipts (ADRs)

Question 164

ADRs can be ______ or ______.

Answer 164

1. Sponsored

2. Unsponsored

Question 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.

Answer 165

Sponsored

Question 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.

Answer 166

Unsponsored

Question 167

Preferred stock is preferred over common stock at two times:

1. ______
2. ______

Answer 167

1. Dividend Payment

2. Liquidation

Question 168

Preferred stock is ______ than common stock. However, because it is an equity security, it is ______ than bonds, which are debt instruments.

Answer 168

1. Safer

2. Riskier

Question 169

Oftentimes, a corporation will establish a(n) ______ to insure payment of the preferred stock dividend.

Answer 169

Sinking Fund

Question 170

The annual dividend is expressed either as a percentage of par value (typically ______ for preferred stock) or as a dollar amount.

Answer 170

$100

Question 171

All dividends must be declared by the ______ before they are paid to either preferred stock or common stock.

Answer 171

Board of Directors

Question 172

Preferred shares have a par value of ______ unless stated otherwise. The par value represents the face amount of the security.

Answer 172

$100

Question 173

______ were created to yield a fixed, stated return comparable to bonds. They have no voting privilege.

Answer 173

Preferred Stocks

Question 174

The value of both preferred stocks and bonds is affected by fluctuation in ______. Preferred stock, like a bond, is ______.

Answer 174

1. Interest Rates

2. Interest Rate Sensitive

Question 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 ______.

Answer 175

1. Marketability

2. Dividend

Question 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.

Answer 176

Callable

Question 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.

Answer 177

Call Provision

Question 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.

Answer 178

Call Feature

Question 179

The ______ feature allows the preferred shares to participate with the common shares in the earnings of an exceptional year.

Answer 179

Participating

Question 180

The ______ provision permits owners to convert, or exchange, their preferred stock for a designated number of common shares.

Answer 180

Convertible

Question 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.

Answer 181

Convertible

Question 182

The ______ and ______ are determined at the convertible preferred stock’s issuance.

Answer 182

1. Conversion Price

2. Conversion Ratio

Question 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 ______.

Answer 183

1. Conversion Price
2. Conversion Ratio
3. Par Value
4. Conversion Price

Question 184

A convertible preferred stock is convertible into common at $20 per share. What is the conversion ratio?

Answer 184

1:5

Par Value / Conversion Price = Conversion Ratio

$100 / $20 = 5

Question 185

In any given year, dividends cannot be paid to ______ until the full stated dividend to the ______ has been paid.

Answer 185

1. Common Shareholders

2. Preferred

Question 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.

Answer 186

1. Straight
2. Non-Cumulative
3. Cumulative

Question 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?

Answer 187

$15

Par Value = $100, resulting in a 5% or $5 annual dividend. Two years past dividends ($5 + $5) plus this year dividends $5 = $15.

Question 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.

Answer 188

1. Adjustable Rate
2. Quarterly
3. Stock Price

Question 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.

Answer 189

1. Variable-Rate
2. Benchmark Rate

London Inter-Bank Offered Rate (LIBOR)

Question 190

Types of Equities: ______ or ______.

Answer 190

1. Common

2. Preferred

Question 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 ______.

Answer 191

1. Voting
2. Ownership
3. Vote
4. Dividends
5. Preemptive
6. Information
7. Manage

Question 192

Shares ______: maximum number of shares a company may ultimately issue.

Answer 192

Authorized

Question 193

Shares ______: number of shares either publicly or privately to shareholders.

Answer 193

Issued

Question 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.

Answer 194

Treasury Stock

Question 195

Shares ______ = Shares Issued - Treasury Stock

Answer 195

Outstanding

Question 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 ______.

Answer 196

1. Liquidation
2. Cumulative
3. Common
4. Vote

Question 197

______ Preferred Shares: convertible into common stock.

Answer 197

Convertible

Question 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).

Answer 198

1. Long-Term
2. Perpetual
3. Higher
4. Value
5. Sweeteners

Question 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 ______).

Answer 199

1. Stock
2. Discount
3. Stock
4. Short-Term
5. 30 to 60 Days

Question 200

If a corporation wanted to raise additional capital to build a new plant, it could do so by selling ______ or issuing a(n) ______.

Answer 200

1. First Mortgage Bonds

2. Rights Offering

Question 201

Common stock cannot be ______ by the issuing corporation.

Answer 201

Called

Question 202

If a corporation decides to buy back its own outstanding shares or “______,” the decision is usually made by the ______.

Answer 202

1. Treasury Stock

2. Board of Directors

Question 203

If a corporation has a(n) ______, shareholders cannot redeem ______ for cash from the corporation.

Answer 203

1. Rights Offering

2. Rights

Question 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.

Answer 204

1. Preemptive Rights
2. One Right
3. Purportionate

Question 205

When a corporation repurchases its own stock, it DOES / DOES NOT increase the voting power of the Board of Directors.

Answer 205

DOES NOT

Question 206

Rights are valid for ______ to ______; warrants are ______.

Answer 206

1. 30 to 90 days

2. Long-Term

Question 207

______ do not determine dividend policy.

Answer 207

Stockholders

Question 208

A(n) ______ shareholder does not have the right to vote directly on the salaries of senior management.

Answer 208

Common

Question 209

Preferred stock usually does not have a(n) ______.

Answer 209

Maturity Date

Question 210

If preferred stock is converted into common stock, there will be ______ common shares outstanding and ______ earnings per share.

Answer 210

1. More

2. Lower

Question 211

The first date that shares can be sold regular way without a due bill is the ______ or ______.

Answer 211

1. Ex-Date

2. Ex-Dividend Date