Chapter 1 - Securities Flashcards
What is the accounting equation?
Assets = Liabilities + Equity
What is the equation for Net worth?
Networth = Assets - Liabilities
What is authorized stock?
Stock declared in the company charter
Why would a company purchase its shares? What is it called?
- To increase its EPS, employee stock option plans, future acquisitions
- Treasury Stock
What is par value for a stock?
An arbitrary value assigned to the stock in the company charter
What is the book value of a stock?
This is what the stockholder could expect to receive in the case of liquidation.
(Assets - Liabilites)/Outstanding Shares
In the voting of board members which voting style empowers the minority investor?
Cumulative Voting - Stockholders allocate votes as they see fit
What is a stock split?
Increases the shares of a company and reduces the purchase price of the stock
If an investor has 100 shares in a company at $60 and the firm announces a 5:4 split how many shares would the investor have and what would the value per share be?
Current Value = 100 * $60 = $6000
100 * 5 = 500, 500/4 = 125 shares
125 * x = $6000, ($6000/125 = $48)
What is preferred stock?
Has features of both equity and debt. Ownership in the company but no appreciation like common. Has a fixed dividend and changes with interest rates.
What is the current yield on a stock that has a quarterly dividend of $1.25 and a current market price of $60?
$1.25 * 4 = $5.00
$5.00/$60 = 0.083 or 8.3%
What is participating preferred stock?
If a company does well and offers a share in the profits after liabilities have been paid.
Which dividend usually has the highest rate?
Callable preferred, because it has the highest amount of risk since it might be called, then straight preferred would have next highest risk.
An investor buys 200 shares of stock at a price of $60. The stock declares a 20% stock dividend. How many shares would the investor receive and what is the new cost basis?
Current value = 200 * 60 = $12,000
Stock dividend = 200 * 1.2 = 240, or 40 new shares
$12,000/240 = $50 cost basis
What is the function of the transfer agent and registrar?
Transfer agent maintains records of ownership, cancels old issues, and issues new certificates. The registrar is outside/independent of the company and ensures there are no more shares than authorized, oversees transfer agent so to speak.
What are the steps for BOD declaring a dividend?
The board first will declare the dividend. A payment date is set for the dividend, and a record date is set. FINRA will set the ex-date for the dividend 2 business days before the record date. Remember D-E-R-P for calendar.
Why would an investor participate in a rights offering?
Preemptive rights for the investor allows an equal stake in the company even if the company issues more shares.
What are 3 options an investor has when notified of a rights offering?
Exercise the rights and purchase the stock at a discounted price. Sell the rights and get profits. Let the rights expire and lose value.
What is the time period for a subscription right and how many rights are issued?
Usually it is a 3-45 day window so the investor may decide what to do. A right is generally issued for each share of common stock outstanding.
What is the formula for cumulative rights? ex-rights?
Cum. Rights = (market price - subscription price)/# of rights to purchase 1 share + 1
Ex-rights = same formula but without the “+ 1”
If a company that has 1 million outstanding shares enters into a rights offering and wants to issue 100k of new stock, how many rights would equal 1 share?
Think in terms of ratios. 1mill/100k = 10:1
10 rights would equal 1 share of stock
What is a warrant?
Certificate that grants the owner the right to purchase the security (stock/bond) at a specific price which is usually higher than current market value.
Explain an ADR.
An American Depository Receipt shows evidence that shares of a foreign company are held on deposit at a US bank in a foreign country.
What does a REIT do?
Manages a portfolio of real estate investments and normally traded publicly. They are used to finance long term real estate projects.
How can a REIT avoid taxes?
75% of its assets invested in real estate, 75% of its income comes from rents and mortgages, and distributes 90% of its income to shareholders. (No losses passed through)
