Chapter 1: Securities Markets, Investment Securities & Economic Factors Flashcards
Common stock is classified in these 4 ways:
- Authorized shares
- Issued stock
- Treasury stock
- Outstanding stock
What are the distinguishing factors of a Treasury stock?
Was outstanding stock before it was repurchased by the issuer
Has no voting rights
Does not receive dividends
Can be reissued or retired
This preferred stock has no special features
Straight preferred (noncumulative)
This preferred stock pays might pay a dividend that is higher than printed on the certificate, dividends must be paid prior to paying a common dividend and may cost extra (less dividend income) because of it’s feature
Cumulative preferred
This preferred stock is most influenced by the price of an issuer’s common stock
Convertible preferred
Because convertible preferred shares can be exchanged for common shares, its price can be closely linked to the price of the issuer’s common and is less influenced by changes in interest rates
This preferred stock the might pay a dividend that is higher than that printed on the certificate. Owners receive shares of corporate profits after all dividends and interest due to other securities are paid. Common dividend must be declared first.
Participating preferred
Name 3 features of participating preferred stock
- This preferred stock the might pay a dividend that is higher than that printed on the certificate.
- Owners receive shares of corporate profits after all dividends and interest due to other securities are paid.
- Common dividend must be declared first.
This preferred stock issuer’s can buy back from investors at a stated price after a specific date?
Callable preferred
Which two preferred stocks might pay a dividend that is higher than that printed on the certificate?
Cumulative preferred and Participating preferred
Cumulative preferred might pay a dividend in arrears in addition to the fixed dividend. Participating preferred might pay part of the common dividend, over and above the fixed dividend.
Which preferred stock issuers call securities when interest rates are falling and replace them with securities that have a lower fixed rate obligation?
Callable preferred
Which preferred stock is tied to the rates of other interest rate benchmarks, such as a treasury bill and money market rates, and can be adjusted as often as semiannually?
Adjustable-rate preferred
Adjustable-rate preferred stocks are tied to what rates?
Other interest rate benchmarks, such as a treasury bill and money market rates
How frequently can adjustable-rate preferred stocks be adjusted?
As often as semiannually
In which of the following ways does preferred stock differ from common stock as an investment?
a. Lower dividends
b. greater sensitivity to interest rate fluctuation
c. lower priority of dividend payment
d. greater voting rights
b. greater sensitivity to interest rate fluctuation
As a fixed income security, preferred stock has a markedly grater price sensitivity to interest rates than does common stock.
Which types of preferred stock typically has the highest stated rate of dividend (all other factors being equal?)
a. participating
b. straight
c. cumulative
d. callable
d. callable
When the stock is called, dividend payments are no longer made. To compensate for that possibility, the issuer must pay a higher dividend.
This type of preferred stock - dividends are no longer made when the stock is called. To compensate for that possibility, the issuer must pay a higher dividend.
Callable preferred
Would straight or cumulative have a higher stated rate?
Cumulative preferred is safer, and there is always a risk-reward trade-off. Because straight preferred has no special features, it will pay a higher stated rate of dividend.
How do you calculate a dividend yield/current yield?
divide the annual dividend by the current price of the stock
This type of dividend is not taxed when received. No tax consequences are incurred until the investor chooses to liquidate the shares and realize the gains and losses.
Stock dividends
This dividend is paid by check or brokerage account
Cash dividends
This dividend is taxed as income in the year received
Cash dividends
Name the 3 types of dividend options
- Cash dividends
- Stock dividends
- Stock splits
This type of dividend changes the number of outstanding stock shares by means of a split
Stock split dividend
This type of dividend must have shareholder approval before changing the trading characteristics
Stock split dividend
This type of dividend keeps the company’s market value the same, but the stock market price per share declines
Stock dividend
Stock dividends are typical of what type of companies?
Growth companies that invest cash resources in research and development
True or False:
Dividends are guaranteed to shareholders.
FALSE.
True or False:
Dividends are paid automatically each quarter
FALSE
A company’s board of directors (BOD) votes when to make these distributions and they are not always guaranteed.
If XYZ Corp did a 2-for-1 stock split, an investor who owned 100 XYZ shares worth $20 per share before the split would own 200 shares worth how much per share?
$10
The total value of the outstanding stock must be the same before and after a split.
If XYZ Corp did a 1-for-2 stock split, an investor with 100 shares worth $20 per share before the split would own 50 shares worth how much per share?
$40
Although the individual share value changes as result of the split, the total value of the stock remains the same.
RST stock has a current market value of $50. Total dividends paid during the year were $5. What is the dividend yield?
The solution is found by dividing $5 by $50. The yield is 10%.
RST stock has a current market value of $50. The most recent quarterly dividend paid was $1.25. What is the dividend yield?
The solution is found by annualizing the quarterly dividend (multiplying by 4) FIRST. $1.25 x 4 = $5.
$5 divided by $50 = 10% dividend yield.
** Remember to use the ANNUAL dividends in calculating yield.
What is the priority of dividend payments made?
- Dividends in arrears paid to cumulative shares
- Stated dividends paid to all preferred shares
- Common dividend
