Chapter 11 Part 2

Question 1

Rights may be freely

Answer 1

transferred

Question 2

Dividends are usually paid

Answer 2

quarterly and are taxable in the year received

Question 3

record date

Answer 3

The board will also state the date on which the shareholder must own the stock to receive the dividend

Question 4

stock dividend. The new shares must be

Answer 4

authorized and entered on the company’s financial statements. An investor who owns the company’s stock on a specific date would receive additional shares based on the declared percentage.

Question 5

Stock dividends are not taxable but the stockholder must

Answer 5

adjust her cost basis per share

Question 6

A forward stock split is a situation where a company

Answer 6

issues more shares at a certain ratio to its existing stock (2-for-l, 3-for-2, etc.). The par value and the market price of the stock are adjusted accordingly. Although the markets tend to react favorably to a stock split, there is no change in the value of the investor’s holdings since he will own more shares that have a lower market price

Question 7

In a reverse stock split, the company

Answer 7

“reduces the number of its outstanding shares and the price increases proportionally. For example, if a company had 10,000 shares trading at $1 a share and split its stock l-for-5, each stockholder would be left with one share for each five shares currently owned. However, the price per share would be adjusted by the same ratio. The company would have 2,000 shares
outstanding with a more marketable price of $5 a share”

Question 8

Unlike cash dividends, stock dividends, stock splits, and reverse stock splits are not taxable upon receipt. Taxes are not due until

Answer 8

the shares are sold

Question 9

Preferred stock is usually issued by

Answer 9

established companies that have already issued common stock. It is intended for investors who are more interested in income than capital appreciation-the same type or investors who might otherwise purchase certain types of debt securities

Question 10

Preferred stockholders do not have

Answer 10

voting rights

Question 11

Preferred stock is normally issued with a

Answer 11

par value of $100, which corresponds to its initial market price, and always carries a specified dividend. For example, if a preferred stock has a dividend of a 5%, it is expected to yield a dividend of $5 annually (5% of the par value of $100). The dividend rate for some preferred stock is stated in a dollar amount, which means that a $3 preferred stock would be expected to pay a $3 annual dividend

Question 12

The dividend rate of preferred stock represents only the

Answer 12

maximum amount that the preferred stockholders will receive. If the company cannot financially support the dividend, the board of directors may choose to pay less than the full amount or they may choose not to pay the current dividend.

Question 13

There are two basic categories of preferred stock

Answer 13

cumulative and noncumulative

Question 14

If the preferred stock is cumulative, then the company must

Answer 14

pay all the preferred dividends, including the dividends in arrears, before shareholders of commom stock can receive any dividends. Dividends in arrears are dividends due to cumulative preferred shareholders that have not yet been paid

Question 15

If preferred stock is noncumulative, dividends

Answer 15

in arrears are not paid to stockholders. Only the current dividend needs to be paid before common stock dividends may be paid. However, if a specified number of noncumulative dividends are missed, noncumulative preferred stockholders may be given voting rights, something that preferred stock docs not normally have

Question 16

The investor who purchases participating preferred stock receives his

Answer 16

stipulated dividend and has the right to receive additional distributions of specified earnings. The additional income is usually tied to distributions made to the common stockholders

Question 17

Corporations rarely issue participating preferred stock. It is primarily issued when the company wants to

Answer 17

attract additional investors. Most preferred stock is nonparticipating

Question 18

A company that issues callable preferred stock has the right to

Answer 18

repurchase the stock (to call it back) at a specified price some time in the future. Usually, the call price is higher than the stock’s par value to induce investors to buy the stock

Question 19

Investors who purchase convertible preferred stock can

Answer 19

exchange their shares for common stock at a specified price, at their discretion. The par value of preferred stock exchanged for each share of coommon is called the conversion price. For example if a share of preferred has $100 par value and a conversion price of $50, the investor will receive one share of common for each $50 par value of preferred converted. In this case, that would be two shares of common for each share of preferred converted. The number of shares of common stock that the investor can receive for each share of preferred is called the conversion ratio

Question 20

You can determine the conversion ratio by dividing the

Answer 20

par value of the preferred stock ($100) by the conversion price. For example, if the conversion price is $25, then the conversion ratio is 4 to I ($100 par value divided by $25). The preferred stockholder would receive four shares of common stock for each share of preferred stock converted