Chapter 3

Question 1

Treasury Stock

Answer 1

If a corporation chooses to repurchase some of its outstanding shares
— Treasury stock is previously issued shares that are no longer outstanding
— do not receive dividends
— have no voting rights

Treasury — Treasury = Outstanding Shares

Question 2

Voting Methods

Answer 2

1. Statutory Voting — benefits larger shareholders
2. Cumulative Voting — most beneficial for small shareholders

Total number of votes will be the same for both

Question 3

Rule 144

Answer 3

Permits the sale of restricted and controlled stock

Question 4

Restricted Stock

Answer 4

— unregistered stock that is acquired through a private placement or as compensation for senior executives of an issuer
— mandatory six month holding period

Question 5

American Depository Receipts (ADRs)

Answer 5

— facilitates the trading of foreign stock in US Markets
— priced in US dollar
— pay dividends in US dollars

1. Sponsored
   — issued in corporation with the foreign company.
   — may trade on US Exchanges (Nasdaq or NYSE)
   and
2. Unsponsored
   — issued without involvement of the foreign company
   — generally trade in OTC market (OTCBB or OTC Pink Sheet)

Question 6

What type of securities are acquired through a private placement?

Answer 6

Restricted Securities — are acquired through a private placement

Question 7

What is the holding period for restricted stock and control stock?

Answer 7

Restricted Stock — must be held for 6 months

Control Stock — there is no holding period

Question 8

How many shares can be sold when filing form 144?

Answer 8

When Form 144 is filed, the maximum sale allowed is the greater of 1% of the outstanding shares or the average weekly trading volume over the previous 4 weeks

Question 9

Blue Chip

Answer 9

— stock of strong, well-established, dividend paying companies

Question 10

Growth Stocks

Answer 10

—Stocks of companies with sales and earnings that are expanding faster than the economy
—pay little (if any) dividends

Question 11

Income Stock

Answer 11

Stock of companies that pay higher than average dividends in relation to market price

Question 12

Defensive Stock

Answer 12

Stock of companies that are resistant to recession (ex: utilities, tobacco, healthcare, cosmetics)

Question 13

Cyclical Stocks

Answer 13

Stock of companies whose value fluctuates with the business cycle (ex: household appliances, automobiles)

Question 14

Preferred Stock

Answer 14

— designed to provide returns that are comparable to bonds
— DOES NOT HAVE VOTING RIGHTS only Common Stock does
— pays a state DIVIDEND (not guaranteed)

1. Non-cumulative
   — investor is only entitled to the current dividend
   — the investor is NOT entitled to unpaid dividend
2. Cumulative
   — investor is entitled to unpaid dividends before common stock dividends may be paid
3. Callable
   — issuer has the ability to repurchase the stock
   — typically repurchased at a premium over par value
4. Participating
   —investor may receive additional dividends based on the company’s profits
5. Cumulative

Question 15

Participating Preffered stock

Answer 15

— allows stockholders to share in dividends paid to common stockholders

Question 16

Callable Preffered Stock

Answer 16

— permits the issuer to remove the stock from the market

Question 17

Cumulative Preferred Stock

Answer 17

— makes up for dividends that have not been paid in previous years

Question 18

Convertible Preffered Stock

Answer 18

— can be exchanged for common stock