Chapter 5 Flashcards
____________ stock is stock that was issued and repurchased by the issuing corporation.
Treasury Stock
True or False: Treasury stock has no voting rights and receives no dividends.
True
Issued stock - Treasury stock = ____________________
Outstanding Stock
The _________ date is the date by which stock must be owned to receive the dividend.
record date
The ex-dividend date occurs ___ business days ________ the record date.
2 business days before
For the exam, name the three market holidays that could impact a trade’s settlement date.
January 1, July 4, and December 25
Who are considered the owners of a corporation?
Common and Preferred Stockholders
True or False: All owners have the right to vote.
False, Preferred stockholders do not
Name two issues on which common stockholders may vote.
Board of Directors, stock splits
What voting method permits one vote for each share owned to be voted for each director?
statutory
This voting method allows stockholders to multiply the number of shares owned by the number of directorships.
Cumulative voting
True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.
True
___________ stock fluctuates with the business cycle.
Cyclical (auto companies, cement)
_________ stock pays higher than average dividends.
Income
____________ stock is resistant to recession.
Defensive Stock (utility companies)
What instruments are used to facilitate trading of foreign securities in the U.S.?
ADR (American Depository Receipts)
Warrants are a ______-term right to buy stock at a preset price.
long-term
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True
What is the longest duration for a warrant?
perpetual
May a warrant be detached and traded separately?
yes
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
short-term
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount.
Existing stockholders receive ______ right for every one share owned.
one
What is the method to calculate the number of shares that can be purchased through a rights offering?
of rights received ÷ # of rights needed to buy each additional share
Name two priorities that preferred stock has over common stock.
Order of liquidation and dividends
$______ is normally the par value for preferred stock.
$100
Describe cumulative preferred stock.
Stock that requires payment of any missing dividends before common stockholders are paid
True or False: Convertible preferred stock may be converted into a bond.
False, converted into common stock
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?
Lower, due to the added opportunity
Cash dividends received by individuals are generally taxed at a maximum rate of ____%.
15%
True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.
True
The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.
preferred and common
A corporation with less than 20% ownership in a company paying dividends may exclude ____% of the dividend from taxes.
70%
What is the tax consequence for an investor who receives a stock dividend?
none, just effects basis
Does the receipt of a stock dividend create a taxable event?
no
Joe owns 100 shares of MNO at $20 (total cost $2,000). If MNO declares a 10% stock dividend, what is Joe’s new basis?
$18.18/share
If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?
First in, first out
A client selling shares would like to determine the specific shares being sold, he should use ________________________.
specific identification
If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.
First one’s bought are sold
A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.
30 days
According to the wash sale rule, what securities are considered substantially the same?
Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option
Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe’s cost basis is:
45
Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?
yes
In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?
Change the issuer, or the coupon, or the maturity
True or False: A wash sale is triggered if the difference in a bond sold and then repurchased is accrued interest/price.
True
Define the term basis.
price paid, including all costs
If securities are inherited, a beneficiary’s holding period is automatically ____________.
long term
Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?
His basis is the market value at the time of his grandfather’s death (stepped up basis).
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
When securities are gifted, the recipient’s holding period will be _______________________.
same as donor’s
True or False: Common stockholders have the right to vote for the payment of dividends.
False
True or False: Both common and preferred stockholders are offered preemptive rights.
False, just common
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Monday, October 17 be entitled to the dividend?
No, 2 days before
XYZ’s record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?
May 1 or after
What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?
deduct or credit on taxes
A corporation with 20% or more ownership in a company paying dividends may exclude _____% of the dividend from taxes.
80%
