Chapter 5

Question 1

____________ stock is stock that was issued and repurchased by the issuing corporation.

Answer 1

Treasury Stock

Question 2

True or False: Treasury stock has no voting rights and receives no dividends.

Answer 2

True

Question 3

Issued stock - Treasury stock = ____________________

Answer 3

Outstanding Stock

Question 4

The _________ date is the date by which stock must be owned to receive the dividend.

Answer 4

record date

Question 5

The ex-dividend date occurs ___ business days ________ the record date.

Answer 5

2 business days before

Question 6

For the exam, name the three market holidays that could impact a trade’s settlement date.

Answer 6

January 1, July 4, and December 25

Question 7

Who are considered the owners of a corporation?

Answer 7

Common and Preferred Stockholders

Question 8

True or False: All owners have the right to vote.

Answer 8

False, Preferred stockholders do not

Question 9

Name two issues on which common stockholders may vote.

Answer 9

Board of Directors, stock splits

Question 10

What voting method permits one vote for each share owned to be voted for each director?

Answer 10

statutory

Question 11

This voting method allows stockholders to multiply the number of shares owned by the number of directorships.

Answer 11

Cumulative voting

Question 12

True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.

Answer 12

True

Question 13

___________ stock fluctuates with the business cycle.

Answer 13

Cyclical (auto companies, cement)

Question 14

_________ stock pays higher than average dividends.

Answer 14

Income

Question 15

____________ stock is resistant to recession.

Answer 15

Defensive Stock (utility companies)

Question 16

What instruments are used to facilitate trading of foreign securities in the U.S.?

Answer 16

ADR (American Depository Receipts)

Question 17

Warrants are a ______-term right to buy stock at a preset price.

Answer 17

long-term

Question 18

True or False: Warrants are generally attached to the delivery of another security (stock or bond).

Answer 18

True

Question 19

What is the longest duration for a warrant?

Answer 19

perpetual

Question 20

May a warrant be detached and traded separately?

Answer 20

yes

Question 21

Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.

Answer 21

short-term

Question 22

What is the advantage existing stockholders receive through rights offerings?

Answer 22

The ability to maintain their percentage of ownership and buy additional shares at a discount.

Question 23

Existing stockholders receive ______ right for every one share owned.

Answer 23

one

Question 24

What is the method to calculate the number of shares that can be purchased through a rights offering?

Answer 24

of rights received ÷ # of rights needed to buy each additional share

Question 25

Name two priorities that preferred stock has over common stock.

Answer 25

Order of liquidation and dividends

Question 26

$______ is normally the par value for preferred stock.

Answer 26

$100

Question 27

Describe cumulative preferred stock.

Answer 27

Stock that requires payment of any missing dividends before common stockholders are paid

Question 28

True or False: Convertible preferred stock may be converted into a bond.

Answer 28

False, converted into common stock

Question 29

The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________

Answer 29

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)

Question 30

What is a derivative?

Answer 30

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages

Question 31

When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?

Answer 31

Lower, due to the added opportunity

Question 32

Cash dividends received by individuals are generally taxed at a maximum rate of ____%.

Answer 32

15%

Question 33

True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.

Answer 33

True

Question 34

The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.

Answer 34

preferred and common

Question 35

A corporation with less than 20% ownership in a company paying dividends may exclude ____% of the dividend from taxes.

Answer 35

70%

Question 36

What is the tax consequence for an investor who receives a stock dividend?

Answer 36

none, just effects basis

Question 37

Does the receipt of a stock dividend create a taxable event?

Answer 37

no

Question 38

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?

Answer 38

$18.18/share

Question 39

If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?

Answer 39

First in, first out

Question 40

A client selling shares would like to determine the specific shares being sold, he should use ________________________.

Answer 40

specific identification

Question 41

If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.

Answer 41

First one's bought are sold

Question 42

A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.

Answer 42

30 days

Question 43

According to the wash sale rule, what securities are considered substantially the same?

Answer 43

Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option

Question 44

Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe's cost basis is:

Answer 44

45

Question 45

Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?

Answer 45

yes

Question 46

In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?

Answer 46

Change the issuer, or the coupon, or the maturity

Question 47

True or False: A wash sale is triggered if the difference in a bond sold and then repurchased is accrued interest/price.

Answer 47

True

Question 48

Define the term basis.

Answer 48

price paid, including all costs

Question 49

If securities are inherited, a beneficiary's holding period is automatically ____________.

Answer 49

long term

Question 50

Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?

Answer 50

His basis is the market value at the time of his grandfather's death (stepped up basis).

Question 51

How is basis determined for the recipient of gifted securities?

Answer 51

Basis will be the donor's cost or market value, whichever is lower.

Question 52

When securities are gifted, the recipient's holding period will be _______________________.

Answer 52

same as donor's

Question 53

True or False: Common stockholders have the right to vote for the payment of dividends.

Answer 53

False

Question 54

True or False: Both common and preferred stockholders are offered preemptive rights.

Answer 54

False, just common

Question 55

If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?

Answer 55

No

Question 56

ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Monday, October 17 be entitled to the dividend?

Answer 56

No, 2 days before

Question 57

XYZ's record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?

Answer 57

May 1 or after

Question 58

What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?

Answer 58

deduct or credit on taxes

Question 59

A corporation with 20% or more ownership in a company paying dividends may exclude _____% of the dividend from taxes.

Answer 59

80%