Chapter 6: Stocks Flashcards

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1
Q

Adjustable rate preferred stock has a dividend that adjusts according to _________

A

Prevailing interest rates

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2
Q

ABC is issuing new shares through a rights offering. If a new share costs $16 plus 4 rights and the stock trades at $20, what is the theoretical value of a right prior to the ex date?

  • A. $0.20
  • B. $0.80
  • C. $1.00
  • D. $1.20
A

B. $0.80

  • The stock is trading with (cum) rights so you need to use the cum rights formula:
  • (M - S) / (N + 1)
  • ($20 - $16) / ($4 + $1)
  • $4/$5 = $0.80
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3
Q

ABC is offering 2,000,000 shares of its common stock to the public; 1,500,000 shares are authorized but previously unissued, and insiders of the company are selling the the other 500,000 shares. Which of the following are TRUE about this offering?

  • I. the EPS of ABC will increase
  • II. the EPS of ABC will decrease
  • III. the number of outstanding shares will increase by 500,000
  • IV. the number of outstanding shares will increase by 1,500,000
  • A. I and III
  • B. I and IV
  • C. II and III
  • D. II and IV
A

D. II and IV

  • The offering is a combined, or split, offering.
  • The 1.5 million shares previously issued are a primary offering, and the 500k shares are a secondary offering.
  • When considering the earnings per share will increase or decrease, you can assume the company earns the same amount of money.
  • Now the same amount of money will be divided among 1.5 million more shares.
  • Therefore, you can deduce EPS will decrease, not increase.
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4
Q

A client owns 400 shares of ABC common stock at $33 per share. ABC previously declared a 10% stock dividend. Assuming no change in the market price of ABC prior to the dividend, what is the client’s position after the dividend?

  • A. 400 shares at $30
  • B. 440 shares at $33
  • C. 400 shares at $36.30
  • D. 440 shares at $30
A

D. 440 shares at $30

  • The client’s overall value of investment doesnt change. The client gets a 10% dividend, so he gets 10% more shares.
  • 400 + 10% [40] = 440 new number of shares
  • Overall value of investment = 400 * $33 = $13,200
  • $13,200/440 = $30 per share
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5
Q

If ABC preferred stock ($100 par) is convertible into common stock for $25, what is the conversion ratio?

  • A. 1 share
  • B. 4 shares
  • C. 25 shares
  • D. 100 shares
A

B. 4 shares

  • Conversion ratio = par value / conversion price
  • Conversion ratio = $100 / $25 = 4 shares
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6
Q

The amount over par value that an issuer receives for selling stock is called ________.

A

Paid in capital

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