Chapter 6: Stocks Flashcards
Adjustable rate preferred stock has a dividend that adjusts according to _________
Prevailing interest rates
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
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
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
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.
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
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
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
B. 4 shares
- Conversion ratio = par value / conversion price
- Conversion ratio = $100 / $25 = 4 shares
The amount over par value that an issuer receives for selling stock is called ________.
Paid in capital