Chapter 8 Equity Securities: Common and Preferred Shares RQ Flashcards
Determine the investor who is most suitable for a preferred share investment.
A. An investor seeking rapid gains.
B. A conservative investor seeking tax efficient income.
C. An investor seeking mainly capital gain.
D. An investor who will need her money within a year.
B. A conservative investor seeking tax efficient income.
Preferred shares are bought largely by income-oriented investors. Conservative individual investors, seeking income, purchase preferred shares to take advantage of the previously mentioned dividend tax credit.
Identify an advantage for an investor that invests in a non-cumulative floating-rate preferred share.
A. Opportunity for tax-deferral of investment income.
B. Unpaid dividends will accumulate in arrears.
C. Investor can force the issuer to redeem the shares.
D. Protection against an increase in interest rates.
D. Protection against an increase in interest rates.
Floating-rate preferreds adjust to changing interest rates. If interest rates rise, the rate on the preferred share will adjust, and there will be little negative impact on the preferred share price.
Identify the type of preferred share risk if a preferred share does not have a retraction feature.
A. Call risk.
B. Extension risk.
C. Liquidity risk.
D. Interest rate risk.
B. Extension risk.
A preferred share that does not have a retraction feature means the issuer has the sole ability to determine when it will return the par value to investors. The issuer could in theory continue to extend the life of the preferred share indefinitely
Identify an advantage for an investor who earns preferred dividends instead of common dividends.
A. Preferred dividend payments take precedence over common dividends.
B. Preferred dividends receive a higher dividend tax credit.
C. Preferred dividends increase with good corporate earnings.
D. Preferred dividends are obligatory while common dividends are not.
A. Preferred dividend payments take precedence over common dividends. Dividends are not obligatory and are payable only if declared by the Board of Directors. If the Board omits the payment of a preferred dividend, there is very little the preferred shareholders can do about it. However, the charters of some companies provide that no dividends are paid to common shareholders until preferred shareholders have received full payment of dividends to which they are entitled.
Select the status of preferred shareholders in the event of bankruptcy or dissolution of a company.
A. Rank ahead of creditors and behind common shareholders.
B. Rank behind creditors and common shareholders.
C. Rank after creditors and before common shareholders.
D. Rank equally with common shareholders and ahead of creditors
C. Rank after creditors and before common shareholders.
Typically preferred shareholders rank after the company’s creditors and debt holders and before common shareholders.
Select the type of preferred shares that pay a fixed dividend for a pre-determined amount of time and then may pay a variable dividend.
A. Rate-reset.
B. Perpetual.
C. Preference.
D. Floating-rate.
A. Rate-reset.
Rate-reset preferred shares entitle the holder to a fixed rate dividend for a predetermined period of time after which the dividend may become a floating rate dividend.
ABC Class B shares have 1 vote per share, and ABC Class A shares have 3 votes per share. Identify the category of shares ABC Class B belong to.
A. Non-voting.
B. Multiple voting.
C. Restricted voting.
D. Subordinate voting.
D. Subordinate voting. Subordinate voting shares are shares in a company which has another class of shares which have greater voting rights on a per share basis.
Kirah owns 1,000 shares of EXY Inc. She receives a notice stating that EXY is implementing a 3:2 stock split. Calculate the number of shares Kirah will hold after the split.
A. 500
B. 667
C. 750
D. 1,500
D. 1,500
Kirah held 1,000 shares pre-split. She will receive 3 shares for every 2 that she holds. After the split, Kirah will hold: (1,000 / 2) x 3 = 1,500 shares
Jesse owns 240 shares of OOP Inc. currently trading at $1.25 with an adjusted cost base of $500. OOP implements a 1:8 reverse stock split. Calculate the number of shares Jesse will hold after the reverse stock split.
A. 30
B. 120
C. 270
D. 480
A. 30
If a reverse split of one new share for eight old were implemented after shareholder approval, a shareholder owning 240 shares of stock would own only 30 new shares after the split (240 / 8=30).
Jarod is planning on buying 1,000 shares of WIT Inc. On Monday May 3rd, he reads that WIT just announced a dividend with a record date of the following Monday, May 10. Jarod is hoping to earn capital gains from this investment rather than dividends. When should he buy the shares?
A. Tuesday, May 4.
B. Wednesday, May 5.
C. Thursday, May 6.
D. Friday, May 7.
D. Friday, May 7.
To determine whether the seller or the buyer is entitled to the dividend when a sale takes place around the time of the dividend payment, the stock exchange names an ex-dividend date. On and after this date, the stock sells ex-dividend; that is, the seller retains the dividend and the buyer is not entitled to it. The ex-dividend date is set at the one business day before the dividend record date. Since trades settle on the second business day after a trade, a purchaser of shares one business day before the record date would not have the trade settle until the day after the record date, and would therefore not be a shareholder of record for purposes of receiving the dividend. If Jarod does not want the dividend, he should buy the shares on the first ex-dividend day – Friday as he will not own them until the following Tuesday and will not be eligible for the dividend. Note that the day the stock starts to trade ex-dividend, the price of the stock adjusts downward by the amount of the dividend per share to reflect that those now buying the stock will not be entitled to a dividend payout. For example, if a company has announced that they will pay a dividend of $1 and the shares are trading at $25 on the last cum-dividend date, on the next business day, which is the first ex-dividend date, the shares will likely open lower by $1 and start trading at $24 per share. By waiting until the ex-dividend date to purchase shares, the investor can avoid the receipt of the dividend and avoid the price drop of the stock. Keep in mind that weekends are not considered business days and therefore do not factor into your counting.
Identify the indicator that is price-weighted and is composed of equally weighted items.
A. Benchmark.
B. Stock average.
C. Stock index.
D. Value-weighting.
B. Stock average.
A stock average is the arithmetic average of the current prices of a group of stocks. It is price-weighted, and all of the stocks are equally weighted, i.e., no specific weights are applied when constructing the average.
Riyad describes to his Investment Advisor preferred shares that he just inherited. The preferred share has a fixed dividend rate but the board of directors skipped the last three quarterly payments. Riyad tells his advisor that according to the terms of the issue, the dividends will not be payable, and he is thinking of using one of the other features to force the issuer to buy the shares from him so he can be rid of the investment. What two features is Riyad referring to?
A. Non-cumulative and retractable.
B. Cumulative and retractable.
C. Non-cumulative and callable.
D. Cumulative and restricted.
A. Non-cumulative and retractable.
A preferred share that skips dividend payments and is not obligated to pay those skipped payments in the future is a non-cumulative share. A preferred share that allows the owner to force the redemption of the shares is a retractable share.
ABC’s stock quotation for May 31 is shown in the table below. Determine the closing price from the previous day, May 30.
ABC Ltd. Stock Quotation
52 weeks
High Low Stock Div. High Low Close Change Volume
24.65 19.18 ABC .10 20.38 19.87 20.21 -.45 8,500
A. $19.76
B. $20.32
C. $20.66
D. $20.83
The quotation for ABC shows that for the trading day that ended May 31, the change in price was decrease of $0.45. Therefore, the previous day’s closing price must have been $0.45 higher than the close on May 31. The previous day’s closing price must have been $20.21 + $0.45 = $20.66
Eduardo’s Investment Advisor suggests that instead of receiving dividends in cash from his DEF common shares Eduardo could instead have the dividends redirected to purchase additional DEF common shares. Identify the type of arrangement Eduardo’s IA is discussing.
A. Stock dividend.
B. Dividend reinvestment plan.
C. Fixed-reset.
D. Cumulative arrears.
B. Dividend reinvestment plan.
Some major companies give their preferred and common shareholders the option of participating in an automatic dividend reinvestment plan. In such a plan, the company diverts the shareholders’ dividends to the purchase of additional shares of the company.
What term best describes preferred share issues that are equal in asset and dividend entitlement?
A. Subordinate.
B. Preference as to assets.
C. Cumulative feature.
D. Pari Passu.
D. Pari Passu. When a company issues more than one class of preferred stock, and those issues are equal in terms of asset and dividend entitlement, the shares are described as ranking pari passu.
