Chpt 1 Equity Securities

Question 1

What are the four classifications of common stock?

Answer 1

Authorized stock
Issued Stock
Outstanding Stock
Treasury Stock

Question 2

Which valuation method of common stock has an arbitrary value?

Answer 2

Par Value

Question 3

Which valuation method of common stock is the current liquidation value of a share?

Answer 3

Book Value

Question 4

Which valuation method of common stock is influenced by supply and demand?

Answer 4

Market Value

Question 5

Issued stock - Treasury Stock = ?

Answer 5

Outstanding Stock

Question 6

What classification of common stock does NOT receive either voting rights nor dividends?

Answer 6

Treasury Stock

Question 7

What type of voting benefits larger investors?

Answer 7

Statutory Voting

Question 8

What type of voting benefits smaller investors?

Answer 8

Cumulative Voting

Question 9

Do common stockholders vote on issuance of additional securities like common stock, preferred stock, and convertible securities?

Answer 9

Yes

Question 10

What does preemptive rights (also known as antidilution provision) allow the stockholder to achieve?

Answer 10

Gives investors the right to maintain a proportionate interest (“same percentage”) in a company’s stock

Question 11

Why are common stockholders known as the most junior security?

Answer 11

Common Stockholders are at the bottom of the liquidation priority list

Question 12

Describe the percentage change in price and quantity during a forward split.

Answer 12

The percentage decrease in price will always be less than the percentage increase in shares. Ex. 2:1 split, the # shares doubles (a 100% increase) whereas the price of the stock is halved (50% decrease).

Question 13

What type of split increases the number of shares and lessen the value?

Answer 13

Forward Split

Question 14

What type of split decreases the number of shares and increases the value?

Answer 14

Reverse split

Question 15

What stays the same during a forward or reverse split?

Answer 15

total ownership interest

Question 16

A forward split (increase/decrease) earnings per share and a reverse split (increase/decrease) earnings per share.

Answer 16

Forward split decreases earnings per share

Reverse split increases earnings per share

Question 17

What are two benefits of being a common stockholder?

Answer 17

Growth and Income (i.e. dividends)

Question 18

What type of dividend is likely to be paid by companies that wish to reinvest earnings for R&D; Ex. Tech companies, aggressive growth companies, and new companies?

Answer 18

Stock dividends

Question 19

What is the least common form of dividend payment?

Answer 19

Property dividends

Question 20

What percentage do corporations receive exclusion on dividend income?

Answer 20

70%

Question 21

What are three risks of owning stock?

Answer 21

Market Risk
Decreased or no Income
Low priority at dissolution

Question 22

Describe the difference a long and short seller may experience.

Answer 22

A long investor’s losses are limited to his total investment in a stock. A short seller’s losses are theoretically unlimited because there is no limit to how high a stock’s price may climb.

Question 23

A preferred stock’s price fluctuates in relation to what?

Answer 23

interest rates

Question 24

Describe preferred stockholders voting rights.

Answer 24

They do not have voting rights.

Question 25

How often do preferred stockholders receive dividends?

Answer 25

Preferred stock dividends (like common stock) are not guaranteed. While they are often paid semiannually, they can be paid on any schedule that is specified in each preferred class prospectus. Payment would have to be approved by BOD.