Common Stock Flashcards
What term would apply to Authorized Stock?
A. Issued
B. Outstanding
C. Voting
D. Par Value
The best answer is D.
Authorized stock is the total number of shares that the company is “authorized” to sell.
Issued stock is the number of shares that have actually been sold to the public out of the authorized total.
Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock – Repurchased Shares (such as shares repurchased for Treasury). The only stock that votes and that receives dividends is Outstanding shares.
Par value is the term that applies to all stock, whether it is Authorized, Issued, or Outstanding.
Which term describes common stock?
A. negotiable
B. redeemable
C. non-negotiable
D. callable
The best answer is A.
Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.
The market price of common stock will be influenced by which of the following?
A. Expectations for future dividend payouts by the company
B. Number of Board of Directors
C. Book value per share
D. Par value per share
The best answer is A.
The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the number of Board of Director seats have no direct bearing on the market price of the common.
The definition of Treasury Stock is:
A. issued stock minus authorized stock
B. issued stock minus outstanding stock
C. authorized stock minus outstanding stock
D. outstanding stock minus authorized stock
The best answer is B.
Treasury stock consists of issued shares that have been repurchased by the corporation. Repurchased shares are no longer “outstanding,” so the definition of Treasury Stock is issued shares minus outstanding shares.
All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT:
A. the number of outstanding shares is reduced
B. the earnings per share is increased
C. the market price of the stock will increase
D. the number of authorized shares will be reduced
The best answer is D.
Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock’s price in the market.
The purchase of Treasury Stock has no effect on authorized shares. This is the legal amount of shares that the company is authorized to sell, established in the company’s corporate charter.
If a company repurchases its own common shares, the number of:
A. outstanding shares will decrease
B. outstanding shares will increase
C. issued shares will decrease
D. unissued shares will increase
The best answer is A.
If a company repurchases shares, the number of outstanding shares decreases.
A corporation has issued 100,000,000 shares of common stock at $1 par. The corporation has 25,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is:
A. $12,500,000
B. $25,000,000
C. $75,000,000
D. $100,000,000
The best answer is C.
Outstanding stock is: Issued stock (100,000,000 shares) minus Treasury stock (25,000,000 shares) = 75,000,000 shares outstanding at $1 par = $75,000,000.
Common dividends are paid:
A. quarterly on issued shares
B. quarterly on outstanding shares
C. semi-annually on issued shares
D. semi-annually on outstanding shares
The best answer is B.
Common dividends are usually declared and paid quarterly. Dividends are only paid on outstanding shares - defined as issued shares minus Treasury stock.
All of the following are methods of dividend payment EXCEPT:
A. cash
B. stock
C. rights
D. product
The best answer is C.
The distribution of “rights” is not a dividend. Rather, it is the “pre-emptive” right of all shareholders to maintain proportionate ownership if the corporation wishes to issue additional shares. The corporation must distribute rights to existing shareholders if it wishes to sell new common shares.
Dividend distributions, on the other hand, are voluntary payments made by the corporation to its shareholders. The amount and form of payment are determined by the Board of Directors.
Dividend payments can take the form of cash; stock dividends; or product dividends. For example, in years past, Procter and Gamble would send a “variety pack” of its products to shareholders in addition to the regular cash dividend. Product dividends are no longer popular, since they are taxable to the shareholder as is any dividend, and the owner would rather receive cash.
A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company’s annual meeting. This is called (a):
A. discretionary authority
B. voting trust
C. proxy
D. trading authorization
The best answer is C.
When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to “stand in” and cast that shareholder’s votes as directed. This is called a “proxy,” where the individual granted the power of attorney acts as the shareholder’s proxy. The “caretaker” wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder’s interests, so this person could be viewed as a caretaker.
Voting of the common stockholder is required for all of the following EXCEPT:
A. when a corporation declares a stock split
B. when a corporation declares a stock dividend
C. when a corporation wishes to issue convertible securities
D. deciding whether to accept a tender offer for the company’s shares
The best answer is B.
Dividend decisions are made by the Board of Directors - no shareholder approval is required. This is true whether a cash or stock dividend is being declared. Changes in the equity capitalization of a company require shareholder approval. A stock split changes par value per share, which requires a shareholder vote. The issuance of convertible securities (which can be converted to equity) is potentially dilutive to the existing common shareholders. They must vote to permit this.
A tender offer is when someone outside the company makes an offer to the existing shareholders to buy their shares, typically at a premium to the current market price. The shareholder can choose to tender or not. If the shareholder chooses to tender, he or she is “voting” to sell the shares to the maker of the offer.
Stockholder approval would not be needed if a corporation wishes to:
A. pay a cash dividend
B. split its stock 2 for 1
C. repurchase shares for its Treasury
D. issue non-convertible securities
The best answer is C.
The repurchase of shares for Treasury will boost earnings per share, because there will be fewer shares outstanding. This boosts the value of the existing common shares, so no shareholder approval is required. This is a decision that is made solely by the Board of Directors.
Stockholder approval is needed for a stock split, because it changes the par value of the stock. The State in which the company is incorporated typically requires shareholder approval of a par value change. In contrast, dividend decisions, either in cash or stock, do not require shareholder approval because they are “paid” out of retained earnings and do not affect par value per share. They are made solely by the Board of Directors of the company.
The issuance of non-convertible securities is not potentially dilutive and does not require shareholder approval. In contrast, the issuance of convertible securities requires shareholder approval because it is potentially dilutive (if the securities are converted, there will be more common shares outstanding, and earnings per common share will fall).
An investor has 500 shares and is voting for 3 open board seats. Which statement is correct if the election employs the statutory voting method?
A. Statutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 500 votes for a favored director.
B. Statutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director.
C. Statutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 500 votes for a favored
D. Statutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director.
The best answer is A.
Statutory voting is also know as proportionate voting. Under the statutory method, the number of shares held (500) is the number of votes that the shareholder can apply to each directorship.
Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships (3 x 500) and apply them to favored individuals. Cumulative voting gives the shareholders disproportionate voting weight as compared to statutory voting and is considered to be an advantage for the small investor.
Which statements are TRUE when comparing statutory versus cumulative voting?
I Cumulative voting is considered to be an advantage for the small investor
II Statutory voting is considered to be an advantage for the small investor
III Cumulative voting allows for disproportionate voting weight to be placed on selected directors
IV Statutory voting allows for disproportionate voting weight to be placed on selected directors
A. I and III
B. I and IV
C. II and III
D. II and IV
The best answer is A.
Under “cumulative” voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. This is why cumulative voting is considered an advantage for the small investor. With statutory voting, one cannot accumulate votes. Under this method, each shareholder can only cast as many votes as he or she has shares for each directorship.
In a corporate liquidation, common stockholders are paid:
A. before bondholders and preferred stockholders
B. after bondholders and preferred stockholders
C. after bondholders but before preferred stockholders
D. before all creditors
The best answer is B.
In a liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.
In a corporate liquidation, the last to get paid is:
A. Unpaid wages and taxes
B. Bondholders
C. Preferred stockholders
D. Common stockholders
The best answer is D.
In a corporate liquidation, common stockholders are paid after everyone else.
All of the following actions will dilute shareholders’ equity EXCEPT:
A. payment of a stock dividend
B. conversion of convertible preferred stock
C. exercise of stock options granted to officers
D. issuance of additional common shares
The best answer is A.
Dilution of an individual stockholder’s equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. However, in total, the shareholder has the same percentage interest in the corporation.
If the holders of convertible securities convert, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity.
Similarly, if the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their “pre-emptive” rights.
Finally, if officers are granted stock options, their exercise of those options results in the issuance of additional common shares, diluting existing shareholders’ equity.
All of the following are rights of a common shareholder EXCEPT the:
A. right to vote
B. right to receive a dividend
C. right to manage
D. right to transfer shares
The best answer is C.
The common shareholder does not manage the company - this is the domain of the Board of Directors and corporate officers. The common shareholder does have the right to vote, receive a dividend, and to sell his shares.
Common stockholders have which of the following “rights”?
A. Right to vote for the Board of Directors
B. Right to vote for the annual dividend rate
C. Pre-emptive right
D. Rights to corporate assets upon dissolution
The best answer is D.
Common shareholders do not set the dividend rate - this decision is made by the Board of Directors of the company. Common shareholders do have the right to vote for the Board of Directors; the pre-emptive right to any new common shares that the company may issue so that their ownership stake would not be diluted by such an action; and the right to remaining corporate assets upon dissolution.
Which of the following is the right of a common shareholder?
A. Right to manage
B. Right to interest
C. Right to receive a dividend
D. Right to vote on the payment of dividends
The best answer is C.
The common shareholder does not manage the company! She has the right to receive a dividend (if declared and paid) but NOT the right to vote on whether or not dividends will be paid. Interest is paid to bondholders; not stockholders.
Common stockholders have all of the following rights EXCEPT:
A. voting for the Board of Directors
B. transferring share ownership without restriction by the issuer
C. inspecting minutes of executive meetings
D. maintaining proportionate ownership in the company
The best answer is C.
Common stockholders do not get to inspect the minutes of executive meetings. They do have the right to vote; to sell their shares without issuer restriction; and to maintain proportionate ownership in the company.
Common shareholders have all of the following rights EXCEPT the right to:
A. receive a dividend if one is declared by the Board of Directors
B. remaining assets in a liquidation of the company after all other claimants
C. inspect the minutes of meetings of the Board of Directors
D. vote for each individual proposed for election to the Board of Directors
The best answer is C.
Common stockholders have the right to vote for the Board of Directors, but they do not have the right to inspect the minutes of Board of Directors meetings. They do have the right to “inspect the books and records” of the company - but this right is limited to inspection of financial reports. The shareholder has the right to receive a dividend if declared by the Board; and is last in line for receiving remaining assets of the company if it liquidates.
PDQ Company $10 par common stock is currently trading at $40. PDQ is currently paying a common dividend of $.20 per share quarterly. The current yield of PDQ stock is:
A. 0.5%
B. 2.0%
C. 5.0%
D. 8.0%
The best answer is B.
Yields are based on annual return. The formula for current yield is:
Annual Income
———————– = Current Yield
Market Price
$.80
——— = 2.00%
$40
The Price / Earnings Ratio is a measure of:
A. profitability
B. valuation
C. volatility
D. velocity
The best answer is B.
The P/E ratio of a company is a valuation measure. Companies with high P/E ratios are being valued very highly by the market; while those with low P/E ratios are being valued at a low level. Rapidly growing companies tend to have high P/E ratios, while mature companies tend to have low P/E ratios.
To determine if a stock appears to be overpriced, what would be examined?
A. The company’s Earnings Per Share
B. The company’s Dividend Payout Ratio
C. The company’s Price to Earnings Ratio
D. The company’s Debt to Equity Ratio
The best answer is C.
The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued.
DUPA Corp. has a Price/Earnings multiple of 20 and a market price of $45. What was the corporation’s Earnings Per Common Share?
A. $.225
B. $.44
C. $2.25
D. $4.44
The best answer is C.
The Earnings per Share can be found by taking the:
Market Price
—————— = Earnings per Share
Multiple
45
—– = $2.25
20
A company’s common stock is selling in the market at a “multiple of 10”. If the market price of the common stock is currently $10, which statement is TRUE?
A. The company has paid dividends of $1 per share this year
B. The company has earnings per share of $1 this year
C. The company has paid dividends of $100 per share this year
D. The company has earnings per share of $100 this year
The best answer is B.
When a stock is selling at a “multiple” of 10, this means that the market price is 10 times the current earnings per share. The “multiple” refers to the Price/Earnings Per Share ratio.
Which term describes common stock?
A. negotiable
B. redeemable
C. non-negotiable
D. callable
The best answer is A.
Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.
The market price of common stock will be influenced by which of the following?
A. The par value of the shares
B. Expectations for future earnings growth
C. Date of incorporation for the issuer
D. Book value of the company
The best answer is B.
The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the issuer’s date of incorporation have no direct bearing on the market price of the common.
What term would apply to Treasury Stock?
A. Negotiable
B. Outstanding
C. Voting
D. Par Value
The best answer is D.
The only stock that votes and receives dividends is Outstanding shares. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock – Repurchased Shares (such as shares repurchased for Treasury).
Treasury stock consists of shares that have been repurchased and “retired,” so Treasury stock does not receive dividends and has no voting rights. Par value is the term that applies to all stock, whether it is Authorized, Issued, Treasury, or Outstanding.
