Equities Flashcards
Chapter 4 – Equities
What is the formula for Outstanding Stock?
Outstanding Stock = Issued Stock – Treasury Stock
Outstanding stock represents the total shares currently held by shareholders, excluding treasury stock.
Chapter 4 – Equities
How do you determine the new number of shares after a forward stock split?
New number of shares = Number of Shares Owned x Stock Split Ratio
A forward stock split increases the number of shares and decreases the cost basis per share.
Chapter 4 – Equities
What is the formula to determine the new cost basis per share after a forward stock split?
New cost basis per share = Original Cost Basis Per Share x Inverse of Split Ratio
The inverse of the split ratio is used to adjust the cost basis in accordance with the split.
Chapter 4 – Equities
How do you calculate the new number of shares when a company issues a stock dividend?
New number of shares = Number of Shares Owned x Dividend %
This calculation reflects the increase in shares due to the dividend issued.
Chapter 4 – Equities
What is the formula to determine the new cost basis per share after a stock dividend?
New cost basis per share = Total initial investment ÷ Total Shares Owned (including new shares)
This formula accounts for the total investment spread over the increased number of shares.
Chapter 4 – Equities
How is a company’s market capitalization found?
Market Capitalization = Current Market Price x Number of Shares Outstanding
Market capitalization reflects the total market value of a company’s outstanding shares.
Chapter 4 – Equities
What is the formula to determine the capital gain or loss from the sale of gifted securities?
Capital Gain or Loss = Sale Price – Donor’s Cost Basis or Market Value at Time of Gift (whichever is lower)
This formula helps in calculating the gain or loss when securities are sold that were received as a gift.
Chapter 4 – Equities
How is the capital gain or loss from the sale of inherited securities calculated?
Capital Gain or Loss = Sale Price – Market Value at Death of Donor
The holding period for inherited securities is always considered long-term.
Chapter 4 – Equities
What is the formula for calculating the Conversion Ratio of a convertible preferred stock?
Conversion Ratio = Par Value of Preferred Stock ($100) ÷ Conversion Price
This ratio determines how many shares of common stock one receives for each share of preferred stock.
Chapter 4 – Equities
If the conversion price is $20, what is the conversion ratio for a preferred stock with a par value of $100?
Conversion ratio is 5-for-1
This means for every share of preferred stock, an investor can convert it into 5 shares of common stock.
Chapter 4 – Equities
How is the Parity Price of common stock calculated?
Parity Price of Common = Preferred Price ÷ Conversion Ratio
This calculation helps investors understand the relative value of common stock compared to preferred stock.
Chapter 4 – Equities
What is the formula for finding the Parity Price of convertible preferred stock?
Parity Price of Preferred = Common Stock Price x Conversion Ratio
This formula indicates the equivalent value of preferred stock based on the common stock price and the conversion ratio.
