Equity Securities Flashcards
Of the following types of corporate securities, which generally provides full voting rights to the owners?
[A] Common stock
[B] Preferred stock
[C] Serial bonds
[D] Revenue bonds
[A] Common stock
Common stock provides full voting rights on most corporate matters (e.g.. The election of the board of directors). Preferred stock generally does not have voting rights, but only have voting rights under exceptional circumstances (e.g.. The company has missed several dividends) The other two categories are creditors, rather than owners of the company and therefore don’t have voting rights.
Common stockholders can take which of the following actions with regard to the corporation’s business activities?
[A] Vote on a stock split
[B] Inspect the minutes from a Board of Directors meeting
[C] Vote on a cash dividend
[D] Approve expansion plans into another market
[A] Vote on a stock split
Common stockholders would be asked to vote on a stock split. They do not have a right to inspect minutes of a board meeting. Declaring a dividend and deciding on business expansion are matters that would be handled by the management of the company with Board of Director input.
Which of the following are true of warrants?
[A] The market price of the stock is below the exercise price when they are issued.
[B] All are perpetual.
[C] They pay dividends.
[D] The market price of the stock is considerably above the exercise price when they are issued.
[A] The market price of the stock is below the exercise price when they are issued.
Because warrants are used as an incentive or “sweetener,” the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
When the owner of common stock receives Proxy Material, which of the following do they then have?
[A] First choice on new shares being issued by the company
[B] their right to vote has been waived
[C] the right to vote their shares in the voting matter presented at the shareholders meeting
[D] the right to set the amount of the next dividend to be paid to the shareholders
[C] the right to vote their shares in the voting matter presented at the shareholders meeting
Proxy material is like an absentee vote and allows shareholders to vote their choice when the shareholder is unable to attend the shareholders meeting.
A stock dividend would be paid on which of the following securities?
[A] Common stock
[B] Preferred stock
[C] Treasury notes
[D] Treasury bills
[A] Common stock
Treasury notes and bills are forms of debt issued by the US Government. They do not pay dividends and would not pay stock dividends. Normally, preferred stock pays dividends in the form of cash, not stock. It is more typical to have stock dividends with common stocks.
Crystal Keep is a publicly traded company. It declares a dividend on May 9th for shareholders of record as of May 17th. The dividend is paid on June 5th. On which date does the investor incur a tax liability for this dividend? [A] June 5th [B] June 3rd [C] May 9th [D] May 17th
[A] June 5th
The payable date is the date that the dividend is actually paid. This date also creates the taxable event for the investor.
A Preemptive Rights clause in a corporate charter includes all of the following characteristics except:
[A] allows the existing shareholders first right of refusal on the newly issued shares
[B] protects the existing shareholders from dilution of shares
[C] allows the existing shareholders control over newly issued shares
[D] requires the corporation to repurchase shares from existing shareholders at predetermined intervals
[D] requires the corporation to repurchase shares from existing shareholders at predetermined intervals
A preemptive rights clause allows existing shareholders first choice on newly issued shares and protects the existing shareholders from dilution.
Which of the following is typically considered a unit of trading when dealing in common stock?
[A] Lots with a value of $10,000 or more
[B] Lots with a value of $100 or less
[C] Lots of 10,000 shares
[D] Lots of 100 shares
[D] Lots of 100 shares
The most common trading unit for common stock is 100 shares. It is considered a round lot.
In relation to limited partnerships, the “flow-through principal” refers to:
[A] The flow-through of partnership income and expenses to its members so that they can be reported on the members’ individual tax returns.
[B] A provision in the partnership agreement that before a partnership interest is offered to anyone else it must first be offered to a general or limited partner.
[C] The right of limited partners to inspect the books and records of the limited partnership.
[D] Borrowing against the investment to create a greater asset value.
[A] The flow-through of partnership income and expenses to its members so that they can be reported on the members’ individual tax returns.
The “flow-through principal” refers to the flow of profits and losses from the partnership to the investor. This is what made limited partnerships attractive tax shelter investments prior to change in the legislation.
All of the following are correct regarding common stock EXCEPT:
[A] Common shares may be held in street name by a broker-dealer.
[B] Common shares may be called by the issuing corporation after a specified date.
[C] Common shares may be used as collateral for a loan in a margin account.
[D] Ownership of common shares may be transferred with proper assignment on the back of the stock certificate.
[B] Common shares may be called by the issuing corporation after a specified date.
Common stock is never callable.
Which of the following is a defensive stock? [A] Aerospace company [B] Food company debenture. [C] Blue chip [D] Public utility
[D] Public utility
Defensive stocks (not defense) are stocks that remain stable during good and bad times. A Debenture is a type of bond, and is not a stock.
Normally a stock will begin trading ex-dividend on the:
[A] Second business day prior to the record date.
[B] Business day prior to the record date.
[C] Second business day prior to the payable date.
[D] Record date.
[B] Business day prior to the record date.
Regular-way settlement is trade date plus 2 business days. For this reason, ex-date occurs on the business day prior to the record date. (Formerly T+3 and 2 business days prior to record date)
Which of the following statement concerning Real Estate Investment Trusts are correct?
I. They are considered investment companies under Federal Securities Laws
II. They redeem securities at net asset value
III. They must be registered with the SEC before a public sale
IV. They are not considered tax shelter investments because operating losses do not pass through to the owners of the REIT
[A] I and II
[B] III and IV
[C] I, III, and IV
[D] I, II, III, and IV
[B] III and IV
REITs (Real Estate Investment Trusts) trade like a stock trade and are not considered to be an investment company. They also are not classified as a tax shelter investment.
A company has authorized 10,000,000 shares of common stock. 8,000,000 shares have been issued. 4,000,000 shares are treasury. This means:
[A] 8,000,000 shares are outstanding
[B] 10,000,000 shares are outstanding
[C] 4,000,000 shares are outstanding
[D] 14,000,000 shares are outstanding
[C] 4,000,000 shares are outstanding
Issued stock minus Treasury stock = Outstanding Stock
Therefore, 8,000,000 issued - 4,000,000 Treasury would equal the 4,000,000 outstanding shares.
Which would be a counter-cyclical industry?
[A] The computer software industry
[B] The pharmaceutical industry
[C] The gold mining industry
[D] The automobile industry
[C] The gold mining industry
Counter-cyclical industries are industries that either perform equal or better during down times in the economy. Gold mining and silver mining companies are companies that would likely remain stable or perform better during a down economy.
