Equity Securities Flashcards
When dividend payments to common stockholders decrease but the price of the common stock remains the same, the yield on the common stock will:
A
Decrease
B
Initially increase, then levels off
C
Increase
D
Remain the same
A
Decrease
The dividend yield is equal to the annual dividend divided by the current price. If the dividend payment decreases and the market price remains the same, the dividend yield will decrease. For example, if the annual dividend was $2 per share and the current market price (CMP) was $20, the dividend yield would be 10% (2 ÷ 20 = 0.10). If the dividend payment fell to $1 and the CMP remains $20 per share, the dividend yield falls to 5% (1 ÷ 20 = 0.05).
If the call holder exercises their option, what happens?
C
The writer must sell the underlying security at the strike price
When an option contract is exercised, the writer of the contract is notified that this occurred. It lets the writer know that they will have to fulfill the contract. Prior to being exercised, the writer had an obligation. Once exercised, that obligation becomes an assignment. If a call is exercised, the writer needs to sell the underlying security at the strike price. If a put is exercised, the writer needs to purchase the underlying security at the strike price.
An investor holds shares of a publicly traded corporation that has been in the news lately for repeated scandals. This negative publicity has caused the stock price to fall by nearly half from its recent peak. The investor believes that it’s time for new management and that shareholders should pressure the board of directors to remove the CEO. The investor wants to begin a letter-writing campaign to shareholders and requests a list of current shareholders from the transfer agent. Which of the following regarding this situation is TRUE?
A
Shareholders are entitled to receive the names and addresses of other shareholders upon request
B
The list of current shareholders on file with the transfer agent is restricted to officers and directors only
C
The corporation must file its list of shareholders with the SEC along with its quarterly report, and this information can be retrieved online via the SEC’s EDGAR database
D
The transfer agent must deny this request because the list of current shareholders is entirely confidential
A
Shareholders are entitled to receive the names and addresses of other shareholders upon request
Shareholders have the right to inspect the books, records, and shareholder lists of the corporation in which they have invested. The financial reports can be downloaded from an online database, but not the shareholder list. No shareholder is restricted from receiving the list of all shareholders.
When a corporation buys shares back from existing shareholders these shares are called:
A
Issued
B
Treasury
C
Outstanding
D
Authorized
B
Treasury
The corporation may offer to buy back outstanding shares from the existing shareholders. These shares that were previously issued and then repurchased by the company are referred to as treasury stock. Once repurchased by the corporation, treasury stock has no voting rights and is not entitled to receive dividends. Treasury shares can be retired permanently or can be used to fund employee stock plans or be paid to stockholders in the form of a dividend. A company may buy its own stock if they feel it is undervalued or to boost the price of the common stock in the market. If the company earns the same amount of profits, but there are fewer shares outstanding, the reported earnings per share will increase. Shares of stock that are in possession of investors are referred to as outstanding shares.
The record date for a dividend on XYZ stock has been set for Thursday, February 10. What is the last day an investor could purchase the stock and be entitled to receive the dividend?
A
Monday, February 7
B
Friday, February 11
C
Tuesday, February 8
D
Wednesday, February 9
C
Tuesday, February 8
Assuming regular-way settlement, the last day the investor can conduct the trade is on Tuesday, February 8. The settlement date (trade date + 2 business days) is the date the buyer is the official owner; the investor would need the trade to settle at the very latest on the record date, which is February 10. The ex-dividend date falls 1 business day prior to the record date (R-1), in this example the ex-dividend date is Wednesday, February 9.
Which of the following statements is false about American depositary receipts?
A
ADRs pay dividends in the foreign currency
B
ADRs are subject to political risk
C
ADRs are subject to currency risk
D
ADRs have no voting rights
A
ADRs pay dividends in the foreign currency
ADRs are shares of foreign stock held by a U.S. bank overseas, they have both currency & political risk. Dividends paid by the foreign corporation are passed through the bank and paid to U.S. investors in U.S. dollars. Taxes may be withheld by the foreign company’s local government before being paid to the investors. ADRs have no voting or preemptive rights.
An investor has an option to sell 100 shares of ABC stock at $50 per share until the expiration of the contract. The investor has a:
A
Short call option
B
Long call option
C
Short put option
D
Long put option
D
Long put option
A put option gives the buyer/holder the right to sell stock at a stated price, the strike price, until the option contract expires. A call option gives the buyer/holder the right to buy stock at a stated price, the strike price, until the option contract expires. The question states the investor has an option to sell, not an obligation, making this a long put option.
An individual owns 2 round lots of ABC Industries. The stock has moved up 3 points from yesterday’s close. What is the increase in the individual’s net worth based on this price change?
A
$30
B
$600
C
$60
D
$300
B
$600
A round lot of stock contains 100 shares, so the individual owns 200 shares of ABC Industries. A 1-point move in a stock equates to a $1.00 increase in value per share, giving a total increase in net worth of $600 ($3 x 200).
What benefit, if any, does cumulative preferred stock provide to stockholders?
A
Investors owning cumulative preferred shares may receive an additional dividend, after payment of dividends on common stocks
B
Any dividends in arrears must be paid to cumulative preferred shareholders before dividends may be paid to common shareholders
C
Investors owning cumulative preferred shares automatically reinvestment accrued dividends
D
Investors owning cumulative preferred shares may purchase additional shares at regular intervals
B
Any dividends in arrears must be paid to cumulative preferred shareholders before dividends may be paid to common shareholders
Cumulative preferred stockholders will receive any and all previously unpaid dividends before common stockholders can receive a dividend. Additional dividends paid to preferred shareholders only apply if the shares are participating, meaning eligible to receive an additional dividend if declared by the BOD.
The record date to receive a dividend is set for Tuesday, January 14th. If a current stockholder wishes to receive the dividend, but want to sell their shares, they must sell the stock in a regular way trade no earlier than:
A
Tuesday January 14th
B
Friday January 10th
C
Monday January 13th
D
Thursday January 9th
C
Monday January 13th
If an individual owns common stock and wishes to receive the dividend, that individual cannot sell their shares prior to the ex-date. The ex-date is 1 business day prior to the record date, in this example Monday January 13th. If the stock is sold on or after January 13th, the seller would still be entitled to receive the dividend. If the stock is sold before this date, the individual that purchases the shares would be entitled to receive the dividend.
3% preferred stock participating to 4%, means that an owner of the preferred shares:
A
Must receive a participating additional 4% each year the board declares a dividend
B
Must receive an additional 3% in any year the board declares the 4% dividend
C
Could receive an additional 1% over the stated 3% dividend if the board declares it
D
Could receive an additional 4% over the stated 3% dividend if the board declares it
C
Could receive an additional 1% over the stated 3% dividend if the board declares it
3% preferred participating to 4% means that the company can pay its preferred shareholders an additional 1% in dividends above the 3% if the board of directors (BOD) declares it. The additional “participating” dividend is generally paid in profitable years.
Which of the following statements is true regarding owners and writers of equity call option contracts?
A
The owner of a call is obligated to exercise the contract and, when exercised, a writer would then be assigned the obligation to buy the shares from the owner at the strike price
B
The owner of a call is obligated to exercise the contract and, when exercised, the owner will sell the shares to the writer at the strike price
C
The owner of a call has the right to exercise the contract and, if exercised, the writer would then be assigned and obligated to sell the shares to the owner at the strike price
D
The owner of a call has the right to exercise the contract and, if exercised, the writer would then have the right to buy the shares from the owner at the strike price
C
The owner of a call has the right to exercise the contract and, if exercised, the writer would then be assigned and obligated to sell the shares to the owner at the strike price
Those who purchase (owners) equity option contracts have the right to exercise, and sellers (writers) are obligated to perform when they are assigned. With calls the owner has the right to exercise the contract to buy shares at the strike price. The writer, in turn, would then be assigned and must fulfill the obligation to sell the shares to the owner at the strike price.
A stockholder owns 200 shares of common stock in the ACM Corporation. 3 new members are to be elected to the board of directors. If ACM uses statutory voting, how many votes may the stockholder cast for each of the 3 candidates?
A
1,200
B
200
C
600
D
3
B
200
Stockholders may cast 1 vote per share that they own for each directorship position under the statutory method. Under the cumulative method, shareholders have the same number of total votes (1 vote per share owned times the number of directorship positions being voted on) but they may cast that total number of votes in any manner among the positions being voted on. For example, they could cast all their votes on 1 position, thereby forfeiting any vote on the remaining positions.
The management of a publicly held company decides to offer their existing common stockholders the option of trading their shares for bonds. This is known as a:
A
Private offer
B
Sell out
C
Exchange offer
D
Consolidation
C
Exchange offer
A corporation may decide to reduce the number of outstanding common shares. With an exchange offer, which is a type of tender offer, the corporation offers common stockholders the option of trading in their common stock for another security, such as a bond or preferred stock.
Which of the following types of preferred stock has the highest dividend?
A
Convertible preferred
B
Participating preferred
C
Callable preferred
D
Straight preferred
C
Callable preferred
Callable preferred stock offers a higher stated dividend to compensate investors for the potential early retirement of the issue.
