Equity Securities

Question 1

Who takes on more risk? Why?
A. General creditors
B. Bond holders
C. Common stockholders
D. Preferred stockholders

Answer 1

C. Common stockholders
They are junior to all other parties. Last to be paid.

Known as residual claim to assets.

Question 2

What is a treasury stock?

Answer 2

Previously outstanding shares which have to be purchased from the secondary market and stored by the board of directors.

Question 3

What is common stock?

What is it also called?

Answer 3

Last to be paid if corporation is liquidated through bankruptcy.

It is also called junior security.

Question 4

What are stocks also known as?

Answer 4

Equity securities

Question 4

What is a stock or share?

Answer 4

Stock is considered an ongoing instrument.

Share represents ownership in a corporation.

Stock share will exist as long as the corporation exists.

Question 4

What are bonds also known as?

Answer 4

Debt instruments

Or

Leverage instruments

Question 5

What is a bond?

Answer 5

A loan to the corporation, creating a liability for the corporation.

Bond holders are creditors to the corporation?

Question 6

What is the significance of a maturity date with bonds?

Answer 6

It is when the corporation repays bond holder and the bond ceases to exist

Question 7

What is total capitalization?

Answer 7

Sum of all stocks and bonds issued to raise operating capital

Question 8

What are the two net worth equations?

Answer 8

Asset= liabilities+net worth

Assets-liabilities= net worth

Question 9

Bankruptcy priority

Answer 9

1. Employees bank wages
2. Internal Revenue Service (IRS)
3. Mortgages and lien holders that have specific claim to assets
4. Secured bond holders
5. Unsecured bond holders or general creditors
6. Subordinated debentures
7. Preferred stockholders
8. Common stockholders

Question 10

What is the maximum stockholders can lose?

Answer 10

Price paid for the stock

Known as “limited liability”

Question 11

The total number of shares authorized in the corporate charter

Answer 11

Authorized share

Question 12

Portion of total authorized shares that are actually sold to investors

Answer 12

Issued shares

Question 13

Authorized shares that have not yet been sold

Answer 13

Unissued shares

Question 14

Stock that has been sold and bought back by corporation

Answer 14

Treasury stock

Question 15

What is the purpose of treasury stock?

Answer 15

Fund employee bonus plans
Or
Distributed to stockholders in lieu of a cash dividend

NO VOTING RIGHTS!!!

Question 16

Number of shares in the hands of investors at any given time?

Answer 16

Outstanding stock

Question 17

Equation for outstanding stocks

Answer 17

Outstanding stock= issued shares- treasury stock

Question 18

Number of outstanding common share x the market price per share

Answer 18

Market cap (capitalization)

Question 19

Rights of common stockholders?

Answer 19

• right to vote through proxy
• right to transfer ownership
• right to receive dividends once declared
• right to inspect corporation’s books
• preemptive right
• junior claim to corporate assets in the event of liquidation

Question 20

What issues are voted on?

Answer 20

• Election of board of directors
• changes in operations for the company
• stock splits
• issuance of additional securities

Question 21

What is voting by proxy?

Answer 21

Limited power of attorney stockholder grants to someone else

Have authority to vote at their discretion or instruction of stockholder

Question 23

What is the difference between statutory and cumulative voting?

Answer 23

Statutory: shareholders permitted one vote for each share they own for each vacancy.
Cumulative: shareholder has the same total number of votes but may divide them among the vacancies in any way they desire.

Question 25

Number of shares X number of vacancies= total votes

Answer 25

Statutory voting

Question 26

Total number of votes = number of shares X number of vacancies

Answer 26

Cumulative voting