Fundamentals of Equity Investments Flashcards

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1
Q

What is the tax consequence for an investor who receives a stock dividend?

A

Her cost basis must be adjusted.

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2
Q

Existing stockholders receive ______ right for every one share owned.

A

Existing stockholders receive one right for every one share owned.

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3
Q

If securities are inherited, a beneficiary’s holding period is automatically ____________.

A

If securities are inherited, a beneficiary’s holding period is automatically long-term (regardless of previous owner’s).

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4
Q

The _________ date is the date by which stock must be owned to receive the dividend.

A

The Record date is the date by which stock must be owned to receive the dividend.

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5
Q

What is the longest duration for a warrant?

A

Perpetual

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6
Q

In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?

A

Change the issuer, or the coupon, or the maturity

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7
Q

If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?

A

No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.

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8
Q

What instruments are used to facilitate trading of foreign securities in the U.S.?

A

American Depositary Receipts (ADRs)

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9
Q

Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.

A

Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.

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10
Q

May a warrant be detached and traded separately?

A

Yes

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11
Q

Name two priorities that preferred stock has over common stock.

A

Order of liquidation and dividends

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12
Q

____________ stock is resistant to recession.

A

Defensive stock is resistant to recession (utility companies).

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13
Q

What is the advantage existing stockholders receive through rights offerings?

A

The ability to maintain their percentage of ownership and buy additional shares at a discount.

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14
Q

According to the wash sale rule, what securities are considered substantially the same?

A

Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option

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15
Q

Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe’s cost basis is:

A

$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)

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16
Q

Joe owns 100 shares of MNO at $20 (total cost $2,000). If MNO declares a 10% stock dividend, what is Joe’s new basis?

A

Original cost ÷ new total number of shares ($2,000 ÷ 110 shares = $18.18)

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17
Q

XYZ’s record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?

A

On Tuesday, May 1 or later. She must remain the owner at least through May 3 to keep the dividend.

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18
Q

What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?

A

The amount of the foreign tax can be claimed as a credit or deduction on her U.S. return.

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19
Q

How is basis determined for the recipient of gifted securities?

A

Basis will be the donor’s cost or market value, whichever is lower.

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20
Q

A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.

A

A sale for a loss would trigger the wash sale rule if the same security is repurchased within 30 days of the sale.

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21
Q

Describe cumulative preferred stock.

A

Stock that requires payment of any missing dividends before common stockholders are paid

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22
Q

True or False: Treasury stock has no voting rights and receives no dividends.

A

True

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23
Q

The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.

A

The corporate dividend exclusion rule applies to dividends paid on both common and preferred stock.

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24
Q

True or False: All owners have the right to vote.

A

False. Only common stockholders have the right to vote.

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25
Q

What voting method permits one vote for each share owned to be voted for each director?

A

Statutory

26
Q

This voting method allows stockholders to multiply the number of shares owned by the number of directorships.

A

Cumulative voting

27
Q

A client selling shares would like to determine the specific shares being sold, he should use ________________________.

A

A client selling shares would like to determine the specific shares being sold, he should use Specific Identification.

28
Q

____________ stock is stock that was issued and repurchased by the issuing corporation.

A

Treasury stock is stock that was issued and repurchased by the issuing corporation.

29
Q

The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________

A

The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)

30
Q

Issued stock - Treasury stock = ____________________

A

Issued stock - Treasury stock = Outstanding stock

31
Q

Define the term basis.

A

The total cost to acquire an asset.

32
Q

A corporation with 20% or more ownership in a company paying dividends may exclude _____% of the dividend from taxes.

A

A corporation with 20% or more ownership in a company paying dividends may exclude 80% of the dividend from taxes.

33
Q

True or False: A wash sale is triggered if the difference in a bond sold and then repurchased is accrued interest/price.

A

True. To not trigger the wash sale rule, the issuer, coupon, or maturity must be changed.

34
Q

_________ stock pays higher than average dividends.

A

Income stock pays higher than average dividends (e.g., stocks of utility companies).

35
Q

ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Monday, October 17 be entitled to the dividend?

A

No, the investor must own (trade settles) on or before the record date. This trade would not settle until October 20.

36
Q

Who are considered the owners of a corporation?

A

Common and preferred stockholders

37
Q

___________ stock fluctuates with the business cycle.

A

Cyclical stock fluctuates with the business cycle (auto companies).

38
Q

True or False: Convertible preferred stock may be converted into a bond.

A

False. Convertible securities are convertible into common stock.

39
Q

When securities are gifted, the recipient’s holding period will be _______________________.

A

When securities are gifted, the recipient’s holding period will be the same as the donor’s.

40
Q

Does the receipt of a stock dividend create a taxable event?

A

No, not until the stock is actually sold.

41
Q

True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.

A

True

42
Q

The ex-dividend date occurs ___ business days ________ the record date.

A

The ex-dividend date occurs 2 business days before the record date.

43
Q

Warrants are a ______-term right to buy stock at a preset price.

A

Warrants are a long-term right to buy stock at a preset price.

44
Q

True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.

A

True. However, it does not guarantee them representation on the board.

45
Q

When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?

A

Lower, due to the added opportunity

46
Q

For the exam, name the three market holidays that could impact a trade’s settlement date.

A

January 1, July 4, and December 25

47
Q

If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.

A

If an investor does not use Specific Identification when selling securities, the IRS assumes FIFO (first-in, first-out)

48
Q

True or False: Warrants are generally attached to the delivery of another security (stock or bond).

A

True

49
Q

Cash dividends received by individuals are generally taxed at a maximum rate of ____%.

A

Cash dividends received by individuals are generally taxed at a maximum rate of 20%.

50
Q

What is the method to calculate the number of shares that can be purchased through a rights offering?

A

of rights received ÷ # of rights needed to buy each additional share

51
Q

True or False: Both common and preferred stockholders are offered preemptive rights.

A

False. Preemptive rights are only offered to common stockholders.

52
Q

True or False: Common stockholders have the right to vote for the payment of dividends.

A

False. Dividend payments are determined by the board of directors.

53
Q

Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?

A

His basis is the market value at the time of his grandfather’s death (stepped up basis).

54
Q

What is a derivative?

A

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages

55
Q

$______ is normally the par value for preferred stock.

A

$100 is normally the par value for preferred stock.

56
Q

If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?

A

FIFO (first-in, first-out)

57
Q

Name two issues on which common stockholders may vote.

A

Board of Directors elections and stock splits

58
Q

Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?

A

Yes

59
Q

True or False: A stockholder is able to vote for a director, but not an officer.

A

True

60
Q

A corporation with less than 20% ownership in a company paying dividends may exclude ____% of the dividend from taxes.

A

A corporation with less than 20% ownership in a company paying dividends may exclude 70% of the dividend from taxes.