Fundamentals of Equity Investments Flashcards
What is the tax consequence for an investor who receives a stock dividend?
Her cost basis must be adjusted.
Existing stockholders receive ______ right for every one share owned.
Existing stockholders receive one right for every one share owned.
If securities are inherited, a beneficiary’s holding period is automatically ____________.
If securities are inherited, a beneficiary’s holding period is automatically long-term (regardless of previous owner’s).
The _________ date is the date by which stock must be owned to receive the dividend.
The Record date is the date by which stock must be owned to receive the dividend.
What is the longest duration for a warrant?
Perpetual
In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?
Change the issuer, or the coupon, or the maturity
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.
What instruments are used to facilitate trading of foreign securities in the U.S.?
American Depositary Receipts (ADRs)
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.
May a warrant be detached and traded separately?
Yes
Name two priorities that preferred stock has over common stock.
Order of liquidation and dividends
____________ stock is resistant to recession.
Defensive stock is resistant to recession (utility companies).
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount.
According to the wash sale rule, what securities are considered substantially the same?
Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option
Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe’s cost basis is:
$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)
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?
Original cost ÷ new total number of shares ($2,000 ÷ 110 shares = $18.18)
XYZ’s record date is Thursday, May 3. With a regular-way trade, when could Emma sell her stock, but keep the dividend?
On Tuesday, May 1 or later. She must remain the owner at least through May 3 to keep the dividend.
What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?
The amount of the foreign tax can be claimed as a credit or deduction on her U.S. return.
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.
A sale for a loss would trigger the wash sale rule if the same security is repurchased within 30 days of the sale.
Describe cumulative preferred stock.
Stock that requires payment of any missing dividends before common stockholders are paid
True or False: Treasury stock has no voting rights and receives no dividends.
True
The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.
The corporate dividend exclusion rule applies to dividends paid on both common and preferred stock.
True or False: All owners have the right to vote.
False. Only common stockholders have the right to vote.
What voting method permits one vote for each share owned to be voted for each director?
Statutory
This voting method allows stockholders to multiply the number of shares owned by the number of directorships.
Cumulative voting
A client selling shares would like to determine the specific shares being sold, he should use ________________________.
A client selling shares would like to determine the specific shares being sold, he should use Specific Identification.
____________ stock is stock that was issued and repurchased by the issuing corporation.
Treasury stock is stock that was issued and repurchased by the issuing corporation.
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
The formula for finding conversion ratio is: Par ÷ Conversion Price (par for preferred is $100)
Issued stock - Treasury stock = ____________________
Issued stock - Treasury stock = Outstanding stock
Define the term basis.
The total cost to acquire an asset.
A corporation with 20% or more ownership in a company paying dividends may exclude _____% of the dividend from taxes.
A corporation with 20% or more ownership in a company paying dividends may exclude 80% of the dividend from taxes.
True or False: A wash sale is triggered if the difference in a bond sold and then repurchased is accrued interest/price.
True. To not trigger the wash sale rule, the issuer, coupon, or maturity must be changed.
_________ stock pays higher than average dividends.
Income stock pays higher than average dividends (e.g., stocks of utility companies).
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Monday, October 17 be entitled to the dividend?
No, the investor must own (trade settles) on or before the record date. This trade would not settle until October 20.
Who are considered the owners of a corporation?
Common and preferred stockholders
___________ stock fluctuates with the business cycle.
Cyclical stock fluctuates with the business cycle (auto companies).
True or False: Convertible preferred stock may be converted into a bond.
False. Convertible securities are convertible into common stock.
When securities are gifted, the recipient’s holding period will be _______________________.
When securities are gifted, the recipient’s holding period will be the same as the donor’s.
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is actually sold.
True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.
True
The ex-dividend date occurs ___ business days ________ the record date.
The ex-dividend date occurs 2 business days before the record date.
Warrants are a ______-term right to buy stock at a preset price.
Warrants are a long-term right to buy stock at a preset price.
True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.
True. However, it does not guarantee them representation on the board.
When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?
Lower, due to the added opportunity
For the exam, name the three market holidays that could impact a trade’s settlement date.
January 1, July 4, and December 25
If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.
If an investor does not use Specific Identification when selling securities, the IRS assumes FIFO (first-in, first-out)
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True
Cash dividends received by individuals are generally taxed at a maximum rate of ____%.
Cash dividends received by individuals are generally taxed at a maximum rate of 20%.
What is the method to calculate the number of shares that can be purchased through a rights offering?
of rights received ÷ # of rights needed to buy each additional share
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
True or False: Common stockholders have the right to vote for the payment of dividends.
False. Dividend payments are determined by the board of directors.
Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?
His basis is the market value at the time of his grandfather’s death (stepped up basis).
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
$______ is normally the par value for preferred stock.
$100 is normally the par value for preferred stock.
If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?
FIFO (first-in, first-out)
Name two issues on which common stockholders may vote.
Board of Directors elections and stock splits
Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?
Yes
True or False: A stockholder is able to vote for a director, but not an officer.
True
A corporation with less than 20% ownership in a company paying dividends may exclude ____% of the dividend from taxes.
A corporation with less than 20% ownership in a company paying dividends may exclude 70% of the dividend from taxes.
