Fundamentals of Equity Investments

Question 1

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

Answer 1

Her cost basis must be adjusted.

Question 2

Existing stockholders receive ______ right for every one share owned.

Answer 2

Existing stockholders receive one right for every one share owned.

Question 3

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

Answer 3

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

Question 4

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

Answer 4

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

Question 5

What is the longest duration for a warrant?

Answer 5

Perpetual

Question 6

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

Answer 6

Change the issuer, or the coupon, or the maturity

Question 7

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

Answer 7

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

Question 8

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

Answer 8

American Depositary Receipts (ADRs)

Question 9

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

Answer 9

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

Question 10

May a warrant be detached and traded separately?

Answer 10

Yes

Question 11

Name two priorities that preferred stock has over common stock.

Answer 11

Order of liquidation and dividends

Question 12

____________ stock is resistant to recession.

Answer 12

Defensive stock is resistant to recession (utility companies).

Question 13

What is the advantage existing stockholders receive through rights offerings?

Answer 13

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

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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?

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

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

Question 19

How is basis determined for the recipient of gifted securities?

Answer 19

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

Question 20

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

Answer 20

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

Question 21

Describe cumulative preferred stock.

Answer 21

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

Question 22

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

Answer 22

True

Question 23

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

Answer 23

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

Question 24

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

Answer 24

False. Only common stockholders have the right to vote.

Question 25

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

Answer 25

Statutory

Question 26

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

Answer 26

Cumulative voting

Question 27

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

Answer 27

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

Question 28

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

Answer 28

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

Question 29

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

Answer 29

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

Question 30

Issued stock - Treasury stock = ____________________

Answer 30

Issued stock - Treasury stock = Outstanding stock

Question 31

Define the term basis.

Answer 31

The total cost to acquire an asset.

Question 32

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

Answer 32

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

Question 33

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

Answer 33

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

Question 34

_________ stock pays higher than average dividends.

Answer 34

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

Question 35

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

Answer 35

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

Question 36

Who are considered the owners of a corporation?

Answer 36

Common and preferred stockholders

Question 37

___________ stock fluctuates with the business cycle.

Answer 37

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

Question 38

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

Answer 38

False. Convertible securities are convertible into common stock.

Question 39

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

Answer 39

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

Question 40

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

Answer 40

No, not until the stock is actually sold.

Question 41

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

Answer 41

True

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

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

Answer 44

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

Question 45

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

Answer 45

Lower, due to the added opportunity

Question 46

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

Answer 46

January 1, July 4, and December 25

Question 47

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

Answer 47

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

Question 48

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

Answer 48

True

Question 49

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

Answer 49

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

Question 50

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

Answer 50

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

Question 51

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

Answer 51

False. Preemptive rights are only offered to common stockholders.

Question 52

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

Answer 52

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

Question 53

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

Answer 53

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

Question 54

What is a derivative?

Answer 54

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

Question 55

$______ is normally the par value for preferred stock.

Answer 55

$100 is normally the par value for preferred stock.

Question 56

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

Answer 56

FIFO (first-in, first-out)

Question 57

Name two issues on which common stockholders may vote.

Answer 57

Board of Directors elections and stock splits

Question 58

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

Answer 58

Yes

Question 59

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

Answer 59

True

Question 60

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

Answer 60

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