Investments

Question 1

What is a security?

Answer 1

An INTANGIBLE FINANCIAL ASSET that may be bought, sold, or gifted between persons. It may be represented by a paper certificate or held in an electronic record.

Question 2

What is the difference between commodities and securities?

Answer 2

While a security is a financial asset, a commodity is generally a hard asset such as gold, beef, orange juice, or oil. There is an active market in a derivative investment in commodities called futures, but futures are based on commodities and so are not considered a security.

Question 3

What is the Howey Test?

Answer 3

A legal test for what is considered a security

Question 4

Give an example of a security

Answer 4

So, if people pool their money together with the expectation that a third party (usually a manager) will make a profit for them, a person’s interest in that enterprise is a security

Question 5

Describe the steps for the HOWEY TEST

Answer 5

The Howey Test is a FOUR-PART TEST, as described here.

A security is

1. an INVESTMENT OF MONEY made into
2. a COMMON ENTERPRISE
3. with the EXPECTATION OF PROFIT
4. through the EFFORTS OF A THIRD PARTY.

Question 6

What are crypto currencies defined as? (security or investment?)

Answer 6

It appears that cryptocurrency would likely meet our basic definition of a security, but you should note that there is no third-party management. Currently the Securities and Exchange Commission (SEC) treats cryptocurrency as a commodity. If you should see cryptocurrencies on the exam,

remember that they are a commodity not a security.

Question 7

What are some examples of items mistaken as investments but are actually a security?

Answer 7

■ Stocks ■ Bonds, notes, and debentures (all types of debt) ■ Options ■ Mutual funds ■ Jumbo CDs ■ Depositary receipts ■ Units in an investment ■ Variable life and variable annuities

Question 8

What are the two basic forms of securities?

Answer 8

two basic securities are called

stocks (also called equities) 
and bonds (debt)

Question 9

All of the following are considered securities except
A. U.S. minted gold coins.
B. common stock of XYZ Corporation.
C. 15 British pound put contracts. D. Treasury bonds.

Answer 9

A Stocks, bonds, and options are all examples of securities. Gold and gold coins are a commodity, not a security.

Question 10

Give examples of items NOT considered as securities

Answer 10

■ Cash and currency 
■ Fixed annuities 
■ Life insurance (whole and term) 
■ A personal residence 
■ Commodities and futures contracts

Question 11

Another term for stocks and bonds is 
A. equity and debt. 
B. shares and units. 
C. voting and nonvoting. 
D. taxable and tax free.

Answer 11

A. equity and debt.

Equity is a common term for securities that represent ownership interest, such as stocks. Bonds are the most common type of debt security.

Question 12

Which of the following is not a security that an investor would purchase? 
A. Common shares of ABC Petroleum, Inc. 
B. Debt issue by ABC Petroleum 
C. Bitcoins 
D. Windmill Growth Fund

Answer 12

C. Bitcoins

Bitcoin is considered a commodity, not a security.

Question 13

What are the VARIOUS CLASSES of COMMON STOCK?

Answer 13

AIOT

■ authorized;
■ issued;
■ outstanding; and
■ treasury.

Question 14

What are the BENEFITS of PURCHASING SHARES IN A COMPANY?

Answer 14

They can benefit from an INCREASE IN THE PRICE OF THE SHARES (capital appreciation)

and by SHARING IN EARNINGS through a DISTRIBUTION OF PROFITS called DIVIDENDS.

Question 15

What are share considered to be?

Answer 15

They are called equities because they represent ownership in the company.

Question 16

Individuals who purchase shares in a company are considered as ?

Answer 16

These investors are called stockholders or shareholders; they are the company’s owners

Question 17

Why does a company sell shares?

Answer 17

A company issues (sells) stock to raise capital (money).

Question 18

If a corporation issues 100 shares of stock, each share represents an identical 1/100—or 1%—ownership position in the company. An investor who owns 10 shares of stock would own _____a___of the company; an investor who owns 50 shares of stock would own __b__ of the company.

Answer 18

a. 10%

b. 50%

Question 19

What is the benefit of having a Board of Directors ?

Answer 19

By electing a BOD, stockholders have a say in the company’s management but are not involved in the day-to-day details of its operations.

Question 20

What is AUTHORIZED STOCK?

Answer 20

The corporate charter specifies the number of shares the company is AUTHORIZED TO ISSUE it is a decision made by the founders of the business.

Question 21

How is a corporation formed?

Answer 21

through the preparation of a CORPORATE CHARTER.

Question 22

What is the benefit gained from being a corporation against being a sole trader?

Answer 22

RAISE MONEY by ISSUING SECURITIES

Question 23

What is an ISSUED STOCK?

Answer 23

Issued stock is AUTHORIZED STOCK that has been SOLD TO INVESTORS. Those investors have bought the stock and the company has received the money.

Question 24

How is COMMON STOCK normally CLASSIFIED?

Answer 24

CLASSIFIED by the SIZE OF THE CORPORATION

Question 25

What are some needs for use of UNISSUED STOCK?

Answer 25

■ raising new capital for expansion,
■ paying stock dividends, or
■ exchanging common stock for outstanding convertible bonds or preferred stock.

Question 26

What is OUTSTANDING STOCK?

Answer 26

OUTSTANDING STOCK includes ANY SHARES that a company HAS ISSUED and are IN THE HANDS OF INVESTORS.

Question 27

What is the MEASUREMENT used for COMMON STOCK called?

Answer 27

MARKET CAPITALIZATION, or just MARKET CAP

Question 28

What is treasury stock?

Answer 28

Treasury stock is stock a corporation has issued and subsequently reacquired.

Question 29

How is MARKET CAP calculated?

Answer 29

by multiplying the NUMBER OF OUTSTANDING SHARES by the CURRENT MARKET VALUE (CMV) of a share

(outstanding shares x CMV) = Market Cap

Question 30

What is Large cap stock?

Answer 30

Large-cap stocks are the largest companies. These can be rapidly growing technology companies or big, long-established firms.

Question 31

What is penny stock?

Answer 31

A penny stock is an UNLISTED (not listed on a U.S. stock exchange) security trading at LESS THAN $5 per share.

Question 32

What is cash dividend?

Answer 32

Cash dividends are normally distributed by check if an investor holds the stock certificate, or they are automatically deposited to a brokerage account if the shares are held in street name (held in a brokerage account in the firm’s name to facilitate payments and delivery)

Question 33

What is mid cap stock?

Answer 33

large by most standards, just not as huge as the large-cap stocks. A company that is too large to be a small cap, but not large enough to be large cap, are the mid caps. They tend to reflect characteristics of both small and large caps, as you might expect with a label like “mid cap.”

Question 34

What is stock dividend?

Answer 34

If a company wishes to reinvest its profits for business purposes rather than to pay cash dividends, its BOD may declare a stock dividend.

Question 35

What is small cap stock?

Answer 35

The smallest stocks that are still large enough to be listed on national exchanges are small caps. They tend to be oriented toward GROWTH and produce VERY LITTLE DIVIDENDS.

Question 36

If the company wishes to ISSUE MORE STOCK THAN AUTHORIZED what is the process?

Answer 36

If the company wants to issue more shares than are authorized, the CHARTER must be AMENDED through a STOCKHOLDER VOTE.

Question 37

True or False

AUTHORIZED BUT UNISSUED STOCK does NOT carry the RIGHTS AND PRIVILEGES of ISSUED SHARES and is NOT CONSIDERED in determining a company’s total capitalization.

Answer 37

True

Question 38

What are BLUE CHIP stock?

Answer 38

Large-cap companies that have a long history of steady dividend payments

Question 39

What stock can be HELD INDEFINITELY?

Answer 39

TREASURY STOCK

The corporation can hold this stock indefinitely or can reissue or retire it.

Question 40

Describe the rights of AUTHORIZED BUT UNISSUED STOCK?

Answer 40

Authorized but unissued stock DOES NOT carry the RIGHTS AND PRIVILEGES of ISSUED SHARES and is NOT considered in determining a company’s TOTAL CAPITALIZATION.

Question 41

Describe the RIGHTS FEATURE of TREASURY STOCK

Answer 41

Treasury stock DOES NOT carry the rights of OUTSTANDING COMMON SHARES, such as voting rights and the right to receive dividends. For that reason, ANALYSTS are only concerned with OUTSTANDING SHARES.

Question 42

Define dividends

Answer 42

distributions of a company’s profits to its shareholders

Question 43

Equity securities defined as PENNY STOCKS are considered _________

Answer 43

highly speculative.

Question 44

What is the PENNY STOCK DISCLOSURE AGREEMENT?

Answer 44

describes the risks associated with penny stock investments.

Question 45

Based on penny stock cold calling, who is an ESTABLISHED CUSTOMER?

Answer 45

■ has held an account with the BD for at least ONE YEAR (and has made a deposit of funds or securities) or

■ has made AT LEAST THREE penny stock purchases of different issuers on different days.

Question 46

When penny stock cold calling, what should the broker-dealer disclose?

Answer 46

■ the name of the penny stock,

■ the number of shares to be purchased,

■ a current quotation, and

■ the amount of commission that the firm and the representative received

Question 47

SEC rules regarding cold-calling customers state that when a BD’s representative contacts a potential customer to purchase penny stocks the representative must first

Answer 47

DETERMINE SUITABILITY on the basis of information about the buyer’s financial situation and objectives.

Question 48

The provisions of the penny stock rules apply only to _____1_______ such as those that might occur during a cold call.

Unsolicited transactions—those not recommended by the BD or the registered representative (RR)—are _2_____ from these rules on suitability and disclosure.

Answer 48

1 solicited transactions

2 exempt

Question 49

How are CASH DIVIDENDS treated AFTER BEING DECLARED?

Answer 49

cash dividends are typically PAID QUARTERLY and are TAXED IN THE YEAR THEY ARE DISTRIBUTED.

Question 50

Our client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of the following are true about the position EXCEPT

A. they will receive dividends in U.S. dollars.
B. the security may be traded in U.S. markets.
C. they have the same voting rights as an owner of the common stock.
D. they have the right to request the underlying common shares be issued to them directly

Answer 50

C. they have the same voting rights as an owner of the common stock.

It is important to remember that ADRS are issued by a depository bank and the bank is the registered owners of the shares. Depository banks are NOT REQUIRED TO PASS VOTING PROXIES through to the ADR holders.

TRUE
A. they will receive dividends in U.S. dollars.
B. the security may be traded in U.S. markets.
D. they have the right to request the underlying common shares be issued to them directly

Question 51

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a CUMULATIVE voting system. Your customer owns 300 participating PREFERRED SHARES of Big Trucks. He has

A. 900 votes he can divide anyway he wants among the three seats.

B. no voting rights.

C. 300 votes each for the open seats.

D. 300 votes total to spread among the three open seats.

Answer 51

B. no voting rights.

Your customer owns preferred stock. Preferred stock carries no voting rights.

Question 52

In 2011, RST Corporation had both common stock and $100 par value 4% noncumulative preferred stock outstanding. The preferred, like the common stock, pay dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of
A. $1.00. B. $4.00. C. $17.00. D. $20.00.

Answer 52

A. $1.00

In the case of a NONCUMULATIVE PREFERRED STOCK, skipped dividends are FOREVER LOST. So, when the company is able to pay a dividend, as is always the case, it must pay the CURRENT PREFERRED DIVIDEND before paying to the common shares. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00—an amount that must be paid before the quarterly common dividend can be paid.

Question 53

CASH DIVIDENDS can be TAXED as either

Answer 53

NONQUALIFIED (taxed at the investor’s ordinary income tax rate) or as

QUALIFIED

Question 54

The MAXIMUM TAX RATE on qualified specified is based on

Answer 54

CURRENT IRS TAX CODE and will depend on the investor’s INCOME TAX BRACKET

Question 55

If a PREFERRED STOCK is described as XYZ 6% PREFERRED PARTICIPATING to 9%, the company pays its holders up to ______________ if the BOD declares so.

Answer 55

3% in ADDITIONAL DIVIDENDS in PROFITABLE YEARS

Question 56

What is a PRODUCT DIVIDEND?

Answer 56

some companies will pay a dividend by SENDING A SAMPLE of the company’s product to shareholders.

Question 57

I. An investor buys 200 shares of XYZ at $60 per share for a total cost of ______.

II. If XYZ were to declare and pay a 20% STOCK DIVIDEND, the investor would now have a total of ___________ shares.

III. What is the NEW COST BASIS? In this light, when the shares are later sold, the investor will list $__ per share as the cost.

Answer 57

I. Total cost $12,000
(200 shares x $60)

II. Total shares after 20% 240 shares
(200 shares x 20% = 40 additional shares).

III. $50 per share
Dividing $12,000 by 240 shares results in a NEW COST BASIS of $50 per share
(12,000/240 = 50)

Question 58

The difference between the COST and the SALE PRICE will be the

Answer 58

investor’s GAIN OR LOSS PER SHARE.

Question 59

PRIORITY AT DISSOLUTION over COMMON STOCK

Answer 59

If a corporation goes bankrupt, PREFERRED STOCKHOLDERS have a PRIORITY CLAIM over COMMON STOCKHOLDERS on the assets remaining AFTER CREDITORS have been paid.

Question 60

RISKS of owning PREFERRED STOCK

Answer 60

■ PURCHASING POWER RISK—This is the potential that, because of INFLATION, the fixed income produced will not purchase as much in the future as it does today.

■ INTEREST RATE SENSITIVITY—Like a fixed-income security, when INTEREST RATES RISE, the VALUE OF PREFERRED SHARES DECLINES. (This will be discussed in greater detail later in this unit.)

■ DECREASED OR NO DIVIDEND INCOME—As with common stock ownership, there is the possibility of dividend income decreasing or ceasing entirely if the company loses money. The decision to pay a dividend rests with the BOD, and while the dividend percentage is fixed, if is not guaranteed to be paid.

■ PRIORITY AT DISSOLUTION—While preferred shareholders are paid before common shareholders if a company enters bankruptcy, the preferred shares are paid behind all creditors

Question 61

What are the types of preferred stock?

Answer 61

■ Straight (noncumulative)—Straight preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.

■ Cumulative—Cumulative preferred stock accrues payments due its shareholders in the event dividends are reduced or suspended.

Question 62

When the company resumes dividend payments, CUMULATIVE PREFERRED STOCKHOLDERS receive

Answer 62

CURRENT DIVIDENDS plus the TOTAL ACCUMULATED DIVIDENDS—dividends in arrears—before any dividends may be distributed to COMMON STOCKHOLDERS.

Question 63

What is CALLABLE PREFERRED?

Answer 63

stock which a company can BUY BACK from investors at a STATED PRICE AFTER A SPECIFIED DATE.

The right to call the stock allows the company to replace a relatively high fixed-dividend obligation with a lower one when the cost of money has gone down.

Question 64

Why would you include PREFERRED STOCK in a client’s portfolio?

Answer 64

■ FIXED INCOME from DIVIDENDS
■ PRIOR CLAIM AHEAD of COMMON STOCK
■ Convertible preferred stock SACRIFICES INCOME in exchange for POTENTIAL APPRECIATION (discussed shortly)

Question 65

A PREFERRED STOCK is CONVERTIBLE if the OWNER can EXCHANGE THE SHARES for a FIXED NUMBER OF SHARES of the ISSUING CORPORATION’S COMMON STOCK.

Answer 65

Convertible preferred

Question 66

What are the FOUR DATES associated with DIVIDEND DISBURSEMENT?

Answer 66

DERP

declaration,
ex-dividend,
record, and
payable.

Question 67

Declaration date

Answer 67

When a company’s BOD APPROVES A DIVIDEND PAYMENT, it is recognized as the DATE THE DIVIDEND WAS DECLARED.

Question 68

Ex-dividend date (ex-date)

Answer 68

On the basis of the dividend record date, Financial Industry Regulatory Authority (FINRA)—or the exchange if the stock is listed on an exchange—declares an ex-date.

The ex-date is ONE BUSINESS DAY BEFORE THE RECORD DATE.

If the stock is purchased on or after the ex-date, the new owner has purchased the stock “ex” without the dividend and is therefore nor entitled to receive it.

Question 69

Record date

Answer 69

The STOCKHOLDERS OF RECORD (those who own the stock) on the record date RECEIVE THE DIVIDEND DISTRIBUTION.

Question 70

On the ______ date, the DIVIDEND DISBURSING AGENT sends DIVIDEND CHECKS to ALL STOCKHOLDERS whose names appear on the books as owners as of the record date.

Answer 70

Payable date

Question 71

What is a simple abbreviation for the DIVIDEND DISBURSEMENT DATE PROCESS in the ORDER OF THEIR OCCURRENCE?

Answer 71

DERP will help you remember the order in which the dates involving dividend distributions occur.

The order of dates are:
declaration, 
ex-dividend, 
record, and 
payable

Question 72

What are some BENEFITS of OWNING COMMON STOCK?

Answer 72

Common shareholders enjoy numerous benefits, including

voting rights,

the opportunity for capital appreciation,

current income,

as well as limited liability

Question 73

An ABSENTEE BALLOT, known as a ____, is made available for those SHAREHOLDERS who want to vote but CAN’T ATTEND THE SHAREHOLDER MEETING

Answer 73

proxy

Question 74

COMMON STOCK is known to be _______ to anyone who wants to BUY IT or RECEIVE IT AS A GIFT

Answer 74

freely transferable

Question 75

True or False

SHAREHOLDERS of COMMON STOCK need the PERMISSION OF THE CORPORATION to SELL THEIR STOCK?

Answer 75

False

SHAREHOLDERS have the RIGHT TO SELL OR GIVE AWAY their shares WITHOUT PERMISSION of the corporation

Question 76

What are the TWO TYPES of VOTING?

Answer 76

Depending on the company’s BYLAWS and APPLICABLE STATE LAWS, a STOCKHOLDER may have either a:

STATUTORY VOTE or a
CUMULATIVE VOTE.

Question 77

What is STATUTORY VOTING?

Answer 77

STATUTORY VOTING allows A STOCKHOLDER to CAST ONE VOTE PER SHARE OWNED for EACH ITEM ON A BALLOT, such as candidates for the BOD.

A BOARD CANDIDATE needs a SIMPLE MAJORITY to be ELECTED

Question 78

True or False

A STOCKHOLDER can cast ONE VOTE for EACH SHARE OF STOCK OWNED

Answer 78

True

Question 79

What is CUMULATIVE VOTING?

Answer 79

allows STOCKHOLDERS to ALLOCATE THEIR TOTAL VOTES in ANY MANNER THEY CHOOSE.

Question 80

EXAMPLE:

Mr. X Owns 100 Shares

STATUTORY VOTING

Board of directors: seat 1 ____

Board of directors: seat 2 ____

Board of directors: seat 3 100

Answer 80

Board of directors: seat 1 100

Board of directors: seat 2 100

Board of directors: seat 3 100

Question 81

EXAMPLE:

Mr. X Owns 100 Shares
CUMULATIVE VOTING

Board of directors: seat 1 175
Board of directors: seat 2 ii__
Board of directors: seat 3 __i

OR
Board of directors: seat 1 300
Board of directors: seat 2 __iii_
Board of directors: seat 3 0

Answer 81

i) 75
ii)50
TOTAL OF 300

iii) 0
TOTAL OF 300

Question 82

XYZ Corporation will be electing THREE DIRECTORS at its annual meeting. EACH XYZ shareholder has a NUMBER OF VOTES EQUAL to the NUMBER OF SHARES OWNED TIMES the NUMBER OF DIRECTORSHIPS up for election.

Assume that a shareholder owns 100 shares. Under STATUTORY VOTING the shareholder may use a MAXIMUM of __a__ votes for ANY ONE SEAT on the board.

Under CUMULATIVE VOTING, the shareholder may allocate __b__ votes any way they choose (ie., to one director or split between two or more), giving the shareholder a greater impact.

Answer 82

a. 100

b. 300

Question 83

CUMULATIVE VOTING benefits the _______a_______,

whereas STATUTORY VOTING benefits _____b_____.

Answer 83

a. smaller investor

b. larger shareholders

Question 84

What is GROWTH (capital gain)?

Answer 84

An INCREASE in the MARKET PRICE of securities is CAPITAL APPRECIATION

Question 85

WHY would you include COMMON STOCK in a client’s portfolio?

Answer 85

■ Potential CAPTIAL APPRECIATION
■ INCOME from DIVIDENDS
■ HEDGE against INFLATION

Question 86

What are the RISKS associated with owning COMMON STOCK?

Answer 86

■ LOW PRIORITY at DISSOLUTION

■ DECREASED or NO DIVIDEND INCOME

■ Market risk

Question 87

Explain the RISK of LOW PRIORITY at DISSOLUTION

Answer 87

a company enters BANKRUPTCY, the holders of its BONDS AND PREFERRED STOCK have PRIORITY over COMMON STOCKHOLDERS.

A company’s DEBT AND PREFERRED SHARES are considered SENIOR SECURITIES.

Question 88

Explain the RISK of DECREASED or NO DIVIDEND INCOME

Answer 88

A RISK OF STOCK OWNERSHIP is the possibility of DIVIDEND INCOME decreasing or ceasing entirely if the company LOSES MONEY.

The COMMON STOCKHOLDERS have the LAST CLAIM on EARNINGS.

Question 89

Explain the risk of MARKET RISK associated with OWNING COMMON STOCK

Answer 89

Chance that a stock will DECLINE IN PRICE is one risk of owning common stock.

A stock’s price FLUCTUATES DAILY as PERCEPTIONS of the COMPANY’S BUSINESS PROSPECTS change and influence the actions of BUYERS AND SELLERS.

Question 90

Which of the following would most likely REQUIRE SHAREHOLDER APPROVAL?

A. Declaring a dividend
B. Firing the CEO
C. Hiring a new CFO
D. Changing the corporation’s name

Answer 90

D. Changing the corporation’s name

Changing the corporation’s name is a SIGNIFICANT MATTER that will likely need SHAREHOLDER APPROVAL.

DECLARING A DIVIDEND and the HIRING AND FIRING OF SENIOR EXECUTIVES is WELL WITHIN THE BOARD’S POWER

Question 91

All Big Company, Inc.. an NYSE-listed manufacturer of large objects, has declared a 50.cents.a.share dividend payable next month. All Big also has options available for trade. The actual ex-dividend date will be declared by 
A. the OTC. 
B. the NYSE. 
C. FINRA 
D. the CBOE

Answer 91

B
Ex-dates are set by the market center where trades will likely take place. In the case of an NYSE-listed stock, the New york Stock Exchange will determine the ex-date.

Question 92

Which of the following securities would likely provide the greatest potential for capital appreciation?
A. A preferred stock B. A U.S. Treasury STRIP C. A common stock D. A convertible bond

Answer 92

C

Common stocks would be the most suitable for investors seeking capital appreciation (growth).

Question 93

What are STOCKS RIGHTS sometimes considered as?

Answer 93

sometimes known as PREEMTIVE RIGHTS or simply RIGHTS

Question 94

What is stock rights?

Answer 94

entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company otters them to the general public.

Question 95

What is a warrant?

Answer 95

a certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time the warrants arc issued, and at some time in the future.

Question 96

The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically ___days.

Answer 96

30-45

Question 97

A stockholder who receives rights may

Answer 97

■ exercise the rights to buy stock by sending the rights certificates and a check for the required amount to the rights agent;

■ sell the rights and profit from their market value (rights certificates are negotiable securities); or

■ let the rights expire and lose their value (not a likely scenario).

Question 98

What is the difference between a warrant and a right?

Answer 98

Unlike a right, a warrant is usually a long-term instrument that gives the investor the option of buying shares at a later date at the specified (exercise) price.

Question 99

What is RIGHTS OFFERING?

Answer 99

allows STOCKHOLDERS to PURCHASE COMMON STOCK BELOW THE CURRENT MARKET PRICE

Question 100

Seabird Shipping, Inc., currently has 1,000,000 common shares outstanding. The shares are trading at $50 a share. Seabird will raise money by selling an additional 100,000 shares via a rights offering. The right allows the shareholder to purchase shares of the new offering for 10 rights and $48 per share. If all the rights are exercised, Seabird will receive______i_____ and will have __ii__ shares outstanding.

Answer 100

i $4,800,000 ($48* 100,000)

ii 1,100,000

Question 101

Shane Seabird, Jr., owns 20% of Seabird Shipping’s outstanding shares (200,000 shares). He will receive__i__ rights (one per share he owns). In order to maintain his percentage of ownership, he will need to buy 20% of the new offering (20,000 shares) to bring his total up to ___ii___shares 20% of the 1.100,000 outstanding shares after the offer is complete). To do this, he will exercise all 200,000 rights and pay $960,000.

Answer 101

i 200,000

ii 220,000

Question 102

short term, given to existing shareholders, allows one to purchase shares below current market value

Answer 102

Rights

Question 103

long term, bundled with other securities, allows someone to purchase shares at a price that is above the current market value at the time the _______ were issued

Answer 103

Warrants

Question 104

What are control stocks?

Answer 104

those owned by directors, officers, or persons who own or control 10% or more of the issuer’s voting stock.

Question 105

applies to SHARES THAT ARE SOLD THROUGH a NONSTANDARD OFFERING and are subject to RESALE RESTRICTIONS and to sales by persons who are classified as a CONTROL PERSON (insider) of the issuer.

Answer 105

Rule 144: Restricted stock and control persons

Question 106

What is restricted stock?

Answer 106

Restricted securities are those ACQUIRED THROUGH SOME MEANS other than a REGISTERED PUBLIC OFFERING.

A security purchased in a PRIVATE PLACEMENT is a restricted security.

Question 107

Restricted stock is sometimes referred to as

Answer 107

legended, or legended certs

Question 108

According to Rule 144, after holding restricted stock fully paid for six months, an investor may

Answer 108

begin selling shares.

Question 109

How can restricted stock be SOLD?

Answer 109

BEFORE these shares may he sold, the ISSUER MUST RELEASE (remove) the restriction, allowing the shares to trade freely.

Question 110

If an UNAFFILIATED INDIVIDUAL owns 7% of the voting stock of xYZ, that person is NOT A CONTROL PERSON. However, If that person’s SPOUSE owns 4% of the voting stock, then

Answer 110

then BOTH would be considered CONTROL PERSONS.

In other words, if there is a 10% or more interest held by IMMEDIATE FAMILY MEMBERS, then ALL those family members owning voting stock are control persons

Question 111

What is CONTROL PERSON also referred to as?

Answer 111

Affiliate

Question 112

What FORM is be completed in the event an AFFILIATE would like to SELL SHARES?

And what is the USE of this form?

Answer 112

When a control person wants to sell shares, that person must complete a Form 144.

The form is used to determine the number of shares the control person may sell over a 90-day period.

Question 113

The VOLUME LIMITATIONS under Rule 144 are the greater of

Answer 113

■ 1% of the OUTSTANDING SHARES of the company or

■ the AVERAGE WEEKLY TRADING VOLUME over the MOST RECENT FOUR WEEKS.

Question 114

Mrs. Davidson owns 8% of Copper Mountain Metals Corporation and her husband, Mr. Davidson, owns 4%.

Mr. Davidson would like to sell some of his shares.

When he files Form 144 he discovers that Copper Mountain has 2,400.000 outstanding shares.

The recent trading volume of the company is as follows:

Week Ending Volume

April 7
23,000

March 31
25,000

March 24
26,000

March 17
24,000

March 10
30,000

How many shares may Mr. Davidson sell in the next 90 days under Rule 144?

A. 24,000 shares
B. 24,500 shares
C. 32,000 shares
D. 26,250 share

Answer 114

The answer is 24,500 shares and is found by first determining 1% of 2.4 million shares (2,400,000 x 0.01124,000 shares.

The next step is to find the simple mean (average) of the most recent four weeks. In this question, you would not use the week of March 10 information.

The average is 24.500 shares (23K • 25K • 26K • 24K = 98K; 98K /4 = 24,500 shares). The volume limit is the higher of these two numbers, or 24,500 shares.

Question 115

Under Rule 144. which of the following sales are subject to volume limitations on the number of shares sold?

I. Control person selling registered stock held for 1 year

II. Control person selling restricted stock held for 2 years

III. Nonaffiliate selling registered stock held for I month

IV. Nonaffiliate selling restricted stock held for more than 6 months

A. III and IV B. I and II C. land III D. I and IV

Answer 115

C. l and III

Control persons (insiders) are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after six months. Registered shares sold by nonaffiliates have no Form 144 filing requirement.

Question 116

American Liquidators Corporation (Ticker MT) has 100 million outstanding common shares.
The company would like to raise capital by selling 100 million new shares.
In order to accomplish, this they would

A. offer warrants to existing shareholders.

B. suggest that existing shareholders go to the market and double their existing position.

C. offer stock rights to existing shareholders.

D. perform a stock split.

Answer 116

C. offer stock rights to existing shareholders.

LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering.
Warrants are long term and normally attached to a fixed-income offer.

Question 117

Because the VALUE of a CONVERTIBLE PREFERRED STOCK is LINKED TO THE VALUE of a COMMON STOCK, the CONVERTIBLE PREFERRED SHARE PRICE tends to

Answer 117

fluctuate IN LINE with COMMON STOCK.

Question 118

For example, as a convertible preferred issue is convertible at $40, once the common stock crosses $40 the preferred will

Answer 118

track the value of the common stock because investors assume that at some point, the preferred will be converted into the common.

Question 119

What is ADJUSTABLE RATE PREFERRED ?

Answer 119

Some PREDERRED stocks are issued with adjustable (or variable) DIVIDEND RATES.

Such dividends are usually tied to the rates of other interest rate benchmarks, such as TREASURY BILLS and MONEY MARKET rates

Question 120

What would be the LEAST APPROPRIATE choice for any investor looking to EARN INCOME through PREFERRED STOCKS?

Answer 120

For investors looking for income through preferred stocks, ADJUSTABLE RATE PREFERRED would be their least appropriate choice.

Question 121

Describe preferred stock

Answer 121

In addition to fixed dividends, participating preferred stock offers its owners a share of corporate profits that remain after all dividends and interest due other securities are paid. The percentage to which participating preferred stock participates is noted on the stock certificate.

Question 122

What are the risks associated with owning preferred stock?

Answer 122

■ Purchasing power risk
■ Interest rate sensitivity.
■ Decreased or no dividend income
■ Priority at Dissolution

Question 123

Squidco, Inc., is issuing 100 million dollars in 4V% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at 550 per share anytime in the next 10 years. Squid co common is currently trading at $29.95 a share. This is an example of A. a warrant. El. a stock right. C. a follow-on offering. D. a call.

Answer 123

A

A warrant is normally issued attached to a fixed-income security to attract more interest in the debt issue. Warrants are generally longer term (five or more years)

Question 124

What is American depositary receipts?

Answer 124

ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company’s home market.

Question 125

Describe the ease of use of ADRs’

Answer 125

ADRs will be listed on the NYSE or Nasdaq.# but some may be traded over the counter (OTC). This U.S.-based trading means the investor gets to execute her trade in a familiar well-regulated setting

Question 126

Describe ADR taxation

Answer 126

Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor’s U.S. tax liability. Any trading profits (capital gains) from the ADR would only be taxable in the United States.

Question 127

Describe ADR currency and political risk

Answer 127

ADRs are issued and pay dividends in U.S. dollars. That means these securities eliminate the complications of currency conversion. However, ADRs arc still subject to currency risk. The company pays dividends in its home currency and the issuing bank converts to and pays out those dividends in U.S. dollars. When the currency exchange rate changes, so will these dividends (in U.S. dollar terms). Also, the value of the ADR. itself will rise and fall in conjunction with the value of the underlying foreign stock, which is also influenced by currency swings.

Question 128

A preferred stock’s annual dividend represents its

Answer 128

fixed rate of return. This is a key attraction for income-oriented investors.

Question 129

Preferred stock is

Answer 129

an equity security because it represents a class of ownership in the issuing corporation. Although it is an equity security, it shares some characteristics with a debt security. As with debt securities, the rate of return on a preferred stock is fixed rather than subject to variation, as with common stock.

Question 130

How is a preferred stock identified?

Answer 130

by its annual dividend payment stated as a percentage of its par value

Question 131

A preferred stock with a par value of $100 that pays $6 in annual dividends is known as a

Answer 131

6% preferred ($6 dividend / 9100 par).

Question 132

Unlike common shareholders what is the difference for a preferred shareholder?

Answer 132

unlike common shareholders, preferred shareholders generally have no voting rights nor do they have preemptive rights. With few exceptions, the right to vote for board members or on other corporate issues is reserved for common shareholders.

Question 133

True or False

All corporations issue common stock, but not all corporations issue preferred stock.

Answer 133

True

Question 134

What are the benefits associated with preferred stock?

Answer 134

Dividend preference—When the BOD declares dividend, owners of preferred shares must be paid before any payment to common shareholders.

Priority at dissolution over common stock—If a corporation goes bankrupt, preferred stockholders have a priority claim over common stockholders on the assets remaining after creditors have been paid.

Question 135

Describe Purchasing power risk for preferred stock

Answer 135

This is the potential that, because of inflation, the fixed income produced will not purchase as much in the future as it does today.

Question 136

What are the two types of preferred stock?

Answer 136

Straight (non-cumulative) and Cumulative

Question 137

Describe non-cumulative preferred stock

Answer 137

Straight preferred stock has no special features beyond the stated dividend payment. Missed dividends are not paid to the holder.

Question 138

Describe Interest rate sensitivity based on preferred stock

Answer 138

Like a fixed-income security, when interest rates rise, the value of preferred shares declines.

Question 139

Describe Decreased or no dividend income based on preferred stock

Answer 139

there is the possibility of dividend income decreasing or ceasing entirely if the company loses money. The decision to pay a dividend rests with the BOD, and while the dividend percentage is fixed, it is not guaranteed to be paid.

Question 140

Priority at Dissolution risk related to preferred stock

Answer 140

While preferred shareholders are paid before common shareholders if a company enters bankruptcy, the preferred shares are paid behind all creditors.

Question 141

Describe cumulative preferred stock

Answer 141

Cumulative preferred stock accrues payments due its shareholders in the event dividends are reduced or suspended.

Question 142

why would you include preferred stock in a client’s portfolio?

Answer 142

■ Fixed income from dividends ■ Prior claim ahead of common stock ■ Convertible preferred stock sacrifices income in exchange for potential appreciation (discussed shortly)

Question 143

True or False
When the company resumes dividend payments, cumulative preferred stockholders receive current dividends plus the total accumulated dividends—dividends In arrears—before any dividends may be distributed to common stockholders.

Answer 143

True