Lesson 7: Equity Securities Flashcards
The dividend-payout ratio is equal to
A) the dividend yield.
B) dividends per share divided by the par value of the stock per share.
C) dividends per share divided by the current market price per share.
D) dividends per share divided by earnings per share.
The correct answer is (D).
The dividend-payout ratio is equal to dividends per share divided by earnings per share.
A type of preferred stock whose payments, when missed, must be paid prior to paying dividends to common stock is
A) preferential preferred stock.
B) participating preferred stock.
C) non-cumulative preferred stock.
D) cumulative preferred stock.
The correct answer is (D). Preferred stock (also known as straight preferred stock) has a right to a fixed dividend. Preferred stock may also be cumulative and/or participating. Cumulative preferred stock has the right to receive unpaid dividends that are in arrears before common shareholders receive any dividends. Participating preferred stock is entitled to share in the profits of the company.
An order to buy or sell a certain quantity of a security at a specific or better price, but only after a specified price has been reached, is called a
A) stop-limit order.
B) stop-loss order.
C) stop order.
D) limit order.
The correct answer is (A).
A stop-limit order is an order to buy or sell a certain quantity at a specific or better price once a stop price has been reached.
Blue-chip stocks are most likely
A) issued by firms that have well-known brand-name product lines.
B) characterized as having high growth potential.
C) expected to outperform during economic expansions.
D) securities with high levels of systematic risk.
The correct answer is (A).
Blue-chip stocks are those that are supported by famous brand names and large corporations. Blue-chip firms are stable, have generated substantial operating cash flow for many years, and are expected to continue being market and industry leaders in the future.
Which of the following dates related to dividends has been most affected by recent changes in technology and brokerage policies?
A) The declaration date
B) The ex-dividend date
C) The record date
D) The payment date
The correct answer is (B).
Over the past few decades, the ex-dividend date has moved closer-and-closer to the record date. Changes in technology and in brokerage policies have reduced the time necessary to process orders, allowing investors to own securities more quickly after purchasing them.
Which of the following investor acts would most directly allow them to profit off a decline in a security’s price?
A) A purchase holder
B) A stop-loss order
C) A short sale
D) A capital loss
The correct answer is (C).
Short sales allow investors to profit off the decline in a security’s price.
Coyote, Inc., has net earnings of $3 billion this year. It has 500 million shares of common stock outstanding, and it paid $0.25 per share per quarter this year as a dividend. Which of the following is correct?
A) The retention ratio equals 8.33%.
B) The payout ratio equals 8.33%.
C) The payout ratio equals 16.67%.
D) The retention ratio equals 16.67%.
The correct answer is (C).
The dividend per share equals $1.00. The Earnings Per Share (EPS) equals $6.00, which is found by dividing net earnings by outstanding shares. The payout ratio = dividend per share / EPS.
Darrel buys Hollandaise, Inc., stock for $112 using a margin account with a 50 percent initial margin and a 35 percent maintenance margin. Assuming the price of the stock drops to $56, how much would Darrel need to pay to restore the equity in his account to the maintenance margin?
A) $0
B) $14.80
C) $19.60
D) $22.40
The correct answer is (C).
Required equity: $56 × 35% = $19.60
Current equity: $56 stock price − $56 loan = $0
Margin call: $19.60 - $0 = $19.60
Which of these market indexes is price-weighted?
A) The S&P 500
B) The Russell 2000 index
C) The Wilshire 5000 index
D) The Dow Jones Industrial Average
The correct answer is (D).
The Dow Jones Industrial Average is is price-weighted rather than value-weighted. It is also unlike the other indexes because it has only 30 companies, while the other indexes have at least 500 companies. And, it is the least representative of the U.S. economy.
Rich, Inc.’s, stock pays a $5 dividend quarterly. Its current earnings per share is $25. If the stock is currently trading at $400, what is the dividend yield percentage?
A) 1.25%
B) 5%
C) 20%
D) 25%
The correct answer is (B).
The dividend yield percentage is equal to the total annual dividends per share divided by the stock price.
($5 × 4) / $400 = 5%
