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Unit 2 > One > Flashcards

One Flashcards

1
Q

What are retained earnings?

A

Profits retained by a company are often used to expand. and reinforce business operations.
Earnings not paid to investors by dividends

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2
Q

Three things that impact the market price of common stock

A
  1. Demand for stock in the market
  2. Future expectations of the company
  3. Future dividend payments
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3
Q

Three ways profits are utilized?

A
  1. Retain profit
  2. Pay profit to shareholders
  3. Both
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4
Q

Four actions BODs can take to guide the company?

A
  1. Hiring and/or firing senior-level employees
  2. Managing senior level employee compensation
  3. Creating and implementing general company policies
  4. Approving dividend payouts to investors
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5
Q

What positions do common stockholders have the right to vote for?

A

Only BOD

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6
Q

What are two ongoing reports. companies must file?

A
  1. 10 - K annual audited financial report
  2. 10-Q unaudited financial report
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7
Q

What are 5 types of securities?

A
  1. stocks
  2. bonds
  3. mutual funds
  4. options
  5. ETFs
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8
Q

What is a preemptive right?

A

The ability to buy newly-issued shares before they’re publicly offered

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9
Q

What do rights allow investors to do?

A

Purchase new shares at a lower price than its market value

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9
Q

What are the three paths an investor can take with rights?

A
  1. Exercise
  2. Sell
  3. Expire
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10
Q

What is a benefit to a company of offering rights?

A

They don’t need to hire an underwriter

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10
Q

Three paths investor can take with warrants?

A
  1. Exercise
  2. Trade
  3. Expire
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11
Q

Four characteristics of Rights

A
  1. Right to purchase new shares at fixed price
  2. Intrinsic value at issuance
  3. Little time value
  4. Short term
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12
Q

Four characteristics of warrants?

A
  1. Right to purchase new shares at fixed price
  2. No intrinsic value at issuance
  3. Long term
  4. Time value exists
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13
Q

What is a bond?

A

A. bond is a debt security that allows investors to loan funds to organizations in return for interest

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14
Q
A
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15
Q

What must companies do before performing dilutive actions?

A

Get majority of shareholder approval

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16
Q

Why is issuing convertible securities a dilutive action?

A

Because you are giving new common shares to only some stockholders

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17
Q
A
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18
Q

What are three types of dilutive actions?

A
  1. Private placements
  2. Issuing Convertible stock
  3. Options to employees
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19
Q

What type of investor are pre-emptive rights issued to?

A

Common stockholders

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20
Q

When would a company do a forward stock split?

A

When they feel their stock price is too expensive for the average investor

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21
Q

What is a legal method for issuers to manipulate stock prices?

A

Stock splits

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22
Q

What requires approval from the BOD but not shareholders?

A

Dividends of any form

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23
Q

Who must approve stock splits?

A

Sharehoolders by majority

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24
Q

What is a liquidation of assets?

A

The sale of all company assets

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25
Q

What is the order of payout during liquidation?

A
  1. Unpaid wages
  2. Unpaid taxes
    3.. Secured creditors
  3. Unsecured creditors
  4. Junior unsecured creditors
  5. Preferred stockholders
  6. Common stockholders
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26
Q

When do secured creditors have first rights vs. Unpaid wages and taxes?

A

Secured creditors have first right to the collateral backing the loan while unpaid wages and taxes are first if the collateral backing the loan is liquidated and does not cover the loan balance

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27
Q

When will the liquidation go to the secured creditor first instead of the unpaid wages and taxes?

A

If the collateral backing the loan is liquidated and does not cover the loan balance

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28
Q

What is a lien for secured creditors?

A

The right to a property if a loan cannot be repaid

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29
Q

What is senior debt?

A

Debt that maintains priority over general and junior debt in the event of liquidation

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30
Q

What are 5 things a transfer agent is responsible for?

A
  1. Transfer ownership of sellers to buyers
  2. Maintain book of stockholders
  3. Make dividend payments to stockholders
  4. Distribute proxies to stockholders
  5. Keep an accurate count of shares outstanding
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31
Q

What are the three specific steps for transfer agents?

A
  1. Redeem the seller’s shares
  2. Adds the buyer to the list of stockholders
  3. Electronically issue shares to the buyer
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32
Q

What registration format are securities registered?

A

Book entry format

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33
Q

When a stock split occurs, who is responsible for accurate track of outstanding shares and ownership?

A

Transfer agent

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34
Q

Difference between negotiable and redeemable securities?

A

Negotiable trade between investors, redeemable bought and sold with the issuer

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35
Q

Two prominent redeemable securities

A
  1. Mutual funds
  2. Unit investment trusts
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36
Q

At what price does investor purchase redeemable securities from issuer?

A

at the NAV

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37
Q

What is the public offering price for redeemable securities?

A

Public offering price + sales charge

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38
Q

Equation for net asset values?

A

(Assets - liabilities)/Outstanding shares

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39
Q

What is a redemption request?

A

Investor cashing out mutual funds from issuer at NAV price

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40
Q

What two examples of secondary distributions?

A
  1. When an employee sells a large part of the shares they’ve acquired
  2. Investors liquidate their private placements
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41
Q

What secondary market do listed stocks trade in?

A

Third market

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42
Q

What happens in the fourth market?

A

Large institutions trade without brokers

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43
Q

Where does the fourth market operate?

A

ECN

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44
Q

How do ECN agencies make money?

A

Commissions

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45
Q

What are 5 roles in the completement of financial transaction?

A
  1. Broker dealers
  2. Introducing broker dealers
  3. Clearing brokers
  4. Clearinghouses
  5. Transfer agents
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46
Q

What are two differences between introducing brokers and clearing brokers?

A
  1. Introducing brokers don’t maintain custody of ustomer assets, clearing brokers do.
  2. Introducing brokers do not process trades, they outsource to CB
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47
Q

What four things do clearing brokers do?

A
  1. Maintain custody
  2. Process orders
  3. Clearing services between investors and clearinghouse
  4. Facilitating trades
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48
Q

What does “Best execution mean”?

A

Obtaining the best possible price

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49
Q

What is the confirmation flow for a trade?

A

Clearing broker sends a trade confirmation to the introducing broker who then informs customer

50
Q

What do transfer agents do?

A

They work on behalf of issuers to keep track of investors that own securities

51
Q

What is the cutoff time for cash settlement trades?

A

2:30pm ET

52
Q

Three roles of clearing house

A
  1. Organization responsible for clearing trades
  2. Ensures buyers deliver cash
  3. Ensures seller delivers securities
53
Q

What are settlement rules for common stock regular way and cash settlement?

A
  1. Regular way - T+2
  2. Cash settlement - same day if by 2:30pm
54
Q

When is the ex-date for a stock split?

A

The day after the payable date

55
Q

Who determines the ex-dividend rate for NYSE?

A

The NYSE

56
Q

Who determines the ex-date for OTC trades?

A

FINRA

57
Q

When is the cash settlement ex-date?

A

The day after the record date

58
Q

What kind of account must you open before selling short?

A

Open a margin account

59
Q

What is leverage?

A

investing with borrowed funds

60
Q

What are the consequences of investing borrowed funds?

A

Amplification of gain and losses

61
Q

what must you do to be eligible to lend securities?

A

Sign the loan consent form

62
Q

Why is investor responsibility in paying a loaned dividend payment usually a wash?

A

Because the stock usually drops in price transiently when the dividend is paid, so they recoup the dividend value.

63
Q

Who has to pay dividends on shares held short?

A

The short seller (investor) to the lender

64
Q

Who creates the ADR?

A

Domestic financial firms with foreign branches

65
Q

Four steps of companies creating ADFs?

A
  1. JP Morgan purchases large amounts of foreign stock with high US demand
  2. Stocks are placed into a trust account
  3. Account is sliced into receipts
  4. Receipts are registered with the SEC and sold to American investors
66
Q

3 Disadvantages of ADR

A
  1. No voting rights
  2. No preemptive rights
  3. foreign currency exchange risk
67
Q

What happens if the foreign government witholds part of the dividend for tax purposes?

A

IRS provides a tax credit to investors

68
Q

What are the two currency exchange risks in ADR?

A
  1. If currency being exchanged out of weekends
  2. Currency being exchanged into strengthtnes
69
Q

What is an ADR?

A

Us- registered receipt for foreign investments

70
Q

What happens when foreign issuers issue rights?

A

The rights will be sold with proceeds distributed to ADR holders

71
Q

What are tender offers?

A

Direct proposals to purchase stock from current investors at premium prices

72
Q

Why would investors try a tender offer rather than buy shares from the market?

A

Because buying shares would market would flood it with demand and drive up the stock price

73
Q

What are the two time regulations for tender offers?

A
  1. Investors must. be provided 20+ business days to make decision
  2. If tender offer changes, extended by 10 days
74
Q

Why would a company do a stock buybsck?

A

With fewer outstanding shares, the issuer will report higher EPS even if the revenue stays flat

75
Q

Three steps to hostile takeover

A
  1. Purchasing significant stock positions
  2. Instilling hand picked BOD
  3. New BOD bending at will of outsider
76
Q

What is the result of a stock buyback?

A

Issuer repurchases shares and EPS increases with fewer outstanding shares

77
Q

5 Requirements for tender offer

A
  1. Proposal to purchase security from current investors
  2. Offered at premium to market price
  3. participants must be long the security
  4. Must be available for at least 20 business days
  5. Additional 10 if change
78
Q

Two types of systematic risk?

A
  1. Market Risk
  2. Inflation risk
79
Q

What is a stock index?

A

Basket of stocks whose performance is averaged to determine performane of market

80
Q

What two types of risk does diversification not help reduce?

A
  1. Market Risk
  2. Inflation risk
81
Q

Why are high inflation levels a short term problem for common stock?

A

Because market values will fall

82
Q

What type of risk does diversification protect against?

A

Non-systematic risk

83
Q

6 types of non-systematic risk?

A
  1. Financial risk
  2. BUsiness risk
  3. Regulatory risk
  4. Legislative risk
  5. Political risk
  6. Liquidity risk
84
Q

What condition make stocks subject to financial risk?

A

Companies have borrowed too much money and owes too much interest

85
Q

When does business risk occur?

A

Products in low demand due to competition or mismanagement

86
Q

When does a company face regulatory risk?

A

Potential or current governmental regulation negatively affects an investment

87
Q

Legislative risk?

A

When a law or regulation negatively affects an investment

88
Q

What. is the difference between legislative and regulatory risk?

A

Regulatory risk when government agency regulates a company, legislative risk when a new law signed by the president impacts an investment

89
Q

When does political risk occur?

A

When there is political instabilities like military coups or threats of war

90
Q

What type of security does political risk most likely affect?

A

Foreign securities from countries with unstable governments

91
Q

When does an investor face liquidity risk?

A

When they have trouble turning their stock into cash

92
Q

When would there be liquidity risk?

A

For stocks that are not listed on exchanges have less trading volume and participants

93
Q

What is the result of liquidity risk?

A

Investor may have to substantially drop their asking price due to no demand

94
Q

What size stocks are less risky?

A

Larger cap stocks

95
Q

Three characteristics of unrealized capital gain?

A
  1. Current gain on investment
  2. Hasn’t been sold
  3. Gainst at risk if market declines
96
Q

Three characteristics of realized capital gain?

A
  1. Locked in gain on investment
  2. Investment sold
  3. No risk on gain
97
Q

What is inflation risk also known as?

A

Purchasing power risk

98
Q

What. isthe best type of security. tohedge against inflation?

A

common stock

99
Q

Three things diversification can result in

A
  1. Portfolio with a low correlation
  2. Reduction of non-systematic risks
  3. Reduction in portfolio volatility
100
Q

What does the term “current” translate to in assets and liabilities?

A

Short term

101
Q

What counts as current assets?

A

Any cash and any item expected to be turned into cash easily within one year

102
Q

5 examples of current assets

A
  1. Cash
  2. Cash equivalents
  3. Accounts receivable
  4. Inventory
  5. Prepaid expenses
103
Q

What are accounts receivable?

A

Money owed to the company by third parties within one year

104
Q

5 examples of current liabilities?

A
  1. Accounts payable
  2. Wages payable
  3. Taxes payable
  4. Interest payable
  5. Principal payable (within one year)
105
Q

What does accounts payable mean?

A

General term for money owed by the company to third parties within one year

106
Q

When are bonds considered a liability?

A

Only if their principal payoff date is within. 1year

107
Q

What are physical assets?

A

Long term physical assets expected. to be utilized for at least one year

108
Q

Intangible assets?

A

Various forms of intellectual property to be utilized for one year

109
Q

What are long term liabilities?

A

Bills, loans, or payments due to third parties in more than one year

110
Q

Four examples of long term liabilities?

A
  1. Bonds and notes > 1 year
  2. Mortgages
  3. Pensions
  4. Long term outstanding loans
111
Q

Three examples of stockholder’s equity?

A
  1. Par value of outstanding stock
  2. Capital in excess of par
  3. Retained earnings
112
Q

What are retained earnings?

A

Earnings business profits that are not distributed to stockholders

113
Q

What are Price to Earnings ratio used for?

A

To determine if a company is overvalued or undervalued

114
Q

What is the PE ratio formula?

A

Market price/earnings. pershare

115
Q

When is a company overvalued?

A

When the PE ratio. ishigh

116
Q

What type of companies maintain higher PE ratios

A

Growth companies

117
Q

What are companies with lower PE ratios called?

A

Value companies

118
Q

Why are value companies PE ratios low?

A

Significant future growth isn’t worth betting on so investors aren’t willing to overpay

119
Q

What two things does a company balance sheet indicate?

A
  1. Compares assets vs. liabilities
  2. Company’s net worth
120
Q

Two High PE ratio characterizations

A
  1. May indicate overpriced investment
  2. Typical for growth companies
121
Q

Two Low PE ratio characterizations?

A
  1. Underpriced investment
  2. Typical of value companies
122
Q

When. isa form 13D filled out?

A

WHen an investor obtains 5% or more of ownership

123
Q

When is form 8K filled out?

A

To report significant corporate events

124
Q

What statement DOES NOT report cash flow?

A

Balance sheet

125
Q

What does the balance sheet report?

A

Assets. andliabilities

Unit 2 (18 decks)

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