Quizzes

Question 1

All of the following securities represent ownership of a corporation EXCEPT:

A. common stock
B. preferred stock
C. convertible preferred stock
D. warrants

Answer 1

The best answer is D.

Warrants do not represent ownership of a corporation; only if they are exercised do they represent ownership, since exercise results in the purchase of the common stock of the issuer. Common stock and preferred stock are both securities that represent ownership.

Question 2

All of the following are types of preferred stock EXCEPT:

A. Performance
B. Participating
C. Cumulative
D. Refundable

Answer 2

The best answer is D.

There is no such thing as refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred “accumulates” any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.

Question 3

A middle-aged widowed customer has an investment objective of stable income and would also like to receive occasional “extra” income to help pay unexpected bills. What type of preferred stock would be the best recommendation?

A. Participating preferred
B. Convertible preferred
C. Straight preferred
D. Variable rate preferred

Answer 3

The best answer is A.

Preferred stock that pays a fixed dividend rate is “straight” preferred. Participating preferred receives the fixed dividend rate, and also participates with common in any “extra” dividends paid by the company – so this meets the customer’s investment objective. Convertible preferred has a fixed dividend rate that is lower than straight preferred, but in compensation for this, it can be converted into a predetermined number of common shares at the option of the holder. Thus, the holder can have capital gains if the market price of the common stock rises. Variable rate preferred has a dividend rate that is tied to a market rate of interest, and the dividend rate varies as that rate varies – so it does not meet the customer’s objective of stable income.

Question 4

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one half additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have outstanding:

A. 100,000 preferred shares and 100,000 common shares
B. 200,000 preferred shares and 100,000 common shares
C. 200,000 preferred shares and 50,000 common shares
D. 50,000 preferred shares and 100,000 common shares

Answer 4

The best answer is C.

Each unit consists of 2 preferred shares x 100,000 units equals 200,000 preferred shares issued and a warrant for 1/2 common share. If the warrants are exercised, 100,000 units x 1/2 common share = 50,000 common shares issued.

Question 5

All of the following are the responsibilities of the registrar EXCEPT the registrar:

A. distributes dividends, corporate reports, and voting materials
B. acts as a watchdog over the transfer agent
C. accounts for the number of shares issued and canceled
D. maintains the integrity of the record of all shareholder names

Answer 5

The best answer is A.

The transfer agent handles the mailings to shareholders - dividends, corporate reports, and voting materials. The registrar acts as a watchdog over the transfer agent and makes sure that any mistakes made by the transfer agent are corrected. The registrar also ensures that all shares are properly accounted for and verifies the integrity of the record of shareholders’ names and addresses.

Question 6

All of the following statements about warrants are true EXCEPT:

A. warrants have a longer term than rights
B. warrants are issued to make corporate senior securities offerings more attractive to investors
C. warrants give the holder a perpetual interest in the issuer’s underlying common stock
D. warrants trade separately from the stock of the company

Answer 6

The best answer is C.

Warrants are long term options to buy a company’s shares at a fixed price. They are typically attached to debt and preferred stock offerings (securities that are “senior” to the common stock of the issuer) to make the securities more attractive to purchasers. This is accomplished because the warrant gives growth potential to these senior security holders if the common stock price should rise in the future. Warrants typically have a fixed life of 5 years or less and then expire. Companies can issue perpetual warrants, but rarely do so.

Question 7

A corporation has issued $100 par, 8% convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $105 while the common stock is trading at $72.75. The corporation calls the preferred stock at par. To realize the largest profit, a customer holding 100 shares of preferred stock should:

A. tender the preferred shares at the call price
B. sell the preferred shares at the current market price
C. sell short the common stock and convert the preferred for delivery to cover the short
D. continue to hold the preferred shares

Answer 7

The best answer is B.

If the preferred shares are tendered at the call price, the owner receives $100 per share. Since par ($100) was paid for each share, there is no profit. If the preferred shares are sold at the current market price of $105, the owner has a profit of $5 per share. Since each preferred share is convertible into 1.4 common shares, the short sale (sale of borrowed shares) of 1.4 common shares will yield 1.4 x $72.75 = $101.85. The preferred can then be converted to common to cover the borrowed short position. This results in a $1.85 profit per share. Thus, selling the preferred is the best choice. Continuing to hold the preferred does not make sense since dividend payments will cease. For this reason, buying additional preferred shares does not make sense either.

Question 8

A corporation issues $100 par convertible preferred stock, convertible at $20 per share when the common stock is trading at $10. The preferred is issued under an “anti-dilutive covenant.” If the company declares a 25% stock dividend, which statements are TRUE?

I The conversion price is adjusted to $16
II The conversion price is adjusted to $25
III The conversion ratio is adjusted to 4:1
IV The conversion ratio is adjusted to 6.25:1

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

Answer 8

The best answer is B.

Under an “anti-dilutive” covenant, if there is a stock split or stock dividend resulting in the issuance of additional common shares, the conversion price and hence the conversion ratio are adjusted to reflect the fact that the market price of each common share will drop on the ex date. Prior to the stock dividend, the conversion price was $20 per share. If there is a 25% stock dividend, the new conversion price will be adjusted to $20/1.25 = $16 per share. Since each preferred share is $100 par, the new conversion ratio will be $100/$16 = 6.25.

Question 9

ABC Corporation has recently completed a $20,000,000 offering of 10% debentures due in 2035. Each bond was sold with a warrant attached that allows the holder to buy 10 shares of ABC common stock at $50 per share. The market price of ABC is currently $42. Which statement(s) are TRUE?

I The warrants help to increase the issue’s marketability
II The warrants help to lower the interest cost on the issue
III The warrants are “under water”
IV The company will raise an additional $10,000,000 if the warrants are exercised

A. I only
B. I and II
C. III and IV
D. I, II, III, IV

Answer 9

The best answer is D.

Warrants are “sweeteners” that are attached to bond and preferred stock offerings to make them more marketable. Because the warrants have potential value, the issue can typically be sold at a lower interest cost (higher price) than if the warrants were not attached. At issuance, the warrants are usually issued “out the money” - as in this example the warrants allow the stock to be purchased at $50 but the stock’s current value is $42. Thus, these warrants are said to be “under water” and will not have real value until the stock price rises above $50. If the warrants are exercised, the 20,000 debentures issued ($20,000,000/ $1,000 par) can be converted into 10 shares of stock each for a total issuance of 200,000 shares. The company will receive $50 per share, for a total of $10,000,000.

Question 10

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of the ex date, the stock is trading at $29. The value of the right is:

A. $.90
B. $1.00
C. $1.10
D. $1.25

Answer 10

The best answer is B.

The value of a right “ex rights” is:

Ajdst Market Price - Market Price
———————————————— = Value “Ex Rights”
N (Rights)

$29-$19 $10
———— = ——— = $1 Value “Ex Rights”
10 10

Question 11

A company has 1,000,000 shares outstanding. It plans to issue 2,000,000 additional common shares to raise funds to build a new manufacturing facility. Your client owns 50,000 shares of this company. How many rights will the customer receive?

A. 25,000
B. 50,000
C. 75,000
D. 100,000

Answer 11

The best answer is B.

The customer receives 1 right per shares, so he or she receives 50,000 rights. Because there are 1,000,000 shares outstanding, the company will issue a total of 1,000,000 rights covering the sale of 2,000,000 additional shares. Therefore, the terms of the offering will be 1,000,000 rights/2,000,000 shares = .5 right per additional shares.

Because this customer gets 50,000 rights, the customer will be able to subscribe to 50,000 rights/.5 right per share = 100,000 additional shares.

Another way of looking at this is that the customer owns 5% of the company (50,000 shares owned /1,000,000 shares outstanding). Because the company is issuing 2,000,000 additional shares, the customer can subscribe to 5% of these, or 100,000 shares.

Question 12

When the market price of ACME Common stock is at $45, which of the following actions, when completed by ACME Corporation, would raise additional capital?

I Declaration of a 2 for 1 stock split
II Announcement of a rights distribution, allowing existing shareholders to buy the stock at $35 per share
III Announcement of a call of ACME $100 par convertible preferred at par, convertible at a 2.5:1 ratio
IV Announcement of an offering of callable preferred stock

A. I and II only
B. II and IV only
C. III and IV only
D. I, II, III, IV

Answer 12

The best answer is B.

The declaration of a stock split will not raise additional capital. Stock splits are typically declared when a company’s stock price has risen too high for investors to easily trade 100 share units. By splitting the stock, the price is halved in the marketplace, making 100 share lots more affordable. A rights distribution will raise additional capital, since the existing shareholders are asked to “subscribe” and therefore, pay, for more shares. The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock. In this case, the issuer is doing a “forced conversion,” because it makes sense for the preferred stockholders to convert to stock worth $45 per share in the market, rather than to tender their preferred shares at par, receiving $100 per preferred share/2.5 common shares per preferred shares = $40 equivalent price per share. Finally, the issuance of new preferred stock would raise new capital for the issuer.

Question 13

Which of the following statements are TRUE when comparing convertible preferred stock and non-convertible preferred stock?

I Convertible preferred stock will have a higher yield than non-convertible preferred stock
II Convertible preferred stock will have a lower yield than non-convertible preferred stock
III Convertible preferred stockholders benefit as the market price of the common stock rises
IV Convertible preferred stockholders benefit as the market price of the common stock falls

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

Answer 13

The best answer is C.

Non-convertible preferred yields are higher than convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common’s price rises, so growth potential is included. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

Question 14

The Board of Directors of a company will set which of the following?

I Declaration date
II Record date
III Ex date
IV Payable date

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

Answer 14

The best answer is C.

The Board of Directors will set the declaration date (the day the dividend was declared), record date (the date on which customer’s name must be on the record books to receive the dividend), and the payable date (the day on which the checks are mailed). The ex date is set by FINRA (the self regulatory organization or SRO that oversees the securities markets in the U.S.) based upon the report of the record date.

Question 15

A customer owns 107 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 10 rights tendered, a shareholder may purchase one additional share at $22 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE?

A. The shareholder can buy a maximum of 10 shares by paying $220
B. The shareholder can buy a maximum of 11 shares by paying $242
C. The shareholder can buy a maximum of 107 shares by paying $2,354
D. The shareholder can buy a maximum of 110 shares by paying $2,420

Answer 15

The best answer is B.

The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 107 shares and thus, will receive 107 rights.

107 rights / 10 rights per share = 10.7 shares, which is rounded up to 11 shares @ $22 each = $242 necessary to subscribe.

Question 16

Which statements are TRUE about the time value and intrinsic value of rights and warrants when issued?

I Warrants have time value but not intrinsic value
II Warrants have intrinsic value but not time value
III Rights have time value but not intrinsic value
IV Rights have intrinsic value but not time value

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

Answer 16

The best answer is B.

Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock’s price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of “time value.”

Rights are very short term options (30-60 days) granted to existing shareholders that allow them to buy the stock at a discount to the current market price. The discount is the “intrinsic value” of the right. However, because they are so short term, they have virtually no “time value.”

Question 17

A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE?

A. 	The shareholder can buy a maximum of 15 shares by paying $360
B. 	The shareholder can buy a maximum of 16 shares by paying $384 Incorrect Answer		C. 	The shareholder can buy a maximum of 17 shares by paying $408 Correct Answer		D. 	The shareholder can buy a maximum of 18 shares by paying $432

Answer 17

The best answer is D.

The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.

Question 18

ABC Corp. has a market price of $15 and a Price/Earnings multiple of 10. What was the corporation’s Earnings Per Common Share?

A. $.67
B. $1.50
C. $10
D. This cannot be determined

Answer 18

The best answer is B.

The Earnings per Share can be found by taking the:

Market Price
——————- = Earnings per Share
Multiple

15
—– = $1.50
10

Question 19

A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be:

A. $200
B. $400
C. $600
D. $800

Answer 19

The best answer is A.

The annual rate is 8% X $50 par value = $4 per share X 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200.

Question 20

If interest rates fall, issuers most likely will call:

I preferred issues with low interest rates
II preferred issues with high interest rates
III preferred issues with low call premiums
IV preferred issues with high call premiums

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

Answer 20

The best answer is C.

If interest rates fall, issuers most likely will “call in” old high rate preferred and replace it by selling new preferred at the lower current rates. The “call premium” is any amount that the issuer will pay the preferred stockholder above par value as “extra” compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

Question 21

A corporation is attempting to sell additional shares to its existing shareholders through a rights distribution. A shareholder who wishes to subscribe must send the purchase amount with the rights certificate to the:

A. transfer agent
B. stand-by underwriter
C. rights agent
D. corporate controller

Answer 21

The best answer is C.

A rights agent is hired to handle the mechanics of a rights offering. To subscribe, the existing shareholders submit their rights with the subscription dollar amount to the rights agent.

Question 22

A customer owns 400 shares of ABC stock. ABC is having a rights offering where 20 rights are needed to subscribe to 1 new share. The customer will receive:

A. 	1 right Incorrect Answer		B. 	20 rights
C. 	100 rights Correct Answer		D. 	400 rights

Answer 22

The best answer is D.

The customer receives a right for each common share held. Since he owns 400 shares, he gets 400 rights.

20 rights are needed to buy 1 new share, so 400 rights / 20 rights per share allows the purchase of 20 new shares.

Question 23

(Refer to the exhibit window to answer the following question)

When is the earliest date that the stock can be sold regular way and still allow the customer to receive the dividend payable Jan 30th, 2018?

A. January 16th
B. January 17th
C. January 18th
D. January 19th

Answer 23

The best answer is C.

The ex date for the dividend payable January 30th, 2018 is set at January 18th. If the stock is sold prior to this date, the new buyer would be on record to receive the dividend. If the stock is sold on the ex date or later, the seller is on the record books for the dividend payment.

Question 24

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of Wednesday, December 1st, the stock is trading at $30. The value of the right is:

A. $.90
B. $1.00
C. $1.10
D. $1.25

Answer 24

The best answer is B.

Since the record date is Friday, December 10th, a customer buying on Wednesday, December 1st would settle on Friday, December 3rd (2 business days later) and would be on the record books for the distribution. Therefore, the stock is trading cum rights. The value of a right “cum rights” is:

Market Price - Sub Price
———————————— = Value “Cum Rights”
N(Rights) + 1

$30-$19 $11
———— = —— = $1 Value “Cum Rights”
10+1 11

Question 25

At the beginning of the year, an investor buys 1,000 shares of XYZ stock, purchased at $33 per share. Subsequently, the stock rises to $40 by the end of the year and the stock pays a $4 dividend during the year. By the end of the following year, the stock has fallen to $25 and pays the same $4 dividend. What is the stock’s dividend yield?

A. 4%
B. 10%
C. 12%
D. 16%

Answer 25

The best answer is D.

Dividend yield is based on the current market share price, not on cost of the stock. The annual dividend amount paid is $4 per year. Since the stock is currently trading at $25 per share, the dividend yield is $4 / $25 = 16%.

Question 26

The regular way ex date, for a dividend paid to stockholders of record on Friday, June 15th, is:

A. Monday, June 11th
B. Tuesday, June 12th
C. Wednesday, June 13th
D. Thursday, June 14th

Answer 26

The best answer is D.

The regular way ex date is set at 1 business day prior to record date. The ex date is the very first date the stock trades without the value of the dividend. If the stock is bought on Wednesday, June 13th in a regular way trade, the trade settles in 2 business days on Friday, June 15th, so the holder is on record to receive the dividend (to receive the dividend, the trade must settle no later than the record date). If the stock is bought on Thursday, June 14th, the trade settles on Monday, June 18th. The stockholder would not have been on the record book as of the evening of June 15th (the record date) to receive the dividend. Thus, the first day that the stock trades without the purchaser receiving the dividend is Thursday, June 14th. This is the ex date.

Question 27

Common stockholders and preferred stockholders BOTH have:

A. voting rights
B. pre-emptive rights
C. dividend rights
D. subscription rights

Answer 27

The best answer is C.

Both common and preferred shareholders have the right to receive dividends, if declared by the Board of Directors. Common shareholders have both voting rights and preemptive/subscription rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive/subscription rights.

Question 28

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT:

A. the number of outstanding shares is reduced
B. the earnings per share is increased
C. the market price of the stock will increase
D. the number of authorized shares will be reduced

Answer 28

The best answer is D.

Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock’s price in the market. The purchase of Treasury Stock has no effect on authorized shares.

Question 29

A corporation has issued $100 par, 6 1/2% cumulative convertible preferred stock, callable at par. The preferred is convertible into 2 shares of common stock. Currently, the preferred stock is trading at $100 while the common stock is trading at $50. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions):

A. $0
B. $1,000 loss
C. $5,000 gain
D. $10,400 gain

Answer 29

The best answer is A.

If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $100 per share = $10,000. Since each share of preferred is convertible into 2 common shares, the 100 preferred shares will be converted into 2 x 100 = 200 common shares. The sale of 200 common shares at the current market price of $50 will yield $10,000. The net profit is: $10,000 - $10,000 = $0. Here, there is a wash, as both the common and preferred are trading at parity.

Question 30

Which statements are TRUE regarding participating preferred stock? Participating preferred:

I participates in any bond interest payments
II participates in “extra” common dividends declared by the Board of Directors
III has a dividend rate that is fixed as to a minimum but not as to a maximum
IV has a dividend rate that is fixed as to a maximum but not as to a minimum

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

Answer 30

The best answer is C.

Participating preferred pays a fixed dividend rate but also participates with common in “extra” dividends declared by the Board of Directors. Therefore, the dividend is fixed as to the minimum amount but not as to the maximum amount.

Question 31

Which of the following are types of preferred stock?
I	 	Performance
II	 	Participating
III	 	Cumulative
IV	 	Refundable

A. I and III only
B. II and IV only
C. I, II, III
D. I, II, III, IV

Answer 31

The best answer is C.

There is no such thing a refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred “accumulates” any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.

Question 32

The Board of Directors of a company will set all of the following EXCEPT:

A. declaration date
B. record date
C. ex date
D. payable date

Answer 32

The best answer is C.

The ex-date is set by FINRA (the self regulatory organization or SRO that oversees the securities markets in the U.S.) once the Board of Directors sets the Record date. The Board of Directors, when it announces a dividend, sets the Declaration date, Record date, and Payable date.

Question 33

Which function would be performed by the registrar?

A. verifying the record of all shareholder names and addresses
B. acting as disbursement agent for the corporation
C. issuing new stock certificates
D. canceling old stock certificates

Answer 33

The best answer is A.

The transfer agent cancels old shares and issues new shares. It is the responsibility of the registrar to maintain the integrity of the shareholder list, and to ensure that the number of shares transferred from one shareholder to another always matches. The transfer agent typically performs the role of paying agent as well. When a corporation makes a distribution, the paying agent actually prepares and mails the checks (using the current shareholder list provided by the registrar).

Question 34

ABC Corporation has declared a rights offering to stockholders of record on Tuesday, June 22nd. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. A customer owning 240 shares wishes to subscribe. The market price of the stock is currently $73. The customer can buy:

A. 12 shares for $720
B. 12 shares for $876
C. 240 shares for $14,400
D. 240 shares for $17,520

Answer 34

The best answer is A.

Since 20 rights are needed to buy 1 new share, the customer holding 240 shares, and therefore receiving 240 rights can buy 240 / 20 = 12 shares at $60 each = $720 total for 12 shares.

Question 35

Callable preferred stock is likely to be redeemed by the issuer if:

A. interest rates rise
B. interest rates fall
C. the common stock price rises
D. the common stock price falls

Answer 35

The best answer is B.

If interest rates fall, issuers can “call in” old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

Question 36

During periods of stable interest rates and increasing stock prices, which type of preferred stock will have the greatest price volatility?

A. Cumulative
B. Reset
C. Callable
D. Convertible

Answer 36

The best answer is D.

Preferred stock is a fixed income security, similar to a bond, where the price of the security moves inversely to interest rate movements. If interest rates are stable, this implies that preferred stock prices will be stable as well. However, convertible preferred stock, if the price of the stock moves up above the conversion price, trades at parity to the equivalent number of common shares into which the preferred stock can be converted. Thus, as the market price of the common stock rises (which has nothing to do with interest rate movements), the price of the preferred will move up as well.

Virtually all preferred stock is cumulative - if the company misses preferred dividend payments, then before it can pay a common dividend, it must make up all unpaid preferred dividend payments.

Callable preferred gives the issuer the right to call in the preferred at a pre-established price, which the issuer would do if market interest rates fell. This would tend to suppress the upward movement of the stock price to no more than the call price as market interest rates fell. In a period of stable interest rates, the issuer has no reason to call the preferred stock.

Reset preferred “resets” the dividend rate as market interest rates move (also called adjustable rate preferred) - so it is a variable rate security. In a period of stable interest rates, the dividend rate would be unchanged and therefore the price of the preferred stock will be stable as well (unless the credit quality of the issuer deteriorated, jeopardizing the dividend payment - this event would cause the price of the preferred shares to drop).

Question 37

(Refer to the exhibit window to answer the following question)

When is the earliest date that the stock can be sold regular way and still allow the customer to receive the dividend payable April 30th?

A. April 16th
B. April 17th
C. April 18th
D. April 19th

Answer 37

The best answer is C.

The ex date for the dividend payable April 30th is set at April 18th. If the stock is sold prior to this date, the new buyer would be on record to receive the dividend. If the stock is sold on the ex date or later, the seller is on the record books for the dividend payment.

Question 38

A customer holds 100 shares of ABC Corp $100 par convertible preferred stock convertible at a 10 to 1 ratio. If ABC declares and pays a 10% stock dividend, then as of the payable date, the customer will now have:

A. 90 shares of ABC preferred stock
B. 100 shares of ABC preferred stock
C. 100 shares of ABC preferred stock and 10 shares of ABC common stock
D. 110 shares of ABC preferred stock

Answer 38

The best answer is B.

If ABC declares and pays a 10% “common” stock dividend, the customer who holds convertible preferred stock still would have 100 shares. However, the conversion ratio which was initially 10 to 1 would reflect the stock dividend and would get adjusted to an 11 to 1 ratio (10% additional common shares into which the preferred is convertible). With a new conversion ratio of 11 to 1, the conversion price per share becomes: $100 par / 11 shares = $9.09 per share.

Question 39

(Refer to the exhibit window to answer the following question)

If Acme Motor Company earned $10.00 per common share in 2017, its dividend payout ratio was:

A. 25%
B. 29%
C. 40%
D. 50%

Answer 39

The best answer is A.

$2.50 of Dividends paid in 2017 divided by $10.00 Earnings per Common Share = 25% Dividend Payout Ratio.

Question 40

A client owns 500 shares of a company with 5,000,000 shares outstanding. The company will issue 1,000,000 shares through a rights offering. If the client subscribes to the offering, he or she will now own:

A. 500 shares
B. 600 shares
C. 1,000 shares
D. 1,500 shares

Answer 40

The best answer is B.

Because the company is issuing 20% additional shares (1,000,000 new shares/5,000,000 outstanding shares = 20%), a stockholder with 500 shares will be allowed to subscribe to 100 of the new shares, for a total holding of 600 shares.

Question 41

Which of the following best describes the duties of a “Rights Agent”? The Rights Agent:

A. ensures that all common shareholders have voting rights
B. ensures that the correct number of shares are canceled and issued by the transfer agent whenever a transfer occurs
C. repurchases company Treasury Stock when market conditions are favorable
D. accepts shareholder subscriptions to a rights offering

Answer 41

The best answer is D.

The rights agent handles the mechanics of a rights offering. In a rights offering, a company is attempting to sell additional shares directly to its existing shareholders. The company hires a “rights agent” to perform these duties.

Question 42

A corporation issues $100 par convertible preferred stock, convertible at $10 per share, when the market price of the common is currently $5. Which statement is TRUE?

A. The conversion ratio is 10:1
B. The conversion ratio is 5:1
C. The conversion ratio is 2:1
D. The conversion ratio cannot be determined

Answer 42

The best answer is A.

The conversion ratio is Par Value / Conversion Price.
$100 Par / $10 Conversion Price = 10:1 Conversion Ratio.

Question 43

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have:

A. 100,000 preferred shares and 25,000 common shares
B. 100,000 preferred shares and 50,000 common shares
C. 200,000 preferred shares and 100,000 common shares
D. 20,000 preferred shares and 200,000 common shares

Answer 43

The best answer is A.

Since each unit consists of 1 preferred issue, 100,000 units X 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units X 1/4 = 25,000 common shares issued if the warrants are exercised.

Question 44

American Depositary Receipts would trade on all of the following exchanges EXCEPT the:

A. London Stock Exchange
B. New York Stock Exchange
C. NASDAQ Stock Market
D. American Stock Exchange

Answer 44

The best answer is A.

American Depositary Receipts are traded in the United States only. ADRs are listed on stock exchanges such as the NYSE, AMEX (now renamed the NYSE American), and NASDAQ. These exchanges list and trade sponsored ADRs. Non-sponsored ADRs that are assembled by banks without the foreign issuer’s participation trade over-the-counter (OTC). ADRs are a vehicle for trading foreign securities in the United States.

Question 45

A customer owns 200 shares of ABC stock. ABC is having a rights offering where 20 rights are needed to subscribe to 1 new share. How many new shares can the customer purchase through this rights offering?

A. 1 share
B. 10 shares
C. 100 shares
D. 200 shares

Answer 45

The best answer is B.

The question asks how many additional shares can be purchased, not how many rights the customer has. The customer has 200 shares, and will receive 1 right for each share, so the customer has 200 rights. Since 20 rights are needed to subscribe to 1 new share, this allows the purchase of 10 new shares.