Scenarios & Practice Questions Flashcards
Which security of the same issuer is likely to give the highest current yield?
A. Warrant
B. Common stock
C. Convertible preferred
D. Non-convertible preferred stock
D. Non-convertible preferred stock
Gets a fixed rate of return without any growth potential
If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI’s market price is $35, the current yield is…
$1.75 / $35 = 5%
CY = annual dividend / current market value
A commodities speculator purchases a 1,000 bushel wheat futures contract at 50 cents per bushel. At expiration, the settlement price is 45 cents per bushel. This individual…
has a $50 loss
$.05 x 1000 = $50
A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield?
0.50 x 4 = 2
Annualize dividend
2/40 = .05
Annualized Dividend/ Current Market Price
Current Yield = 5%
If a company successfully gets the owners of it’s long-term bond issue paying 7% annual interest to exchange them on a dollar-for-dollar basis with the company’s preferred stock paying a 7% annual dividend, what is the effect on EPS?
The 7% interest payment is moved from a pre-tax deduction to an after-tax dividend payment. This increases the amount of taxable income, thereby increasing the company’s tax liability. The 7% payment remains the same, with an increased tax burden & everything else remaining the same.
The EPS will decrease.
Under the UGMA, Ralph wants to give some stock to his brothers son, Jose. His nephew’s father, Bob, is the legal guardian. If Ralph wants to name himself as custodian, what needs to be done?
Ralph must open the account & name himself as the custodian
Of the following, which presents the greatest capital risk?
A. Preferred stock
B. Mortgage bonds
C. Common stock
D. Debentures
C. Common stock
Shareholders come in last in liquidation under bankruptcy proceedings
A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq stock market. To qualify their shares for sale in the state, they would probably use…
notice filing
Of the following, which is not considered when recommending an appropriate mutual fund?
A. Investment objective of the fund
B. Fund’s NAV per share
C. Fund’s expense ratio
D. Portfolio managers tenure
B. Funds NAV per share
Represents the value per share of a MF, ETF, or closed-end fund; is not relevant when considering suitability
An investor purchases a 5% callable convertible subordinated debenture at par. Exactly one year later, the bond is called at $104. The investors total return is…
Total Return = Income + Gain
Called at $104 = +$40 (Gain)
5% Coupon = 2 semi-annual interest payments of $25 in a 1-year holding period
$40 + $50 = $90
$90 Total Return on an investment of $1000 = 9%
A couple owns a home together & they file for bankruptcy. If there is an excess of funds from the sale of the home, where does the extra money go?
to the additional creditors
A married couple buys a house for $150,000. After living in the house for 10 years, they sell it for $750,000. What is the taxable gain?
$750,000 - $150,000 = $600,000
Sale Proceeds - Cost Basis = Capital Gain
Married Couple can exclude $500,000 of appreciated real estate from capital gains tax
$600,000 - $500,000 = $100,000 taxable gain
The sale of US Government securities to an individual with a net worth in excess of $2M by a registered government securities dealer is a…
nonexempt transaction;
the security is exempt, but the transaction is not
An investor in the 28% income tax bracket is considering purchasing an 8% municipal bond or a 10% corporate bond; regarding taxes…
the municipal yield is higher than the corporate bond on an after-tax basis
A farmer who produces soybeans believes that this year’s crop will be the biggest ever. This farmer would most likely hedge this risk by…
going short soybean forwards
A big crop means more supply and lower prices when the crop is harvested. Hedging involves taking an opposite position (benefiting if prices fall). If the farmer is correct, selling short at today’s price will enable delivery in the future at that higher price. Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.
