Study tool

Question 1

An official notice of sale publicizes of the following EXCEPT.

Answer 1

The bonds rating.

Question 2

ADR owners have all the following rights EXCEPT:

Answer 2

the right to sell the ADR in the foreign market.

Question 3

All of the following statements describe stock rights EXCEPT:

Answer 3

they are most commonly offered with debentures to make the offering more attractive.

Question 4

The ex-date for NYSE-listed issues is set by

Answer 4

The ex-date is set by the market where the security principally trades. the NYSE.

Question 5

Dividends from American Depositary Receipts (ADRs) held by U.S. investors are declared in

Answer 5

the foreign currency but paid in U.S. dollars

Question 6

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

Answer 6

The current yield is calculated by dividing the annual dividend by the current market value ($1.75 / $35 = 5%).

Question 7

An experienced investor wants to allocate 10% of an existing portfolio to real estate but does not want to maintain properties, be a landlord, or wait if cash is needed. Which of the following choices would be suitable given the investor’s objectives?

Answer 7

Equity Real Estate Investment Trusts are a way to invest in real estate without having to own or manage properties. REITs trade on exchanges and over the counter; therefore, they are liquid investments. Both of these characteristics meet the investor’s objective and make equity REITs the most suitable recommendation of those offered here…Purchase shares of an equity REIT

Question 8

Which of the following statements regarding ADRs are TRUE?I. Dividends are payable in the underlying foreign currency.
II. Dividends are payable in U.S. dollars.
III. Holders have voting rights.
IV. Holders do not have voting rights.

Answer 8

The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well.
II and IV.

Question 9

If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT:

Answer 9

the issuer must redeem certificates on shareholder request

Question 10

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate?

Answer 10

Callable.

Reference: 1.3.2.5 in the License Exam Manual

Question 11

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above:

Answer 11

In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.
Reference: 1.5.1 in the License Exam Manual

Question 12

Investors should always be aware of taxes applicable to investments they own. Which of the following taxes might be associated with income derived from ADRs but not income from other investments?

Answer 12

Foreign income tax.

Reference: 1.8.1.2 in the License Exam Manual

Question 13

ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split?

Answer 13

A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split. The par value would decrease to $5 per share. .
Reference: 1.2.4.1 in the License Exam Manual

Question 14

Smith and Co., Inc. has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares?

Answer 14

Stockholders receive one right per share owned. Hence, Joe receives 200 rights. The purpose is to maintain shareholders’ proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares (200 / 40 = 5 rights per share). 200 rights, 5 per share.

Question 15

Which of the following have equity positions in a corporation?I. Common stockholders.
II. Preferred stockholders.
III. Convertible bondholders.
IV. Mortgage bondholders.

Answer 15

Common and preferred stockholders have equity, or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners.
I and II.

Question 16

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation “.15q.” If you owned 1,000 shares, you could anticipate annual dividends of:

Answer 16

The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.

Question 17

The following chart shows the capital transactions of ABC Corporation.
Date Event Amount
10-19-96 Initial Offerings 6 million shares
4-1-2000 Treasury Purchase 500,000 shares

ABC wants to raise additional capital by selling 2 million shares through a rights offering and engages an underwriter on a standby basis. By the expiration date, ABC was only able to sell 1 million shares to existing shareholders. After expiration, how many shares does ABC have outstanding?

Answer 17

Before the rights offering, the company had 5.5 million shares outstanding (6 million issued minus 500,000 Treasury shares). In connection with the offering, ABC engages a standby underwriter that commits to purchase any unsold shares. Therefore, regardless of the number of shares initially subscribed to, all 2 million shares will be sold.
7.5 million

Question 18

Which of the following is an advantage of owning American depositary receipts?

Answer 18

The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency.

Question 19

To qualify for favorable tax treatment, real estate investment trusts must do all of the following EXCEPT

Answer 19

Real estate investment trusts (REITs) engage in real estate activities and can qualify for favorable tax treatment if they invest at least 75% of their assets in real estate–related activities and pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they cannot pass through any losses.

Question 20

A new bond issue will include warrants to:

Answer 20

increase the attractiveness of the issue to the public

Question 21

When compared to statutory voting, cumulative voting gives an advantage to

Answer 21

minority stockholders.

Question 22

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by

Answer 22

The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5:4 stock split, the new price should be about 4/5 the old price. A 1/5-change equals 20% (100% / 5 = 20%).

Question 23

All of the following are true of REITs EXCEPT:

Answer 23

they must pass along losses to shareholders

Question 24

A sophisticated investor wants to purchase stock of a foreign company or an American depositary receipt representing the shares of that company. The purchase would align with the investor’s goal of growth and income, but he makes several statements about the potential purchase and only one of them is accurate. You feel it is important to point out and discuss from a suitability perspective which statements were not, and which one was accurate. The accurate statement was

Answer 24

the purchase of American depositary receipts representing the shares exposes me to currency risk

Question 25

A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as “plusses” or advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is NOT an advantage of investing in REITs?

Answer 25

Dividend treatment