UNIT 1 CHECKPOINT EXAM Flashcards
Which of these securities would likely provide the greatest potential for capital appreciation?
A) A convertible bond
B) A common stock
C) A preferred stock
D) A U.S. Treasury STRIP
B) A common stock
Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservative investors since each is primarily an income investment and has limited growth prospects.
Jon owns 100 shares of the Bayside Fishing Company. Bayside has 1,000,000 shares outstanding and operates under a STATUTORY voting system. At the next election for the board, there are TWO open seats. All of these are true EXCEPT
A) Jon has a right to freely transfer his shares.
B) Jon has control of 200 votes, which he can cast any way he likes among the two open seats.
C) Jon has control of 200 votes, and he can cast up to 100 of those votes for each open seat.
D) Jon owns 1/10000 of the Bayside Fishing Company.
B) Jon has control of 200 votes, which he can cast any way he likes among the two open seats.
Owners of common stock have a right to vote on several issues (including who sits on the board of directors and the right to transfer their ownership to another person).
Jon’s 100 shares is 1/10,000 (100/1,000,000) of the company. In a statutory voting system, an owner may vote once per share per open seat.
In a CUMULATIVE voting system, the owner has a number of votes equal to the shares they own multiplied by the number of open seats, and may cast them any way they choose among the open seats.
Mary owns 8% of Doyle Inc., a publically traded publishing company. She has recently married John, a doctor who owns 3% of Doyle. John wants to sell some of his shares to pay off the debt from the wedding and honeymoon. When he does so he will need to
A) not file Form 144 because only owns 3% and is not a control person.
B) file Form 144 because he is a doctor.
C) not file Form 144 due to the spousal exception.
D) file Form 144 because he is a control person.
D) file Form 144 because he is a control person.
Because married couples aggregate their position, and collectively the Mary and John own 11% of the company, John is a control person and will need to file Form 144 to sell his shares of Doyle. There is no exception for spouses nor special requirements just for doctors.
Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of these are true about the position except
A) they have the same voting rights as an owner of the common stock.
B) the security may be traded in U.S. markets.
C) they will receive dividends in U.S. dollars.
D) they have the right to request the underlying common shares be issued to them directly.
A) they have the same voting rights as an owner of the common stock.
It is important to remember that American Depositary Receipts (ADR) are issued by a depositary bank and the bank is the registered owners of the shares. Depository banks are not required to pass voting proxies through to the ADR holders.
The United States Supreme Court decision that provided our current definition of a security is
A) Hawkins v. Florida
B) SEC v. Lorenzo
C) County of San Francisco v. State of California
D) SEC v. Howey
D) SEC v. Howey
The Howey decision (SEC v. Howey, 1946) gives us our current four-prong test, which defines what a security is. SEC v. Lorenzo is a recent case involving fraud. The other cases are made up.
American Liquidators Corporation (the ticker is LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to do this they must give their existing shareholders an opportunity to buy shares sufficient to maintain the shareholders percentage of ownership. In order to accomplish this they would
A) offer stock rights to existing shareholders.
B) offer warrants to existing shareholders.
C) perform a stock split.
D) suggest that existing shareholders go to the market and double their existing position.
A) offer stock rights to existing shareholders.
LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrants are long term and normally attached to a fixed-income offer. Neither the stock split nor investors buying in the market generates capital for the company.
In 2011, RST Corp. had both common stock and $100 par value 4% noncumulative preferred stock, outstanding. The preferred stock, like the common stock, pays dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of
A) $1.00.
B) $4.00.
C) $20.00.
D) $17.00.
A) $1.00.
In the case of a noncumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, which is always the case, it must pay the current preferred dividend prior to paying common. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00—an amount that must be paid before the quarterly common dividend can be paid.
Your customer, MJ, has a strong preference for investing in equity securities; however, she is hoping to increase the amount of current income her portfolio generates. Which of these is the least suitable for her?
A) Generic Motors, Inc., 4 ¾% preferred stock
B) Long Beach Electric, a utility
C) Duratech common stock, an exciting new tech manufacturer
D) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments
C) Duratech common stock, an exciting new tech manufacturer
New, rapidly growing companies tend to pay little or no dividends. The others all sound like decent sources of dividend payments
For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has
A) 900 votes he can divide anyway he wants among the three seats.
B) 300 votes each for the open seats.
C) no voting rights.
D) 300 votes total to spread among the three open seats.
C) no voting rights.
Your customer owns preferred stock. Preferred stock carries no voting rights.
All of the following statements regarding penny stocks are true except
A) penny stock rules apply to both solicited and unsolicited transactions.
B) established customers of the firm need not sign a suitability statement.
C) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document.
D) if an account holds penny stocks, broker/dealers must provide a monthly account statement to the customer.
A) penny stock rules apply to both solicited and unsolicited transactions.
The special penny stock rules only apply to solicited transactions. Because of the greater perceived risk of investing in penny stocks, it is required that the penny stock disclosure document fully describing the risks associated with penny stock investments be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.
All of the following are considered securities except
A) 15 British pound put contracts.
B) common stock of XYZ corporation.
C) Treasury bonds.
D) U.S. minted gold coins.
D) U.S. minted gold coins.
Stocks, bonds, and options are all examples of securities. Gold and gold coins are a commodity, not a security.
Big Company, Inc., an NYSE listed manufacturer of large objects, has declared a 50-cent-per-share-dividend payable next month. Big Company also has options available for trade. The actual ex-dividend date will be declared by
A) the NYSE.
B) the OTC.
C) the CBOE.
D) FINRA.
A) the NYSE.
Ex-dividend dates are set by the market center where trades will likely take place. In the case of an NYSE listed stock, the New York Stock Exchange will determine the ex-date. The fact that Big Company, Inc., has listed options is not relevant to the question.
Which of these would most likely require shareholder approval?
A) Firing the CEO
B) Declaring a dividend
C) Changing the corporation’s name
D) Hiring a new CFO
C) Changing the corporation’s name
Changing the corporation’s name is a significant matter that will likely need shareholder approval. Declaring a dividend and the hiring and firing of senior executives is well within the board’s power.
An American depositary receipt is a
A) domestic security trading in foreign markets.
B) foreign security trading in U.S. markets.
C) domestic security representing a foreign security in U.S. markets.
D) foreign security representing a domestic security in foreign markets.
C) domestic security representing a foreign security in U.S. markets.
An ADR is a domestic security issued under U.S. law and registered with the SEC. It represents ownership in a non-U.S. security. It is used to ease ownership and trading of foreign securities in U.S. markets and for U.S. customers
Under Rule 144, which of these sales are subject to volume limitations on the number of shares sold?
I. Control person selling registered stock held for 1 year
II. Control person selling restricted stock held for 2 years
III. Nonaffiliate selling registered stock held for 1 month
IV. Nonaffiliate selling restricted stock held for more than 6 months
A) II and III
B) III and IV
C) I and II
D) I and IV
C) I and II
Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after 6 months. Registered shares have no Form 144 filing requirement.
