Unit 1 Types & Characteristics of Equity Securities (Testing)

Question 1

Which of the following statements about equity securities is not true?
A) Preferred stock pays a fixed dividend.
B) Preferred stock is an equity security while common stock is a hybrid.
C) Common stock is less sensitive to interest rate risk than preferred stock.
D) Preferred stock is usually nonvoting.

Answer 1

B) Preferred stock is an equity security while common stock is a hybrid.

Question 2

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks?
I. Loss of principal can occur.
II. Price volatility of preferred stock is closely related to interest rates.
III. Preferred stock cannot be traded as readily as bonds.
IV. If the stock is callable, the client’s income can be suddenly lowered.

Answer 2

A) I, II, and IV

Question 3

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own?
I. 125 shares
II. 100 shares
III. Cost basis of $25
IV. Cost basis of $20
A) II and IV
B) I and II
C) I and IV
D) II and III

Answer 3

C) I and IV

Question 4

Which of the following statements best describes cumulative preferred stock?
A) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.
B) Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend.
C) Owners lose any claim to dividends that are not paid in any one year.
D) Owners are allowed to vote for directors using the cumulative voting procedures.

Answer 4

A) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.

Question 5

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934?
I. Registered securities held by a control person
II. Unregistered securities held by a noncontrol person
III. Registered securities held by a noncontrol person
IV. Unregistered securities held by a control person
A) I and III
B) II and III
C) I and IV
D) II and IV

Answer 5

D) II and IV

Question 6

A company that has issued cumulative preferred stock:
A) pays past and current preferred dividends before paying dividends on common stock.
B) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.
C) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common.
D) pays the preferred dividend before paying the coupons due on its outstanding bonds.

Answer 6

A) pays past and current preferred dividends before paying dividends on common stock.

Question 7

If a woman owns 9% of the common shares of XYZ and her spouse owns 2% and wishes to sell his shares, which of these is true?
I. He is considered an affiliate.
II. He is not considered an affiliate.
III. He must file a Form 144 to sell.
IV. He does not have to file a Form 144 to sell.
A) I and III
B) II and III
C) I and IV
D) II and IV

Answer 7

A) I and III

Question 8

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer
A) portable stock options.
B) nonqualified stock options.
C) incentive stock options.
D) listed stock options.

Answer 8

C) incentive stock options.

Question 9

All of the following statements regarding incentive stock options (ISOs) are correct except
A) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain
B) the exercise of ISOs does not create taxable income
C) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise
D) upon the exercise of an ISO, income for AMT purposes is created

Answer 9

C) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise

Question 10

Under Rule 144, which of the following sales are subject to volume limitations?
I. Control person selling registered stock held for one year
II. Control person selling restricted stock held for two year
III. Nonaffiliate selling registered stock held for one year
IV. Nonaffiliate selling restricted stock held for two year
A) I and III
B) I and II
C) II and IV
D) III and IV

Answer 10

B) I and II

Question 11

Investments in which of the following offer the best long-term protection against inflation?
A) Fixed annuities
B) Common stocks
C) Corporate bonds
D) Government bonds

Answer 11

B) Common stocks

Question 12

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?
A) $24
B) $8
C) $16
D) $0

Answer 12

A) $24

Question 13

An investor in an equity security:
A) becomes a creditor of the company.
B) has a say in the day-to-day operations of the business.
C) is assured of a minimum rate of return.
D) acquires an ownership interest in the company.

Answer 13

D) acquires an ownership interest in the company.

Question 14

Three years ago, an investor purchased 1,000 shares of stock in the Equity Protective Life Insurance Company (EPLIC). The purchase price was $53 per share. The current market value of EPLIC stock is $79 per share. If the investor is in the 24% federal income tax bracket, it is correct to state that
A) no tax is owed by the investor.
B) the investor owes tax on a $26,000 short-term capital gain.
C) the investor?s tax liability is $3,900.
D) the investor owes tax on a $26,000 long-term capital gain.

Answer 14

A) no tax is owed by the investor.

Question 15

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?
A) Information regarding the foreign company is easily attainable.
B) They are not subject to exchange rate, or currency, risk.
C) ADRs are traded on exchanges and the OTC markets.
D) ADRs are denominated and pay dividends in U.S. dollars.

Answer 15

B) They are not subject to exchange rate, or currency, risk.

Question 16

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has
A) a proportionately decreased interest in the company.
B) no effective change in the value of the position.
C) a proportionately increased interest in the company.
D) greater exposure.

Answer 16

B) no effective change in the value of the position.

Question 17

An investor wishing to add some diversification to his portfolio wants to purchase 200 shares of an ADR for a Japanese electronics manufacturer. The ADR is listed on the NYSE. Which of the following risks should be of most concern to this investor?
I. Business
II. Currency
III. Inflation
IV. Liquidity
A) II and III
B) III and IV
C) I and II
D) I and IV

Answer 17

C) I and II

Question 18

Which of the following statements regarding preemptive rights is true?
A) Preferred stockholders do not have the right to subscribe to a rights offering.
B) Common stockholders do not have the right to subscribe to a rights offering.
C) Both common and preferred stockholders have the right to subscribe to a rights offering.
D) Neither common nor preferred stockholders have the right to subscribe to a rights offering.

Answer 18

A) Preferred stockholders do not have the right to subscribe to a rights offering.

Question 19

Investments in which of the following offer the best long-term protection against inflation?

A) Fixed annuities
B) Common stocks
C) Government bonds
D) Corporate bonds

Answer 19

B) Common stocks - Common stocks have historically offered returns that outpace inflation over the long term. Investments paying a fixed return, such as bonds and fixed annuities, have the greatest inflation risk.

Question 20

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that

A) the bargain element of the ISO is an AMT preference item.
B) gains on an ISO are always short term, while those on an NQSO are long term.
C) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years.
D) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee.

Answer 20

A) the bargain element of the ISO is an AMT preference item - The only true statement here is that the bargain element (the difference between the current market price at the time of exercise and the strike price) of the ISO (but not the NQSO) is one of the preference items for the alternative minimum tax. It is the bargain element of the NQSO that is reported as wages and it is possible, although difficult, to have long-term capital gains on both. Only the ISO has a maximum time limit and it is 10 years, not five.

Question 21

Rule 144 applies to the sale of all of the following except

A) unregistered securities by a nonaffiliated shareholder of the issuer.
B) unregistered securities by an officer of the issuer.
C) registered securities by an officer of the issuer.
D) registered securities by a nonaffiliated shareholder of the issuer.

Answer 21

D) registered securities by a nonaffiliated shareholder of the issuer. Rule 144 applies to the sale of unregistered securities owned by affiliates or nonaffiliates and the sale of control stock. It does not apply to the sale of registered securities by nonaffiliated persons.

Question 22

An American depositary receipt (ADR) is

A) a certificate representing ownership of a U.S. security that is deposited in a foreign bank.
B) a type of derivative used to speculate in foreign currencies.
C) a document used with interest rate swaps.
D) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank.

Answer 22

D) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank. An American depositary receipt (ADR) is a certificate representing ownership of foreign securities that are on deposit at a U.S. bank. ADRs can be traded on U.S. stock exchanges, are quoted and pay in dividends in U.S. dollars, and receive all the shareholder protections of U.S. securities.

Question 23

The primary defining characteristic of an equity security is

A) it pays dividends, usually quarterly.
B) the ability to keep pace with inflation.
C) it represents ownership in a corporation.
D) voting rights.

Answer 23

C) it represents ownership in a corporation. What does the term equity mean? It means ownership and that is the single most significant fact about an equity security, whether common or preferred stock. Many pay dividends, but that is not at the core of being an equity security. Equity securities include preferred stock, which, with its fixed dividend, does not offer inflation protection and does not have voting rights.

Question 24

All of the following statements regarding incentive stock options (ISOs) are correct except

A) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise
B) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain
C) upon the exercise of an ISO, income for AMT purposes is created
D) the exercise of ISOs does not create taxable income

Answer 24

A) the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise. The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

Question 25

A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?

A) They are not subject to exchange rate, or currency, risk.
B) ADRs are both liquid and marketable.
C) Information regarding the foreign company is more easily attainable than if directly purchased.
D) ADRs are denominated and pay dividends in U.S. dollars.

Answer 25

A) They are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock.

Question 26

Which of the following statements regarding international investing is not correct?

A) International investing offers diversification and potentially higher returns.
B) An international investor faces the additional risks of foreign currency risk and country risk.
C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions.
D) One method to engage in international investing is through American depositary receipts.

Answer 26

C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions. Emerging markets are markets in lesser-developed countries. As a result, the political risk tends to be higher than with developed economies. Whether it is emerging or developed, a U.S.-based investor will always face currency risk, and all countries have some degree of country risk. A way to simplify things is to invest in ADRs rather than the foreign stock itself. International equity is a subclass of equities when allocating assets, and the addition of them tends to offer diversification and potentially higher returns because foreign markets are not necessarily correlated to the U.S. ones.

Question 27

Investing in emerging market stocks is least likely to expose your client to which of the following risks?

A) Currency
B) Interest rate
C) Political
D) Liquidity

Answer 27

B) Interest rate. Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies.

Question 28

A company’s dividend on its common stock is

A) specified in the company charter.
B) determined by its board of directors.
C) mandatory if the company is profitable.
D) voted on by shareholders.

Answer 28

B) determined by its board of directors. A common stock’s dividend payment and amount are determined by the company’s board of directors.

Question 29

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except

A) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO.
B) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation.
C) the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO.
D) ISOs may only be granted to employees, while NSOs may be given to virtually anyone.

Answer 29

B) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.

Question 30

If a customer owns 7% of a publicly traded company’s stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true?

A) The spouse is not an affiliate and Rule 144 applies.
B) The spouse is an affiliate and Rule 144 does not apply.
C) The spouse is an affiliate and Rule 144 applies.
D) The spouse is not an affiliate and Rule 144 does not apply.

Answer 30

C) The spouse is an affiliate and Rule 144 applies. Together, the client and spouse own 13% of the company’s stock, so the spouse is considered an affiliate and is bound by Rule 144. If there is a 10% or more ownership interest among members of an immediate family living at the same residence, then all members are considered control persons (affiliates) subject to Rule 144. For exam purposes, assume that spouses share the same residence.

Question 31

A corporation would like to offer their employees an opportunity to participate in the future growth of the company. Among the methods you might suggest are

A) subordinated debentures.
B) preemptive rights.
C) employee stock options.
D) voting trust certificates.

Answer 31

C) employee stock options. One of the most popular ways to give employees the chance to benefit from an increase in the value of the employer’s stock is through employee stock options.

Question 32

One of the rights of being a common stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to vote is

A) the record date.
B) the ex-dividend date.
C) the election date.
D) the last day of the company?s fiscal year.

Answer 32

A) the record date.

The record date is a date announced by the company as the official date you must be an owner on the company’s records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently two business days.

Question 33

A company that has issued cumulative preferred stock

A) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common.
B) pays the preferred dividend before paying the coupons due on its outstanding bonds.
C) pays past and current preferred dividends before paying dividends on common stock.
D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.

Answer 33

C) pays past and current preferred dividends before paying dividends on common stock.

Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.

Question 34

Reasons why a corporation might issue a convertible preferred stock would include

A) tax savings to the issuer.
B) giving those shareholders an opportunity to participate in the future success of the company.
C) giving those shareholders the ability to convert into the issuer’s bonds.
D) a lower cost to the issuer than would be incurred by the issuance of convertible bonds.

Answer 34

B) giving those shareholders an opportunity to participate in the future success of the company.

The benefit of any convertible security, debt security, or preferred stock is that the ability to convert into the issuer’s common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

Question 35

Which of the following statements concerning international direct investing is correct?

A) Information is not as readily available on foreign investments as on domestic ones.
B) Foreign markets are usually mature and offer no growth advantages.
C) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets.
D) The rates of return on foreign securities are generally less than those available from U.S. markets.

Answer 35

A) Information is not as readily available on foreign investments as on domestic ones.

In general, foreign investments don’t have the transparency of domestic ones. Rather than directly investing in the foreign security, trading the ADR has the advantage of the full disclosure requirements of the SEC. Investors may earn higher returns in foreign markets, and including foreign securities in an investment portfolio may lower risk through greater diversification. This is because there may be a low correlation with U.S. markets. Although securities markets in most developed economies are mature, that doesn’t mean they can’t grow, and the markets in emerging economies offer great potential growth commensurate with their greater risk.

Question 36

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has

A) greater exposure.
B) a proportionately decreased interest in the company.
C) a proportionately increased interest in the company.
D) no effective change in the value of the position.

Answer 36

D) no effective change in the value of the position.

When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same.

Question 37

When comparing restricted stock to nonrestricted stock, it is important to note that the restricted stock has a restriction placed upon its
A) priority in liquidation.
B) voting rights.
C) resale.
D) receipt of dividends.

Answer 37

C) resale

When a stock is restricted, the restriction applies solely to a time limit within which the stock cannot be sold. That restriction is found in Rule 144 of the Securities Act of 1933 and applies to unregistered or control stock.

Question 38

One difference between common stock and preferred stock is that common stockholders
A) have voting rights.
B) own equity in the company.
C) have a priority claim on earnings.
D) receive dividends when declared by the board of directors.

Answer 38

A) have voting rights.

It is rare to find a preferred stock with voting rights and even rarer to find a common stock without them. Both receive dividends when, and if, declared by the board of directors, and these dividends are usually paid quarterly. Both are equity securities, and preferred has the prior claim.

Question 39

Which of the following statements regarding nonqualified stock options (NQSOs) is correct?
A) Unlike incentive stock options, NQSOs are publicly traded.
B) The exercise of NQSOs does not create taxable income.
C) The NQSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price.
D) The NQSO is taxable to the recipient at the time of grant to the extent of the difference between the fair market value of the stock and the grant price.

Answer 39

C) The NQSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price.

The bargain element of an NQSO is taxed to the recipient as salary income at the time the option is exercised. Neither of the employee stock options is publicly traded.

Question 40

An ADR is used to
A) facilitate trading in U.S. securities in foreign markets by U.S. citizens living abroad.
B) reduce currency risk when investing in foreign securities.
C) facilitate trading in foreign securities in U.S. markets by U.S. citizens living in the United States.
D) finance foreign trade in which U.S. citizens are engaged.

Answer 40

C) facilitate trading in foreign securities in U.S. markets by U.S. citizens living in the United States.

American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors.

Question 41

In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable-rate preferred stock, changes in interest rates would be most likely to affect the market price of the
A) common stock.
B) adjustable-rate preferred stock.
C) straight preferred stock.
D) convertible preferred stock.

Answer 41

C) straight preferred stock

Fixed-income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable-rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.

Question 42

A common stockholder’s rights include all of the following except
A) preemptive rights.
B) electing the board of directors.
C) the receipt of dividends if declared by the board of directors.
D) the right to determine the par value of the stock.

Answer 42

D) the right to determine the par value of the stock.

Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation.

Question 43

KAPCO common stock is listed on the New York Stock Exchange, Inc. (NYSE). If an executive vice president of the company buys 400 shares of the company’s stock on the NYSE, she
A) may not sell until she leaves the company.
B) may sell immediately subject to Rule 144 volume limitations.
C) may sell under Rule 144 only after a six-month holding period.
D) may sell immediately without restriction.

Answer 43

B) may sell immediately subject to Rule 144 volume limitations.

If purchased in the open market, such as on the NYSE, the transaction is not a private placement, and the stock does not have a holding period restriction. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.

Question 44

Investing in an emerging market mutual fund subjects the investor to all of the following risks except
A) market volatility.
B) political instability.
C) currency fluctuations.
D) liquidity.

Answer 44

D) liquidity

Although direct investment in emerging market securities would have liquidity risk, the benefit of doing so through a mutual fund is that, under federal regulations, the fund must redeem at NAV upon request.

Question 45

Ownership in a corporation is evidenced by holding shares of the company’s
A) bonds with a first mortgage on the property.
B) common stock only.
C) common or preferred stock.
D) warrants.

Answer 45

C) common or preferred stock.

If you have equity in a corporation, it means you have an ownership interest. Equity securities (common and preferred stock) represent ownership in a corporation. A mortgage bond is a debt security, and a warrant gives the holder the right to acquire equity but, in itself, is not equity.

Question 46

The residual right of common shareholders refers to their right to
A) examine the corporation’s annual reports and other reports, and take legal action if irregularities are found.
B) receive all announced dividends in accordance with the number of shares held.
C) vote in elections for the board of directors and in other important business decisions, such as changes to the charter.
D) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid.

Answer 46

D) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid.

The residual right of common shareholders refers to their position in the event of bankruptcy.

Question 47

One characteristic found in equity securities issued by a corporation is
A) limited liability.
B) a history of keeping pace with inflation.
C) cumulative dividends.
D) preemptive rights.

Answer 47

A) limited liability

Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends.

Question 48

For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm’s growth if the preference shares are
A) participating.
B) convertible.
C) common.
D) cumulative.

Answer 48

D) cumulative

Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed, and regardless of the growth in the company’s earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm’s profits exceed a stated level. Convertible preferred shares can benefit from the firm’s growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock.

Question 49

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 was a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend?
A) $12
B) $8
C) $6
D) $16

Answer 49

B) $8

Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share.

Question 50

The issuer of an ADR is
A) a domestic branch of a foreign bank.
B) a foreign branch of a foreign bank.
C) the exchange on which the ADR is traded.
D) a U.S. depositary bank.

Answer 50

D) a U.S. depositary bank.

The stocks of most foreign companies that trade in the U.S. markets are traded as American depositary receipts (ADRs). U.S. depositary banks (domestic branches of U.S. banks) issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR.