Unit 2 Flashcards
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What is the assumed par value of a preferred share?
$100
Your customer sells 100 shares of Small Co., Inc., common stock at $50 per share. After six months, they close the short position at $40 per share. Small Co. does not pay a dividend. What is the total return?
The formula for calculating total return is (income + gains or – losses) / cost basis. For this question ($0 + $10) / 40 = 10 / 40 = 0.25 (25%).
An affiliate holding unregistered shares can sell under Rule 144 how many how often?
Under Rule 144 (Rule 1%,4weeks,4times per year)
May sell either 1% outstanding or average of volume for the previous 4 weeks.
Each 144 is good for 90 days (3 months) allowing for 4 filings per year.
An affiliate holding unregistered shares can sell under Rule 144 how many how often?
Under Rule 144 (Rule 1%,4weeks,4times per year)
May sell either 1% outstanding or average of volume for the previous 4 weeks.
Each 144 is good for 90 days (3 months) allowing for 4 filings per year.
Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?
A) Unregistered stock acquired by a nonaffiliate under an investment letter
B) Stock acquired on the NYSE by a corporate affiliate
C) Unregistered stock acquired by a corporate affiliate in stock option program
D) Stock acquired by a corporate affiliate in a private placement
(B)
The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.
What are standardized corporate actions?
The most common corporate actions—dividend declarations (both cash and stock), stock splits (both forward and reverse), and the issuance of rights and warrants—are standardized regarding any adjustments to cost basis for outstanding shares.
Some corporate actions are unique, and thus standardized adjustments would not be applicable. These would include, but not be limited to, the following: mergers and acquisitions (M&A), takeovers, spinoffs, tender offers, and buybacks.
What are standardized corporate actions?
The most common corporate actions—dividend declarations (both cash and stock), stock splits (both forward and reverse), and the issuance of rights and warrants—are standardized regarding any adjustments to cost basis for outstanding shares.
Some corporate actions are unique, and thus standardized adjustments would not be applicable. These would include, but not be limited to, the following: mergers and acquisitions (M&A), takeovers, spinoffs, tender offers, and buybacks.
When do stock rights expire?
Rights expire four to six weeks after issue. (30-45 days)
A rights offering allows stockholders to purchase common stock below the current market price. The rights are valued separately from the stock and trade in the secondary market during the subscription period, which is typically 30 to 45 days. Existing shareholders receive one right per share owned. The number of rights required to purchase one share of the new issue depends on the number of outstanding shares and the number of new shares offered.
When do stock rights expire?
Rights expire four–six weeks after issue, so this would not be possible.
Transactions where the penny stock rules are applicable would be those that
Are solicited
Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt, and the rules therefore apply.
An investor has a long position in OMQ stock. After selling the stock at a loss, the investor could purchase which of the following and not violate the wash sale rule?
A) OMQ put options
B) OMQ convertible bonds
C) OMQ call options
D) OMQ warrants
(A)
In order to avoid violating the wash sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period before or after the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock, such as rights, warrants, call options, or a convertible bond. Purchasing the put options would not violate the wash sale rule because these can be exercised to sell the stock, not purchase it.
How many rights is a shareholder given if the shareholder owns 100,000 shares?
Existing shareholders receive one right per share owned.
100,000 rights would be issued.
The number of rights required to purchase one share of the new issue depends on the number of outstanding shares and the number of new shares offered.
What type of dividend is not taxable to the investor.
A stock dividend is a payment of additional shares of the issuer to the stockholder rathe than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.
Sierra Verde Coffee Company has 122 million shares of common stock outstanding. The last four weeks of trading volume are as follows: 120,000 shares; 100,000 shares; 110,000 shares; and 90,000 shares. What is the volume limitation for an affiliate selling shares of the company over the next 90 days?
The volume limitations under Rule 144 are the greater of 1% of the outstanding shares of the company or the average weekly trading volume over the most recent four weeks. In this example 1% of 122 million is 1.22 million. That is higher than any of the trade volumes of the last four weeks, much less the average of 1.05 million.
