Unit 2: Equity Securities

Question 1

stock is trading with rights (before the ex-rights date)

Answer 1

the formula is (M ‒ S ) divided by (N + 1).

Plugging the numbers in, we have ($40 ‒ $35) ÷ (10 + 1) = $5.00 ÷ 11 = $0.45.

Question 2

Participating preferred stock

Answer 2

Participating preferred stock provides a stated dividend amount (as a percentage of par value) plus the opportunity to receive additional dividends, based on predetermined conditions, such as the profitability level of the underlying company. Although the convertible stock offers the possibility of capital appreciation due to its linkage to the common stock, that has no effect on the dividend.

Question 3

Stock trading X-RIGHTS

Answer 3

The formula for the theoretical value of a right when it is ex-rights (the buyer doesn’t get the rights) is (M ‒ S) ÷ N where M = market price of the stock, S = the subscription price, and N = number of rights needed