UNIT 20 CHECKPOINT EXAM Flashcards
On March 3, the board of directors of Seabird Airlines declares a $0.20 a share dividend payable to holders of record, as of March 30. Seabird stock jumps on the news from $35 a share to $40 a share on the news. The current yield of Seabird stock is
A) 2.00%.
B) 5.00%.
C) 0.50%.
D) 2.25%.
A) 2.00%.
Explanation
The formula is (quarterly dividend x 4) / current market value. (0.2 x 4) / 40 = (.8) / 40 = .02 (2%)
Skye purchased 100 shares of Moreno, Inc., for $20 a share. One year later, she sold the shares for $21 dollars. Over the year, Moreno paid a $0.25 quarterly dividend. What was Skye’s gain or loss and how much investment income did she earn?
A) $2 in income
B) $1 gain and $1 in income
C) $2 total gain
D) Cannot be determined from this information
B) $1 gain and $1 in income
Explanation
Gains are derived from opening and closing trades buy and sell in this example). She bought at $20 and sold for $21, so there is $1 in gain. She collected four quarterly dividends for $0.25 each, so a total in $1 in investment income.
Which of these is correct regarding the ex-date for a common stock?
I. It is set by the board of directors.
II. It is set by FINRA or the exchange.
III. It is the first date an investor can purchase a security and not be entitled to the dividend.
IV. It is the date the seller reimburses the buyer for the amount of the dividend paid.
A) II and III
B) I and IV
C) I and III
D) II and IV
A) II and III
II. It is set by FINRA or the exchange.
III. It is the first date an investor can purchase a security and not be entitled to the dividend.
Explanation
Ex-dates, for securities that trade in the secondary markets, are set by the market center where the trade occurs. It represents the day the new owner of a security will no longer receive the dividend if the trade settles regular way.
The Windmill Growth Fund is composed of many stocks from a variety of large companies. It has a stated objective of capital appreciation from holding the stock of the large companies. If you wanted to compare the performance of the fund to the market, which of these indices would be the best?
A) EAFE Index
B) Wilshire 5000
C) S&P 400
D) S&P 500
D) S&P 500
Explanation
The S&P 500 is the standard benchmark for large cap stocks. The S&P 400 is for midcap stocks. The Wilshire 5000 is a broad-based-U.S. equity index that includes large, mid, and small cap stocks. The EAFE is an index for international equities.
An investor has a long position in ABC Chemical Corp. (ABCCC), with a substantial unrealized loss. Wishing to use that loss to offset realized gains, the investor sells the stock. In reinvesting the proceeds of the sale, the investor could avoid violating the wash-sale rule by purchasing
A) ABCCC call options.
B) ABCCC put options.
C) ABCCC convertible bonds.
D) ABCCC warrants.
B) ABCCC put options.
Explanation
In order to avoid violations of the wash-sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period prior to or following the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock; rights, warrants, call options, or a convertible bond. Note that when put options are exercised, the owner now has the right to sell the stock, not purchase it. Therefore buying puts in no way violates the wash-sale rule.
Your customer has performed the following trades
Bought 200 shares of ABC at $40
Bought 400 shares of ABC at 50
Sold 600 shares of ABC at 55
What is the result of these trades?
A) A $5,000 loss
B) A $6,000 gain
C) A $5,000 gain
D) A $6,000 loss
C) A $5,000 gain
Explanation
They bought 200 at 40 for $8,000; then 400 at 50 for $20,000; then sold 600 at 55 for $33,000. $33k – $28k = profit of $5,000.
Drew purchased 100 shares of Moreno, Inc., for $20 a share. One year later, he sold the shares for $21 dollars. Over the year, Moreno paid a $0.25 quarterly dividend. What is Drew’s total return?
A) $1.00.
B) $2.00.
C) 10.00%.
D) 5.00%.
C) 10.00%.
Explanation
Total return includes any income the investment return produces; it is also expressed as a percentage, not dollars. The formula is as follows: ((sales proceeds – cost basis) + income) / cost basis.
Using the formula here, the calculation is as follows: ((21 – 20) + (4 × .25)) / 20 = (1 + 1) / 20 = 2 / 20 = .1 (or 10%).
All of these dates are set by the board of directors of a corporation except
A) the declaration date.
B) the ex-dividend date.
C) the payable date.
D) the record date.
B) the ex-dividend date.
Explanation
The ex-date is set by the market center (i.e., an exchange), or is set by FINRA if it is an over-the-counter traded security.
Four of the best-known indices and averages are listed as follows. How do they rank from most to fewest issues in the index?
I. Dow Jones Industrial Average
II. NYSE Composite Index
III. Standard & Poor’s 500
IV. Wilshire 5000
A) II, III, I, IV
B) I, IV, III, II
C) IV, II, III, I
D) III, II, IV, I
C) IV, II, III, I
IV. Wilshire 5000
II. NYSE Composite Index
III. Standard & Poor’s 500
I. Dow Jones Industrial Average
Explanation
The Wilshire actually had about 3,800 stocks, but still the most on this list. The NYSE composite is around 1,900. The S&P 500 is actually about 500, and the Dow Jones industrials in 30.
Your customer purchased 1,000 shares of SmallCo Stock at $10 a share. SmallCo pays no dividends. Exactly one year later, the customer sold the shares for $12 a share. They realized a
A) $2,000 short-term capital loss.
B) $2,000 long-term capital loss.
C) $2,000 short-term capital gain.
D) $2,000 long-term capital gain.
C) $2,000 short-term capital gain.
Explanation
They bought the shares for $10, and sold for $12, so a $2,000 gain. To be a long-term gain the position must be held for more than one year.
