UNIT 21 CHECKPOINT EXAM Flashcards
Snowflake Resorts, Inc., has announced their intention to repurchase 5 million of the companies outstand shares from the secondary markets. This is called a
A) tender offer.
B) repurchase agreement.
C) buy back.
D) primary offering.
C) buy back.
Explanation
This is an example of a buy back. If the company were buying the shares directly from shareholders at a preset price, it would be a tender offer. A repurchase agreement is a type of money market instrument. If Snowflake Resorts were selling, it would be a primary offering.
On August 20 of last year, when the stock was trading at $42 dollars, Seabird Airlines declared a 15% stock dividend, payable on September 15. On the close of trading, on the pay date, the stock was trading at $40. What would a customer who owned the stock all of last year report for tax purposes?
A) $6 gain
B) $2 loss
C) $2 investment income
D) Nothing
D) Nothing
Explanation
There are no tax implications for a stock dividend.
BigTel Inc., has been the only provider of telephone service for over a century. The courts have declared BigTel is an unlawful monopoly and orders the company to break into smaller, competing companies. Owners of BigTel stock will retain their shares of BigTel (now smaller) and receive shares of three new companies: East-Tel, Cent-Tel, and West-Tel. Which of these is a tax consequence that could occur for this break up of BigTel and the receipt of the new shares?
A) There is no taxable consequence
B) Capital gain dependent on how long the shares were held
C) Income based on the value of the new shares received
D) Partial-long-term capital gain
A) There is no taxable consequence
Explanation
This spinoff is not a taxable event. Each new share will have a new cost basis based on a percentage of the original cast basis. There is no taxable event until shares are sold.
An investor owns 300 shares of a Silicon Valley high tech firm whose shares are quoted on the Nasdaq Stock Market. A month prior to the company’s annual meeting, the broker-dealer holding the stock in street name forwarded the voting proxy to the client. As it happens, the investor had to be at a business meeting in San Francisco that ended the day before the annual meeting. If the investor took advantage of the proximity to attend the meeting
A) the voting proxy would stand because it would have already been counted.
B) only those with reservations would be able to attend the meeting so the proxy vote would stand.
C) the voting proxy would be revoked and only the vote at the meeting would count.
D) only the broker-dealer could rescind the proxy and permit the investor to vote at the meeting.
C) the voting proxy would be revoked and only the vote at the meeting would count.
Explanation
A proxy is automatically revoked if the stockholder attends the shareholder meeting and votes.
Which of these is considered a standard corporate action where adjustments made to cost basis, for outstanding shares, are standardized?
A) Stock split
B) Takeover
C) Buyback
D) Merger
A) Stock split
Explanation
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.
Harry’s Burgers has announced a tender offer for 20 million shares of Jim’s Junkfood Corner at $30 a share. If Harry’s secures all the shares then they will control Jim’s. The shareholders of Jim’s, that submit their shares to the tender offer, will realize which of these?
I. A capital loss occurs if their cost basis is greater than the tender price.
II. There is no effect.
III. A capital gain occurs if their cost basis is less than the tender offer.
IV. Investment income is received equal to the value increase of the new shares.
A) II only
B) I and III
C) I, III, and IV
D) IV only
B) I and III
I. A capital loss occurs if their cost basis is greater than the tender price.
III. A capital gain occurs if their cost basis is less than the tender offer.
Explanation
Shareholders who tender their shares effectively sell the shares at the tender price ($30) and realize a gain or a loss depending on what their cost was for the shares tendered.
Issuers are not required by the Securities Exchange Commission (SEC) to give notice of corporate actions to shareholders for actions such as
A) a reverse split.
B) dividends on the issuer’s common stock.
C) issuance of warrants.
D) interest on the issuer’s bonds.
D) interest on the issuer’s bonds.
Explanation
Because the payment of bond interest is an obligation of a stated amount (i.e., the coupon rate) on a stated date (the two semiannual payment dates), notice to the markets is not required. Reverse splits and warrants are not regular happenings, and even though some companies have paid regular quarterly dividends for more than 100 years, those dividends can vary in amount or could be halted and therefore require notification to the marketplace.
A company’s board of directors has voted to divest of all shares of a subsidiary to create a new company. This is a type of corporate action best characterized as
A) an acquisition.
B) a buyback.
C) a tender offer.
D) a spinoff.
D) a spinoff.
Explanation
A type of divestiture where a parent company sells all of the shares of a subsidiary, or distributes new shares of a company or division it owns, to create a new company is known as a spinoff.
RJN common stock is currently listed on the New York Stock Exchange. Poor operating results over the past several years have led to a sharp decline in RJN’s stock price, putting the company at risk for failing to meet the minimum price requirements to remain listed on the NYSE. The corporate action most likely to be taken to preserve the listing would be
A) a forward split.
B) a reverse split.
C) a stock dividend.
D) increasing earnings.
B) a reverse split.
Explanation
Reverse splits are a favored way of increasing a company’s share price. If, for example, the stock price had fallen to $2 per share, a 1 for 10 reverse split would immediately increase the stock’s price to approximately $20 per share, a much more respectable amount. Of course, there would be no real change in total value to the shareholders because now they would own one-tenths as many shares with a value 10 times per share greater.
An investor purchased 100 shares of MJS on June 19, 2015 at a price of $40 per share. On June 1, 2016, MJS declared a 25% stock dividend. On July 1, 2016, the investor sold 50 shares of the MJS at $50 per share. Which of these statements is correct?
I. The adjusted cost basis of the shares is $30.
II. The adjusted cost basis of the shares is $32.
III. There is a short-term capital gain on 25 shares and long-term gain on the other 25 shares.
IV. There is a long-term capital gain on all of the shares sold.
A) I and III
B) I and IV
C) II and IV
D) II and III
C) II and IV
II. The adjusted cost basis of the shares is $32.
IV. There is a long-term capital gain on all of the shares sold.
Explanation
When a company declares a stock dividend, the cost basis per share is always reduced. The computation is the original total cost ($4,000) divided by the new number of shares. 100 × .25 = 25 additional shares for a total of 125. $4000 / 125 shares equals a new cost basis per share of $32. When any of the shares are sold, including those received in the stock dividend, the holding period for capital gain or loss, is always the original purchase date. In this case, that was more than 12 months ago so any gains are long term.
