UNIT 21 QBANK Flashcards
The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for all of the following except
A) a reverse split on the issuer’s common stock.
B) the issuance of warrants to be attached to a bond offering.
C) dividend payments on the issuer’s common stock.
D) interest payments on the issuer’s debt instruments.
D) interest payments on the issuer’s debt instruments.
Explanation
Payment of bond interest is an obligation and therefore not considered a special corporate action notice. Reverse splits and warrants are not regular happenings, and even though some companies have paid dividends regularly, those dividends are not guaranteed and can be halted. Hence, these events would be considered special corporate actions and therefore require notification to the marketplace.
Proxy voting
A) allows the shareholder to vote his shares without attending the annual meeting.
B) always allows the broker-dealer to vote any shares held at that firm.
C) always allows the broker-dealer to vote any shares held in margin accounts at that firm.
D) allows the registered representative to vote the customer’s shares if it is a discretionary account.
A) allows the shareholder to vote his shares without attending the annual meeting.
Explanation
Most investors do not attend the annual meeting. They indicate how the shares are to be voted and their votes are entered at the meeting. This is called proxy voting.
Two years ago Joshua Ryan bought 100 shares of XYZ at $60 per share. While he held the stock, it paid dividends of $1 the first year and $1.50 the second year. Joshua sold the shares at $40 per share after a 2:1 stock split. How much gain or loss did he incur per share for tax purposes?
A) $17.50 loss per share
B) $12.50 gain per share
C) $20 loss per share
D) $10 gain per share
D) $10 gain per share
Explanation
The formula to calculate a gain or loss for tax purposes is the proceeds minus the cost basis. He bought the shares for $60, and then there was a 2:1 split so the cost basis was adjusted to $30 per share. He sold at $40 so he had a $10 gain. Dividends are not part of the calculation for gain or loss.
Each of the following activities would be deemed by market regulators to be manipulative behavior except
A) proxy solicitation.
B) marking the open or the close.
C) front running.
D) capping.
A) proxy solicitation.
Explanation
Proxies are permissible to be solicited. The Securities and Exchange Commission (SEC) requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to shareholders.
If a stock is at risk of failing to maintain the minimum price requirements to remain listed on the NYSE, the most likely corporate action taken to preserve the listing could be
A) a stock dividend.
B) increasing earnings.
C) a reverse split.
D) reducing staff.
C) a reverse split.
Explanation
Reverse splits are a way of increasing a company’s share price. In a reverse split, the number of shares outstanding decreases, but the price per share increases. As with all adjustments, a shareholder’s total position in the stock remains unchanged before and after the action.
A customer owns 1,000 shares of stock subject to a 2:3 reverse stock split. The position will now consist of
A) more shares worth less per share with the same net position value.
B) fewer shares worth less per share with a decreased net position value.
C) more shares worth more per share with an increased net position value.
D) fewer shares worth more per share with the same net position value.
D) fewer shares worth more per share with the same net position value.
Explanation
With a reverse split, the position will now consist of fewer shares, but each share’s value will be adjusted upward. As with all adjustments, the net position value remains unchanged before and after the adjustment.
Which of the following describes the consequences of a stock split?
I. If the number of shares goes up, the price goes down.
II. If the number of shares goes up, the price goes up.
III. If the number of shares goes down, the price goes down.
IV. If the number of shares goes down, the price goes up.
A) II and IV
B) II and III
C) I and IV
D) I and III
C) I and IV
I. If the number of shares goes up, the price goes down.
IV. If the number of shares goes down, the price goes up.
Explanation
The rule on a stock split is that the total value of the stock must be the same before and after the split. Hence, if the number of shares goes up or down, the price per share must go down or up, respectively.
Jim Davis bought 100 shares of QRS at $60 per share and then the company declared a 3:2 split. What is Davis’ new cost basis and how many shares does he have now?
I. Cost basis is $40 per share
II. Cost basis is $90 per share
III. He now has 150 shares
IV. He now has 67 shares
A) II and III
B) I and III
C) II and IV
D) I and IV
B) I and III
I. Cost basis is $40 per share
III. He now has 150 shares
Explanation
A 3:2 split (3/2) increases the number of shares 50%. 100 shares become 150 shares. The price per share drops proportionally. Multiply the current price by 2/3. $60 × 2/3 = $40 a share.
Which of the following would lead to a standardized cost-base adjustment for stockholders?
A) Spin-off
B) Takeover
C) Dividend
D) Merger
C) Dividend
Explanation
Scheduled, common events such as dividend declarations, issuance of rights and warrants, and forward and reverse stock splits are accompanied by standardized adjustment of the stock’s cost base. Unique events such as corporate mergers, takeovers and spin-offs are dealt with in a nonstandardized case-by-case manner that depends on the individual circumstances. Ideally, the outcome is what is best for the stockholder and the company.
Which of the following describes the results of a 1 for 2 reverse stock split?
A) Half as many shares at the same price
B) Half as many shares at twice the original price
C) Twice as many shares at half the original price
D) Twice as many shares at the same price
B) Half as many shares at twice the original price
Explanation
If a stock price has become too low, for example for listing to continue on an exchange, a corporation may carry out a reverse stock split. In a 1:2 reverse split, the price of the stock is doubled, but the number of shares outstanding is halved. Any stock split, forward or reverse, must leave the total value of the outstanding stock unchanged before and after the adjustment.
An investor owns 200 shares of MNO common stock. The company’s management has proposed a 2:1 stock split. If the price of the stock at the time of the split is $50, what would the investor’s adjusted position be?
A) 400 shares at $100
B) 400 shares at $25
C) 100 shares at $25
D) 100 shares at $200
B) 400 shares at $25
Explanation
The number of shares doubles to 400 (2 × 200) and the price per share would be $25 ($50 ÷ 2).
A corporation divests itself of all of the shares of another company it owns. This is known as
A) a merger.
B) an acquisition.
C) a recapitalization.
D) a spin-off.
D) a spin-off.
Explanation
When one company sells all of the shares of another it owns, this is called a spin-off.
In a proxy contest, which of the following must register with the Securities and Exchange Commission (SEC)?
I. All shareholders who have been approached by solicitors
II. All persons participating in proxy solicitation
III. The upper management of the corporation who are also shareholders
IV. All persons providing shareholders with unsolicited advice
A) II and IV
B) I and III
C) II and III
D) I and IV
A) II and IV
II. All persons participating in proxy solicitation
IV. All persons providing shareholders with unsolicited advice
Explanation
All those participating in the solicitation of proxies, whether directly to obtain proxies themselves, or to provide unsolicited advice to shareholders regarding how to vote must register with the SEC.
In a 20% stock dividend, what happens to the number of shares and the share price?
A) The share price goes up, and the number of shares goes down.
B) The share price goes down, and the number of shares goes down.
C) The share price goes down, and the number of shares goes up.
D) The share price goes up, and the number of shares goes up.
C) The share price goes down, and the number of shares goes up.
Explanation
In a stock dividend the shareholder gets more shares of stock, but because the total value of the shareholder’s position does not change, each share is now worth less.
A customer receives a voting proxy from a broker-dealer for shares owned by the customer and held in street name. The customer returns the proxy but later decides to attend and vote at the shareholder meeting in person. The voting proxy
A) would need to be rescinded in writing by the broker-dealer in order for the shareholder to vote in person.
B) once signed could not be replaced by a vote made in person or by another proxy executed later.
C) would be deemed the shareholders vote because it would have already been counted.
D) would be revoked, and only the vote at the meeting would count.
D) 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. Additionally, a proxy is revoked if another is executed later.
