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A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is: A) $12. B) $14. C) $16. D) $18.

Your answer, $18., was incorrect. The correct answer was: $14. The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14. Reference: 1.3.2.3 in the License Exam Manual.

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by A) 0.1. B) 0.3. C) 0.2. D) 0.25.

Your answer, 0.2., was correct!. The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5:4 stock split, the new price should be about 4/5 the old price. A 1/5-change equals 20% (100% / 5 = 20%). Reference: 1.2.4.1 in the License Exam Manual.

A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 1%. B) 5%. C) 15%. D) 10%.

Your answer, 10%., was incorrect. The correct answer was: 5%. The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield). Reference: 1.4.1.3 in the License Exam Manual.

GHI currently has earnings of $4 and pays a $.50 quarterly dividend. If GHI's market price is $40, the current yield is: A) 15%. B) 5%. C) 1.25%. D) 10%.

Your answer, 5%., was correct!. The quarterly dividend is $.50, so the annual dividend is $2; $2 /· $40 market price = 5% current yield. Reference: 1.4.1.3 in the License Exam Manual.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 3 B) 10 C) 5 D) 15

Your answer, 5, was incorrect. The correct answer was: 10 The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10. Reference: 1.7.1.3 in the License Exam Manual.

GHI stock is at $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield is: A) 6.7%. B) 1%. C) 1.7%. D) 10%

Your answer, 6.7%., was correct!. Current yield is determined by dividing the annual dividend of $4 ($1 per quarter × 4 = $4) by the current stock price of $60 ($4 / $60 = 6.7%). Reference: 1.4.1.3 in the License Exam Manual.

Which of the following securities carries the greatest amount of risk? A) Common stock. B) Preferred stock. C) Corporate bonds. D) Debentures.

Your answer, Common stock., was correct!. Common stockholders are always the last to receive payment in the event of a corporate liquidation and, therefore, have the most risk. However, common stockholders have the greatest potential reward of ownership if the corporation is successful. Reference: 1.2.3.6 in the License Exam Manual.

Which of the following have equity positions in a corporation? Common stockholders. Preferred stockholders. Convertible bondholders. Mortgage bondholders. A) I and II. B) III and IV. C) I and III. D) II and IV.

Your answer, I and II., was correct!. Common and preferred stockholders have equity, or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners. Reference: 1.1.1 in the License Exam Manual.

Common stockholders have all of the following rights and privileges EXCEPT: Voting on the composition of the board of directors. Voting on routine decisions in the company's operations. Receiving par value at liquidation. Receiving a dividend when declared. A) I and III. B) II and III. C) II and IV. D) I and IV.

Your answer, I and IV., was incorrect. The correct answer was: II and III. Ownership of common stock allows shareholders the right to vote on the important affairs in the life of the company, not routine operational decisions. No promise is offered with regard to the stockholder's initial investment, which might be lost, or dividends, which might not be declared. Reference: 1.2.3.1 in the License Exam Manual.

Which of the following statements regarding ADRs are TRUE? Dividends are payable in the underlying foreign currency. Dividends are payable in U.S. dollars. Holders have voting rights. Holders do not have voting rights. A) I and IV. B) II and III. C) I and III. D) II and IV.

Your answer, II and III., was incorrect. The correct answer was: II and IV. The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well. Reference: 1.8.1 in the License Exam Manual.

Which of the following are TRUE of treasury stock? Treasury stock is authorized but not yet issued. Treasury stock may pay a reduced dividend. Treasury stock is issued but has no voting or dividend rights. Treasury stock is previously issued stock that has been repurchased by the issuing company. A) I and II. B) III and IV. C) I and III. D) II and IV.

Your answer, III and IV., was correct!. Treasury stock is a company's stock that has been issued, sold through an offering, and then bought back by the company. When a company repurchases its own stock, that stock has no voting rights or dividend rights and is held in the issuer's treasury. Reference: 1.2.1.4 in the License Exam Manual.

Mr. Brown has several stock rights. Which of the following is NOT an alternative regarding these stock rights? A) Redeeming them from the issuer for cash. B) Exercising. C) Selling at the market. D) Giving the rights to his son.

Your answer, Redeeming them from the issuer for cash., was correct!. Rights are not redeemable by the issuer. They may be sold in the secondary market or be given to someone else to exercise. If exercised, rights are exchanged for an appropriate number of shares of the underlying common stock. Reference: 1.7.1 in the License Exam Manual.

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend? A) Tuesday, May 15. B) Wednesday, May 16. C) Monday, May 14. D) Thursday, May 17.

Your answer, Tuesday, May 15., was incorrect. The correct answer was: Monday, May 14. In order to receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 3 business days, the customer must purchase the stock no later than Monday, May 14. Reference: 1.6.1.5 in the License Exam Manual.

Which of the following securities CANNOT pay a dividend? A) Convertible preferred stock. B) ADR. C) Warrant. D) Class B common stock.

Your answer, Warrant., was correct!. Warrants represent long-term options to buy stock at a fixed price, and, like options, cannot pay dividends. Reference: 1.7.2 in the License Exam Manual.

Which of the following statements regarding warrants is TRUE? A) Warrants are often issued with other securities to make the offering more attractive. B) Warrants are safer than corporate bonds. C) Warrants' terms are generally shorter than rights' terms. D) Warrants give the holder a perpetual interest in the issuer's stock.

Your answer, Warrants are often issued with other securities to make the offering more attractive., was correct!. Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds. Reference: 1.7.2 in the License Exam Manual.

An ADR is used to: A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. B) finance foreign trade in which U.S. citizens are engaged. C) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. D) sweeten a bond offering.

Your answer, facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States., was correct!. American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors. Reference: 1.8 in the License Exam Manual

In general, a corporation assumes the least risk when it obtains funds from: A) a commercial bank. B) sale of income bonds. C) sale of debentures. D) sale of preferred stock.

Your answer, sale of preferred stock., was correct!. Unlike the other choices, the sale of preferred stock does not entail the assumption of debt and is therefore the least risky. It is always riskier to borrow than it is to raise equity because equity does not have to be paid back. Reference: 1.3.1.4 in the License Exam Manual.

For U.S. investors holding American Depositary Receipts (ADRs), dividends received are: A) subject to a foreign withholding tax. B) taxed as a capital gain in the U.S. C) tax-free in both the country of origin and in the U.S. D) tax-free in the country of origin.

Your answer, subject to a foreign withholding tax., was correct!. Any tax taken on dividends received from ADRs is taken in the country of origin. This is a foreign withholding tax for U.S. investors. The foreign withholding tax may later be taken as a credit against any U.S. income taxes owed by the U.S. investor. Reference: 1.8.1.2.2 in the License Exam Manual.

If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT: A) the certificates are publicly traded. B) a mortgage REIT represents pooled capital for real estate financing. C) investors receive dividends periodically. D) the issuer must redeem certificates on shareholder request.

Your answer, the issuer must redeem certificates on shareholder request., was correct!. REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market. Reference: 1.9 in the License Exam Manual.

All of the following are characteristics of a rights offering EXCEPT: A) the subscription period is up to 2 years. B) the subscription price is below the CMV. C) the rights are marketable. D) it is issued to current stockholders.

Your answer, the subscription price is below the CMV., was incorrect. The correct answer was: the subscription period is up to 2 years. Rights offerings are usually very short-lived (30 to 45 days). Reference: 1.7.1.1 in the License Exam Manual.