Chapter 1: Investment Vehicles : Equity Securities

A Preemptive Rights clause in a corporate charter includes all of the following characteristics except:

A preemptive rights clause allows existing shareholders first choice on newly issued shares and protects the existing shareholders from dilution.

Ben likes ABC Incorporated. He decides to buy 100 shares of ABC at $25 per share and pays $2,500. Later that year, ABC Incorporated pays a stock dividend of 5%. Which of the following is true regarding the tax consequences that Ben will have regarding the ABC Inc Stock?

An investor who receives a stock dividend will adjust their cost basis and will have capital gains/losses associated with their cost basis and the current market price in the year that the stock is sold. Here, Ben bought 100 shares at $25/share for a cost basis of $2,500 total. He later received a stock dividend of 5%, which increased the amount of shares he owned to 105 from 100. An adjustment was made to his overall cost of $2,500 to reflect the new number of shares ($2,500 / 105 shares = $23.8095 or $23.81). Whenever Ben sells his shares, he will have capital gains/losses that are tied to that new cost basis.

Which of the following can authorize the repurchase of a company's own stock in the secondary market?

Stockholder approval is not required for repurchasing a company's own stock in the secondary market; it only needs to be approved by the Board of Directors

Which of the following is most likely to fluctuate in value during a period of stable interest rates?

Because convertible securities try to maintain parity with the Common Stock - Convertibles would fluctuate more than non-convertibles even when interest rates are stable.

Which of the following are true of warrants?

Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.

Public utility common stocks generally experience greater price volatility than the common stocks of industrial companies due to which of the following?

Since utility companies have a lot of debt, they would be very sensitive to fluctuating interests rates.

Company B has a preferred stock with several features, two of which are a conversion feature and a participation feature. Half way through the quarter, news came out that they may not meet earnings projections, causing the common stock price to drop. At the end of the quarter, Company B ended up beating earnings estimates which resulted in a participation dividend above the anticipated dividend payout. Which of the following are TRUE?

Features which benefit the holders of securities often allow the issuing entity to reduce dividend and/or interest payments on such securities. The conversion feature and participation feature would both be benefits to the holders of Company B preferred shares. The price of Company B preferred likely did decline in value due to the drop in price of common stock upon the announcement that earnings wouldn't be met. It then likely increased upon the positive news that estimates were beaten and a participation dividend would be paid.

ABC Corporation currently has 500,000 shares of 5% preferred stock outstanding. The stock was issued about a year ago, and since, the dividend rate on similar stocks has gone up to 6%. As well, ABC Corporation is considering a rights offering of stock to common shareholders in order to fund expansion of their current facilities. Which of the following would be TRUE?

If a 5% preferred stock is outstanding and current dividend rates have gone up, it would push the price of the 5% preferred stock down, because the stock is less desirable when compared to the newer preferred. When additional shares of common or preferred are offered by ABC Corporation, this will change the capitalization of ABC Corporation and may cause dilution of the company. Whether perceived as good or bad news, it is likely that the price of all securities offered by ABC Corporation, including the 5% preferred, would be affected by changes to the number of shares that exist, both common and preferred.

An issuer would most likely call in its preferred stock when:

Issuers would most likely call in an outstanding preferred or bond when interest rates are falling because they could issue new securities with a lower dividend or interest rate and reduce their expenses.

When the owner of common stock receives Proxy Material, which of the following do they then have?

Proxy material is like an absentee vote and allows shareholders to vote their choice when the shareholder is unable to attend the shareholders meeting.

A corporation's directors have declared a cash dividend on common stock and have specified the stock record date. Based on the above information which one of the following is incorrect?

The stock record date is not the date which determines who is entitled to a dividend. It is the ex-date which determines who is entitled to a dividend.

Susan is a new investor and recently purchased shares of common stock that you recommended to her. Today she calls to say that she received a check from the company and does not know what it is for. You would explain to her:

When an investor purchases common stock and then receives a check from the company it would represent a dividend from the company sharing its profits with its shareholders. Interest payments are made semi-annually from investments in Bonds. Capital gains would only occur if the security was sold at profit from its purchase price.