Common Stock

Which term describes common stock? A. negotiable B. redeemable C. non-negotiable D. callable

The best answer is A. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.

A corporation has issued 100,000,000 shares of common stock at $1 par. The corporation has 25,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A. $12,500,000 B. $25,000,000 C. $75,000,000 D. $100,000,000

The best answer is C. Outstanding stock is: Issued stock (100,000,000 shares) minus Treasury stock (25,000,000 shares) = 75,000,000 shares outstanding at $1 par = $75,000,000.

Common dividends can be paid in all of the following forms EXCEPT: A. Warrants B. Product C. Stock D. Cash

The best answer is A. Common dividends can be paid in the form of cash, stock, or the products of a company (this last method is obsolete). The distribution of rights or warrants is not a method of dividend payment. In a rights offering, the corporation attempts to raise additional capital by allowing existing shareholders to subscribe to new shares at a discount to the current market price. Rights typically have a life of 30-90 days. Warrants are sweeteners attached to preferred stock or bond offerings by the issuer to make them more attractive to potential investors. Each warrant is a long-term option (up to 5 years) to buy a stated number of shares, at a premium to the market price at the time of issuance. The warrant has no value unless the price of the common stock rises above the exercise price.

All of the following actions will dilute shareholders' equity EXCEPT: A. payment of a stock dividend B. conversion of convertible preferred stock C. exercise of stock options granted to officers D. issuance of additional common shares

The best answer is A. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. However, in total, the shareholder has the same percentage interest in the corporation. If the holders of convertible securities convert, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. Similarly, if the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their "pre-emptive" rights. Finally, if officers are granted stock options, their exercise of those options results in the issuance of additional common shares, diluting existing shareholders' equity.

An investor has 500 shares and is voting for 3 open board seats. Which statement is correct if the election employs the statutory voting method? A. Statutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 500 votes for a favored director. B. Statutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director. C. Statutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 500 votes for a favored director. D. Statutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director.

The best answer is A. Statutory voting is also know as proportionate voting. Under the statutory method, the number of shares held (500) is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships (3 x 500) and apply them to favored individuals. Cumulative voting gives the shareholders disproportionate voting weight as compared to statutory voting and is considered to be an advantage for the small investor.

An investor has 300 shares and is voting for 3 open board seats. Which statement is correct if the election employs the cumulative voting method? A. Cumulative voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 900 votes for a favored director. B. Cumulative voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 300 votes for a favored director. C. Cumulative voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 900 votes for a favored director. D. Cumulative voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 300 votes for a favored director.

The best answer is A. Cumulative voting gives the shareholder a disproportionate voting weight as compared to statutory voting and is considered to be an advantage to the small investor. Under the statutory method, the number of shares held is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships and apply them to favored individuals. In this case the investor has 900 total votes (1 vote per share per board seat) so they may cast a maximum of 900 votes for a favored director.

The market price of common stock will be influenced by which of the following? A. Expectations for future dividend payouts by the company B. Number of Board of Directors C. Book value per share D. Par value per share

The best answer is A. The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the number of Board of Director seats have no direct bearing on the market price of the common.

A client who wants to make an investment in common stock would be most concerned with the company's: A. book value per share B. market value per share C. par value per share D. stated value per share

The best answer is B. This is easy - the first question asked by a customer whenever a purchase is being made is "How much does this cost?" Market value is the current cost, so this is the best answer!

Common dividends are usually paid: A. monthly B. quarterly C. semi-annually D. annually

The best answer is B. Common dividends are usually declared and paid quarterly.

Which terms describe common stock? A. Negotiable and callable B. Negotiable and non-callable C. Non-negotiable and callable D. Non-negotiable and non-callable

The best answer is B. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.

The definition of Treasury stock is: A. authorized shares minus issued shares B. issued shares minus outstanding shares C. authorized shares minus outstanding shares D. capital in excess of par value minus par value

The best answer is B. If a company has the same number of issued shares as the number of shares outstanding, then no shares have been repurchased for the company's Treasury. However, if the company repurchases shares, the number of outstanding shares decreases. Thus, the definition of Treasury stock is issued shares minus outstanding shares.

In a corporate liquidation, common stockholders are paid: A. before bondholders and preferred stockholders B. after bondholders and preferred stockholders C. after bondholders but before preferred stockholders D. before all creditors

The best answer is B. In a liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.

The Price / Earnings Ratio is a measure of: A. profitability B. valuation C. volatility D. velocity

The best answer is B. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios are being valued very highly by the market; while those with low P/E ratios are being valued at a low level. Rapidly growing companies tend to have high P/E ratios, while mature companies tend to have low P/E ratios.

All of the following are methods of dividend payment EXCEPT: A. cash B. stock C. rights D. product

The best answer is C. The distribution of "rights" is not a dividend. Rather, it is the "pre-emptive" right of all shareholders to maintain proportionate ownership if the corporation wishes to issue additional shares. The corporation must distribute rights to existing shareholders if it wishes to sell new common shares. Dividend distributions, on the other hand, are voluntary payments made by the corporation to its shareholders. The amount and form of payment are determined by the Board of Directors. Dividend payments can take the form of cash; stock dividends; or product dividends. For example, in years past, Procter and Gamble would send a "variety pack" of its products to shareholders in addition to the regular cash dividend. Product dividends are no longer popular, since they are taxable to the shareholder as is any dividend, and the owner would rather receive cash.

DUPA Corp. has a Price/Earnings multiple of 20 and a market price of $45. What was the corporation's Earnings Per Common Share? A. $.225 B. $.44 C. $2.25 D. $4.44

The best answer is C. The Earnings per Share can be found by taking the: 4520= $2.25

To determine if a stock appears to be overpriced, what would be examined? A. The company's Earnings Per Share B. The company's Dividend Payout Ratio C. The company's Price to Earnings Ratio D. The company's Debt to Equity Ratio

The best answer is C. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued.

All of the following are rights of a common shareholder EXCEPT the: A. right to vote B. right to receive a dividend C. right to manage D. right to transfer shares

The best answer is C. The common shareholder does not manage the company - this is the domain of the Board of Directors and corporate officers. The common shareholder does have the right to vote, receive a dividend, and to sell his shares.

Which of the following is the right of a common shareholder? A. Right to manage B. Right to interest C. Right to receive a dividend D. Right to vote on the payment of dividends

The best answer is C. The common shareholder does not manage the company! She has the right to receive a dividend (if declared and paid) but NOT the right to vote on whether or not dividends will be paid. Interest is paid to bondholders; not stockholders.

A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. This is called (a): A. discretionary authority B. voting trust C. proxy D. trading authorization

The best answer is C. When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.

Which of the following actions by a corporation would be prohibited? A. Making a cash distribution to shareholders B. Making a stock distribution to shareholders C. Distributing the stock of another company to shareholders D. Distributing tax credits to shareholders

The best answer is D. Corporations can distribute cash dividends; can distribute additional shares of stock in that company as a dividend to conserve cash; or can distribute shares of another company (such as a subsidiary) to shareholders. Tax credits cannot be distributed to shareholders under the corporate business form; they can only be passed to owners of partnerships.

Corporate dividend payments can be made in all of the following ways EXCEPT: A. cash or company products B. additional common shares of that company C. additional common shares of another company D. listed options of that company

The best answer is D. Corporations can pay dividends as cash or in stock, and can also distribute products produced by that company as a dividend to shareholders. For example, Proctor & Gamble used to send soap products to shareholders. A company can make a distribution of additional shares of that company (a stock dividend); or can issue a dividend consisting of shares of another company (typically a wholly owned subsidiary whose shares are distributed to owners of the parent company). Corporations cannot make dividend distributions consisting of listed options in that company, since the contracts are created and issued by the Options Clearing Corporation - NOT the company.

Voting of the common stockholder is NOT required for which of the following? A. When a corporation wishes to issue convertible securities B. When a shareholder decides to accept a tender offer for the company's shares C. When a corporation declares a stock split D. When a corporation declares a cash dividend

The best answer is D. Dividend decisions are made by the Board of Directors - no shareholder approval is required. This is true whether a cash or stock dividend is being declared. Changes in the equity capitalization of a company require shareholder approval. A stock split changes par value per share, which requires a shareholder vote. The issuance of convertible securities (which can be converted to equity) is potentially dilutive to the existing common shareholders. They must vote to permit this. A tender offer is when someone outside the company makes an offer to the existing shareholders to buy their shares, typically at a premium to the current market price. The shareholder can choose to tender or not. If the shareholder chooses to tender, he or she is "voting" to sell the shares to the maker of the offer.

What term would apply to Issued Stock? A. Retired B. Outstanding C. Non-voting D. Par Value

The best answer is D. Issued stock consists of shares that have been issued to the public out of the company's total number of "authorized" shares that it could sell as detailed in its corporate charter. These shares receive dividends and vote. However, if the corporation repurchases shares for its Treasury, this is deducted from the Issued number of shares to arrive at Outstanding shares. It is the Outstanding shares that vote and receive dividends. Note that Outstanding shares will not equal the Issued shares if there have been Treasury repurchases. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.

What term would apply to Treasury Stock? A. Negotiable B. Outstanding C. Voting D. Par Value

The best answer is D. The only stock that votes and receives dividends is Outstanding shares. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). Treasury stock consists of shares that have been repurchased and "retired," so Treasury stock does not receive dividends and has no voting rights. Par value is the term that applies to all stock, whether it is Authorized, Issued, Treasury, or Outstanding.

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT: A. the number of outstanding shares is reduced B. the earnings per share is increased C. the market price of the stock will increase D. the number of authorized shares will be reduced

The best answer is D. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock's price in the market. The purchase of Treasury Stock has no effect on authorized shares. This is the legal amount of shares that the company is authorized to sell, established in the company's corporate charter.

At the beginning of the year, an investor buys 1,000 shares of XYZ stock, purchased at $33 per share. Subsequently, the stock rises to $40 by the end of the year and the stock pays a $4 dividend during the year. By the end of the following year, the stock has fallen to $25 and pays the same $4 dividend. What is the stock's dividend yield? A. 4% B. 10% C. 12% D. 16%

The best answer is D. Dividend yield is based on the current market share price, not on cost of the stock. The annual dividend amount paid is $4 per year. Since the stock is currently trading at $25 per share, the dividend yield is $4 / $25 = 16%.