Equities: Common Stock
Corporate dividend payments may be made in all of the following forms EXCEPT: A Cash or company products B Listed options of that company C Additional common shares of another company D Additional common shares of that company
B. Listed options of that company: Corporations can pay dividends as cash or company products (the distribution of company products as a dividend is pretty much obsolete, however). A corporation can also make a distribution of additional shares of that company or can issue a dividend consisting of shares of another company (typically a subsidiary). Options are created and issued by the Options Clearing Corporation, not the company, and cannot be used as a form of dividend payment.
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. State value per share
B. Market value per share: 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!
The definition of Treasury stock is: A. Authorized shares - Issued shares B. Issued shares-Outstanding shares C. Authorized shares-Outstanding Shares D. Capital in excess of par value-par value
B. Issued Shares-Outstanding Shares: 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.
A customer buys 100 shares of preferred at $101 per share. The par value is $100. The dividend rate is 8%. Each dividend payment will be: A $80 B $400 C $800 D $808
B. $400: The annual rate is 8% x $100 par value = $8 per share x the number of shares = $800. Since preferred dividends are paid semi-annually, each payment would be $400
An investor who wishes to vote at a company's annual meeting: A must physically attend the meeting B can vote by proxy C can vote by assignment D can vote by appointment
B. Can vote by proxy: The way that an investor votes at the company's annual meeting is to appoint someone (usually the management of the company as his or her proxy (meaning "stand in") to vote those shares. There is no requirement for the investor to physically attend the meeting.
Callable preferred stock is likely to be redeemed by the issuer if A interest rates rise B interest rates fall C the common stock price rises D the common stock price falls
The best answer is B. If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.
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
C. $75,000,000: 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.
Dividends on preferred stock may only be paid in: A Common shares of another issuer B Common shares of the same issuer C Cash D Preferred stock of the same issuer
C. Cash: Dividends on preferred stock are paid solely in cash. Common stock dividends may be paid in cash, stock, stock of another company (i.e. subsidiary), or products of that company.
All of the following are methods of dividend payment EXCEPT: A cash B stock C rights D product
C. rights: 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.
In a corporate liquidation, the last to get paid is: A Unpaid wages and taxes B Bondholders C Preferred stockholders D Common stockholders
D. Common Stockholders: In a corporate liquidation, common stockholders are paid after everyone else.
ABC 10% $100 par preferred is trading at $120 in the market. The current yield is: A 5% B 8.33% C 10% D 12%
The best answer is B. The formula for current yield is: Annual Income/Market Price $10/$120 = 8.33%
All of the following features are common to both preferred stock and bonds EXCEPT: A Fixed rate B Can be callable C Fixed maturity date D Semi-annual payments
The best answer is C. Like bonds, preferred stock has a fixed rate, can be callable and pays semi-annually. But unlike bonds, preferred stock has no maturity.
All of the following are types of preferred stock EXCEPT? A Performance B Participating C Cumulative D Refundable
The best answer is D. There is no such thing a refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.
Which statement is TRUE regarding a corporation that has adopted cumulative voting? A Each stockholder must accumulate his votes and cast them for one director B Minority stockholders have a greater ability to elect the director of their choice C Each director must be elected by a majority of the shareholders D Minority stockholders are given proportionately more votes than majority stockholders
B. Minority stockholders have a greater ability to elect the director of their choice: Under "cumulative" voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. The statement that each shareholder must accumulate his votes and cast them for 1 director is false - the votes are accumulated and can be cast as the stockholder sees fit. The statement that each director must be elected by a majority of the shareholders is incorrect - each director must be elected by a majority of the outstanding shares. The statement that minority shareholders are given proportionately more votes than majority shareholders is incorrect - the benefit of cumulative voting is that the minority shareholder can vote all of his votes for 1 (or for a few) director(s), and by virtue of the extra weight of those votes, get the director(s) elected.
Which statement is TRUE regarding the effect of a repurchase of Treasury Stock? A Outstanding shares are reduced and Earnings Per Share are reduced B Outstanding shares are reduced and Earnings Per Share are increased C Outstanding shares are increased and Earnings Per Share are reduced D Outstanding shares are increased and Earnings Per Share are increased
B. Outstanding shares are reduced and Earnings Per Share are increased: Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, Earnings Per Share increases.
Common dividends are usually declared: A quarterly by the Board of Directors of the company B semi-annually by the Board of Directors of the company C quarterly by the Chief Executive Officer of the company D semi-annually by the Chief Executive Officer of the company
B. Quarterly by the board of directors of the company: Common dividends are declared by the Board of Directors (BOD) and usually paid quarterly.
A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. Which statement is TRUE? A This is known as a proxy and once given, it cannot be revoked B This is known as a proxy which may be revoked prior to the annual meeting C This is known as a voting trust and once given, it cannot be revoked D This is known as a voting trust which may be revoked prior to the annual meeting
B. This is known as a proxy which may be revoked prior to the annual meeting: 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. A power of attorney is revocable at any time as long as it is revoked in writing. The customer can revoke the power of attorney if he decides to change his vote or decides to go to the annual meeting himself. 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 statement is FALSE regarding Treasury Stock? A Treasury Stock is not entitled to dividends B Treasury Stock has voting rights C Treasury Stock buybacks decreases the number of shares outstanding D Treasury Stock purchases are used to increase reported Earnings Per Share
B. Treasury stock has voting rights: Treasury stock does not vote nor receive dividends. Treasury stock is deducted from outstanding shares, and since outstanding shares are reduced, Earnings Per Share increases.
The Price / Earnings Ratio is a measure of: A profitability B valuation C volatility D velocity
B. Valuation: 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.
Which term best describes common stock? A. Negotiable and Callable B. Negotiable and Non-Callable C. Non-Negotiable and Callable D. Non-Negotiable and Non-Callable
B.Negotiable and Non-Callable: Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.
All of the following statements are true about preferred stock EXCEPT: A Preferred dividends are paid before common B In most cases dividends are paid semi-annually C Corporations must pay preferred dividends D Preferred shareholders are paid before common shareholders upon liquidation of a corporation
C. Corporations must pay preferred dividends:Preferred stock has preference over common as to the payments of dividends and as to assets upon liquidation. Preferred dividends are, in most cases, paid semi-annually. The Corporation will only pay the preferred dividend if the Board of Directors decides. There is no legal obligation to pay the preferred, however, if it is not paid, investors will not find the stock attractive and won't invest in it.
Common stockholders have all of the following rights EXCEPT: A voting for the Board of Directors B transferring share ownership without restriction by the issuer C Inspecting minutes of executive meetings D maintaining proportionate ownership in the company
C. Inspecting minutes of executive meetings: Common stockholders do not get to inspect the minutes of executive meetings. They do have the right to vote; to sell their shares without issuer restriction; and to maintain proportionate ownership in the company.
Stockholder approval is needed if a corporation wishes to do all of the following EXCEPT: A split its stock 1 for 2 B split its stock 2 for 1 C repurchase shares for Treasury D issue convertible securities
C. Repurchase shares for Treasury: Stockholder approval is needed for a stock split, because it changes the par value of the stock. The State in which the company is incorporated typically requires shareholder approval of a par value change. In contrast, dividend decisions, either in cash or stock, do not require shareholder approval because they are "paid" out of retained earnings and do not affect par value per share. They are made solely by the Board of Directors of the company. Issuance of convertible securities requires shareholder approval because it is potentially "dilutive" (if the securities are converted, there will be more common shares outstanding, and earnings per common share will fall). The repurchase of shares for Treasury will boost earnings per share, because there will be fewer shares outstanding. This boosts the value of the existing common shares, so no shareholder approval is required. This is another decision that is made solely by the Board of Directors.
A customer buys 100 shares of XYZ stock at $40. The stock pays a quarterly dividend of $.50. What is the dividend yield? A 1% B 1.25% C 4% D 5%
D. 5%: Common dividends are paid quarterly. The annual dividend rate is $2.00 ($.50 per calendar quarter x 4). The dividend yield is $2/$40 = 5%.
All of the following actions by a corporation will affect an individual common shareholder's equity EXCEPT: A Issuance of additional common shares B Conversion of convertible preferred stock C Repurchase of common shares D Declaration of a stock dividend or stock split
D. Declaration of a stock dividend or stock split: 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. If the issuer forces conversion of convertible securities, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. If the corporation purchases Treasury Stock, then with fewer shares outstanding, the reported earnings per share, and book value per share will increase - thus common equity increases. If the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their "pre-emptive" rights
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
D. Distributing tax credits to shareholders: 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.
The common stockholder has all of the following rights EXCEPT: A Voting rights B Pre-emptive rights C Dividend rights D Management rights
D. Management Rights: Common stockholders have no management rights; they are passive investors. Common stockholders have voting rights, pre-emptive rights, and dividend rights (if a dividend is declared by the Board of Directors).
What term would apply to Authorized Stock? A. Issued B. Outstanding C. Voting D. Par-Value
D. Par Value: Authorized stock is the total number of shares that the company is "authorized" to sell. Issued stock is the number of shares that have actually been sold to the public out of the authorized total. 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). The only stock that votes and that receives dividends is Outstanding shares. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.
Which statement is TRUE about preferred stock? A When interest rates rise, preferred stock prices rise B Interest rates and preferred prices move in the same direction C Preferred stock dividends are typically adjusted for interest rate swings D When interest rates fall, preferred stock prices rise
D. When interest rates fall, preferred stock prices rise: Preferred stock is a fixed income security that typically has a fixed dividend. When market interest rates move, the only way for the yield on the security to adjust to the market is to have the price change. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security. This inverse relationship between rates and price also applies to fixed income securities
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
D. the number of authorized shares will be reduced: 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.
During periods of stable interest rates, which type of preferred stock will have the greatest price volatility? A Cumulative B Participating C Callable D Adjustable Rate
The best answer is B. Participating preferred gives the preferred shareholder the right to participate with common in any "extra" dividends declared by the Board of Directors. If these extra dividend payments are made, this can cause the preferred stock price to rise even though interest rates have not fallen. Virtually all preferred stock is cumulative - if the company misses preferred dividend payments, then before it can pay a common dividend, it must make up all unpaid preferred dividend payments. Callable preferred gives the issuer the right to call in the preferred at a pre-established price, which the issuer would do if market interest rates fell. This would tend to suppress the upward movement of the stock price to no more than the call price as market interest rates fell. In a period of stable interest rates, the issuer has no reason to call the preferred stock. Adjustable rate preferred adjusts the dividend rate, tied to the movements of a market interest rate index, so as market rates move up, the dividend rate moves up and vice versa. Therefore, in a period of stable interest rates, the dividend rate will not change, nor will the price (unless the credit quality of the issuer deteriorates).
ABC Company has issued 13%, $100 par cumulative preferred stock. Two years ago, ABC paid a preferred dividend of $8. Last year, it paid a preferred dividend of $12 per share. This year, ABC wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A $14 B $19 C $20 D $26
The best answer is B. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be paid). The stated dividend rate on the preferred is 13% based on $100 par. Two years ago, 8% was paid, so 5% was omitted that must be paid. Last year, the corporation only paid 12%, so there is another 1% that must be paid. Also, this year's dividend of 13% must be paid. The total dividend that must be paid is 19% or $19 per preferred share before a common dividend can be paid
What type of preferred stock can move in price as the price of the common stock moves? A Straight preferred B Cumulative preferred C Convertible preferred D Participating preferred
The best answer is C. Convertible securities are convertible into common at a predetermined ratio. If the common stock price rises above the conversion price, then the convertible security will trade at the value of the equivalent number of common shares. For example, assume that $100 par common stock is convertible at $20 per share. If the common stock price moves to $25, the preferred must trade for $125, because it is equivalent to 5 common shares. Cumulative preferred means that if the issuer misses dividend payments, these accumulate and must be paid in full before a common dividend can be paid (all preferred is cumulative). Participating preferred gets to participate with common in any "extra" dividends that are declared by the company Board of Directors.
All of the following are terms associated with preferred stock EXCEPT: A callable B cumulative C redeemable D convertible
The best answer is C. Preferred stock is not a redeemable security - it is a negotiable security. The stock cannot be redeemed with the issuer - an investor who wishes to liquidate must sell the stock in the market. Preferred stock can be callable, cumulative, and convertible.
A customer buys 1,000 shares of ABCD $25 par 8% cumulative preferred stock. This preferred issue pays quarterly dividends. This year, it missed the first 3 quarterly dividends. In the 4th quarter, it paid a common dividend of $.25 per share. In order to do this, it must have paid this preferred shareholder: A $400 B $500 C $1,600 D $2,000
The best answer is D.This customer owns 1,000 shares of $25 par cumulative preferred, for a face value of $25,000. In order to have paid the common dividend,the company must have paid the preferred shareholder the 3 missed quarterly dividends in addition to the current quarterly dividend. Therefore, it must pay the annual dividend amount of 8% of $25,000 = $2,000 to this preferred shareholder.