Equity Securities

Order of Asset Distribution upon Liquidation

1-Taxes 2-Secured Debt 3-Unsecured Debt 4-Preferred Stockholders 5-Common Stockholders

With a DPP, what will decrease the investor's adjusted cost basis?

1. Distribution of property to the partner(s) by the partnership 2. Partnership losses 3. Non-deductible partnership expenses 4. Depletion deductions for oil and gas partnerships

Treasury Stock features

1. does not vote 2. does not receive dividends 3. is not used in the EPS calculation 4. appears on the balance sheet as a deduction from the issued shares

4 reasons a company would repurchase its own stock

1. increase EPS 2. finance future acquisitions 3. provide stock for employee stock option plans 4. fight a takeover attempt

REITs must have at least _% of their assets in real estate related activities

75%

REITs must pay out at least _% of earnings to shareholders

90%

Registered form of stock

A certificate issued in the shareholder's name and recorded on the issuer's books

Warrants/Subscription Warrants

A long-term option to buy stock at a specified price from the issuing company. They are generally issued with debentures

Preferred stock

An equity security that represents ownership in the corporation just as common stock does, but has priority over common stock in receiving dividends and sharing assets if the company is dissolved. Typically pays a fixed dividend and is generally classified as a fixed income security

Real Estate Investment Trust (REIT)

Companies that manage a portfolio of real estate to earn profits for their shareholders

Utility Stock Characteristics

Generally offer above-average dividend yields to investors but less capital appreciation as compared to growth stocks. Usually highly leveraged and can do so safely since they supply a commodity. Due to the leveraged nature of the company, changes in interest rates will have more of an effect on the common stock due to costs associated with debt

Current Yield Formula

Current yield = annual dividends/market price

Cyclical Stock

Cyclical stock is heavily affected by normal business and economic cycles

Equity REIT

Equity REITs take equity positions in real estate. Shareholders receive income from rents received and capital gains when properties are sold at a profit

General Partners

General partners manage the DPPs, General Partnerships, and Limited Partnerships

Main advantages of DPPs

Income and expenses flow through to the partners. For Limited Partners, the capital risk is limited to their cash investment. Capital costs can be depreciated. They provide some diversification and are professionally managed

Defensive stock

Issued by a company that is resistant to normal business cycles and to general stock market fluctuations. They are generally stable and have consistent earnings, year after year

Mortgage REITs

Lend money to building developers and pass the interest income on to shareholders

convertible preferred stock

Preferred stock that may be converted into common stock at the option of the stockholder

Participating Preferred Stock

Preferred stock with dividends that are fixed as to a minimum but not a maximum amount

How often do dividends get paid on Preferred stock?

Quarterly

American Depository Receipts (ADRs)

Receipts traded in the U.S. for foreign securities that are held in bearer form by an American bank in the foreign country. They have no voting privileges, dividends are paid in U.S. dollars, and they are not issued as callable

Rights/Subscription Rights

Rights are short term privileges granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issues shares at a price that is lower than the public offering price before the public is allowed to purchase the new shares

Regular/Statutory voting

Shareholders receive one vote per share per director. Ex: if 100 shares are held and 3 candidates are up for election, the shareholder can vote up to 100 votes per candidate

Cumulative/Block Voting

Shareholders receive one vote per share times the number of directors being voted on. They may cast their votes as a block for one candidate or distribute the votes as they see fit. Ex: If 100 shares are held and 3 candidates are up for election, the shareholder can vote up to 300 votes for one candidate

Why would someone sell a stock short?

Short seller attempts to make money by borrowing and then selling a company's stock at a high price and then later buying and replacing that amount of stock at a lower price. Investors that sell stock short generally expect the market price of the stock to decline (bearish)

Blue Chip Stock

Stock issued by a company that is generally nationally known with a reputation for quality management, products, and services. They generally pay consistent and moderate dividends regardless of good/bad economic conditions

Countercyclical stock

Tends to move in the opposite direction of the economy

Issued Stock

The amount of stock taken from authorized stock that has been sold to the public in a Primary Distribution

Declaration Date

The date on which a dividend is declared by resolution of the Board of Directors of the corporation

Authorized Stock

The maximum number of shares of stock that is allowed to be sold by a corporation

Street name

The security is registered on the issuer's books in the name of the B/D that is holding the stock for the benefit of the client

What are the main disadvantages of DPPs?

There is generally a lack of liquidity. Limited partners do not have control of the management. General Partners have unlimited liability

Regulation T Settlement

Trade date plus four business days (T+4)

Regular Way Settlement

Trade date plus two business days (T+2)

Which of the following statements regarding warrants is not true? [A] They allow the owner to purchase additional shares of common stock. [B] They can be used to increase the attractiveness of a new issue. [C] They are generally long-term. [D] They are an obligation which must be issued by the corporation

[D] They are an obligation which must be issued by the corporation Warrants are always "want to" by a corporation, not a "have to."

What is the liability of a general partner?

Unlimited liability

Long Position

When an investor "Buys" and owns any security.

Short position

When an investor "borrows" stock from their B/D and then sells the stock that they borrowed

The Eskimo Cup Company announces a 20 cent dividend payable March 15th to owners of record Thursday, February 19th and declares a 5% stock dividend payable March 15th to owners of record Friday, February 13th. An investor buys 2,000 shares regular way on Monday, February 16th. He would expect a cash dividend of [A] 20 cents per share on 2,000 shares. [B] 20 cents per share on 2,100 shares. [C] 21 cents per share on 2,000 shares. [D] 21 cents per share on 2,100 shares.

[A] 20 cents per share on 2,000 shares

Rights are best defined by which of the following? [A] A short-term privilege to existing common stockholders to buy new shares in proportion to shares they already own. [B] The ability to receive a fixed cash dividend. [C] A long-term option to buy stock at a set price from the issuing company. [D] The ability to sell stock at a set price for set time period.

[A] A short-term privilege to existing common stockholders to buy new shares in proportion to shares they already own. Rights (RTS) are a short-term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a price that is typically lower than the public offering price before the public is allowed to purchase the new shares. Fixed cash dividends are paid on preferred stock. Warrants give investors a long-term option to buy stock from the company at a set price. Put options allow investors to sell stock at a set price for a set time period.

Assuming all of the following products are available, which provides the customer with the BEST opportunity to invest in a foreign stock? [A] An American Depositary Receipt (ADR) [B] An international fund that includes the stock [C] A global fund that includes the stock [D] A domestic corporation that is within the same sector

[A] An American Depositary Receipt (ADR) Assuming that American Depositary Receipts (ADRs) are available on this foreign stock, this product provides the customer with the BEST opportunity to invest in a foreign company. Each of the other alternative answers does not provide direct investment for the investor in the specified stock. Both international and global funds would be diversified and hold small amounts of the stock in question. The domestic company may be an alternative if the investor is seeking to invest within a particular sector, but it is NOT a direct investment in the company that is specified.

Preferred stock has which of the following characteristics? One can typically expect a dividend at a specific rate. Voting rights typically do not accompany preferred stock. Historically, preferred stock exhibits more appreciation potential than common stock. Dividends are paid only after dividends have already been paid on common stock from the same issuer. [A] I and II [B] II and III [C] I and IV [D] III and IV

[A] I and II Preferred stock typically comes with a specific or fixed dividend rate. Preferred also does not come with voting privileges, though it is possible. Common has more potential for appreciation, since the market price of preferred is normally more tied to the preferred stock's dividend rate. Preferred receives dividends ahead of common, which is one of the reasons that it is "preferred."

Which of the following is TRUE of warrants? [A] When the warrants are issued, the market price of the underlying stock would be below the exercise price. [B] They are all issued as perpetual warrants. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.

[A] When the warrants are issued, the market price of the underlying stock would be below the exercise price. 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.

Mortgage Real Estate Investment Trusts generally invest in which of the following? [A] properties handled by developer or builders [B] income producing properties [C] residential mortgage loans [D] oil and gas properties

[A] properties handled by developer or builders Mortgage Real Estate Investment Trusts lend money to builders and developers and then pass the income on to shareholders.

A round lot unit of trading in common stock is [A] 10 shares [B] 100 shares [C] 500 shares [D] 1000 shares

[B] 100 shares

The stock of a corporation is selling at $55 per share and the corporation pays a quarterly dividend of $1.30. The yield is? [A] 2.4% [B] 9.5% [C] 4.2% [D] 4.7%

[B] 9.5% ( 5.20 Annual Div / 55 Mkt px) = .0945 = 9.5% Remember: To calculate the current yield, you must multiply the QUARTERLY dividend by 4. The yield is based on the annual dividend.

With regard to common stock, prior stockholder's vote is required for which of the following? [A] 20% stock dividend [B] A 3 for 1 stock split [C] Primary distribution of 400,000 unissued shares [D] A purchase of 100,000 treasury shares

[B] A 3 for 1 stock split Outstanding common shareholders must vote to approve stock splits.

Which of the following would probably be most leveraged? [A] A chemical company [B] A utility company [C] An automobile company [D] A steel company

[B] A utility company Utility companies are usually highly leveraged. They can do this safely because they supply a commodity everyone will always need; they are not constrained by a diminishing or volatile market.

Treasury stock has which of the following features? Treasury stock refers to stock that the issuing corporation has repurchased. Treasury stock has not been issued to the public. Treasury stock is traded on margin by the issuing corporation. Treasury stock does not receive dividend payments and does not participate in voting matters. [A] I and III [B] I and IV [C] II and III [D] III and IV

[B] I and IV Treasury stock is stock that has been issued by a corporation and then repurchased by that corporation. Because it is held by the corporation, it does not participate in voting matters and does not receive dividends.

Which of the following is true of cumulative voting? [A] It is advantageous to majority shareholders. [B] Minority shareholders have a better chance of electing a director of their choice. [C] Majority shareholders can always elect the entire board of directors. [D] A stockholder of 400 shares with 5 persons to be elected to the board could only vote 400 shares for each director of his choice.

[B] Minority shareholders have a better chance of electing a director of their choice. Because shareholders can "block" their votes and cast them for the director of their choice, minority stockholders benefit most from cumulative voting

In looking at a particular stock's patterns, you notice that the stock has historically mirrored economic performance. Which of the following would be the BEST characterization of this stock? [A] This would be a speculative growth stock. [B] This would be a cyclical stock. [C] This would be a stock that is defensive with regards to economic fluctuations. [D] This would be a large capitalization blue-chip stock.

[B] This would be a cyclical stock. A stock that tends to fluctuate with changes in the economy would be known as a cyclical stock.

REITs can pass through all of the following to investors except: [A] dividends [B] capital losses [C] capital gains [D] interest

[B] capital losses Since REITs trade like a corporate security, there is no pass through of losses; losses are treated as capital losses.

A common stockholder has all of the following rights except: [A] voting [B] demand dissolution of the company's assets [C] residual claim on the company's assets [D] to examine certain books and records

[B] demand dissolution of the company's assets

Equity Real Estate Investment Trusts will usually invest in which of the following? [A] properties in oil and gas [B] income producing properties [C] residential mortgage loans [D] public municipal facilities

[B] income producing properties

Which of the following investment choices would provide an investor the least liquidity? [A] money market funds [B] limited partnership participation [C] certificate of deposit [D] long-term convertible corporate bond

[B] limited partnership participation Since there is no active secondary market on limited partnerships, they would offer the investors the least liquidity.

Mr. Smith is short 100 shares of ABC common stock when ABC pays a 10% stock dividend. On the morning of the ex-date Mr. Smith would [A] receive 10 additional shares of ABC common stock [B] owe 10 additional shares of ABC common stock [C] not be affected by the stock dividend [D] owe the value of the 10 shares of ABC common stock in cash

[B] owe 10 additional shares of ABC common stock When a customer is SHORT stock and a stock dividend is paid, the investor would OWE the additional shares to the firm that they borrowed the stock from, therefore Mr.Smith would owe 10 additional shares of ABC common stock.

When a cash dividend is paid on a stock, an investor with a short position in the stock would: [A] receive the dividend from the lender [B] owe the dividend to the lender [C] not receive or owe the dividend because the position is short [D] dividends are not applicable to short stock positions

[B] owe the dividend to the lender Since short stock is borrowed, the investor with the position would owe the dividend to the lender.

All of the following are rights of a common stockholder EXCEPT for the right to [A] vote on important matters such as the Board of Directors. [B] receive fixed cash dividends. [C] inspect certain corporate books and records. [D] receive a stock certificate.

[B] receive fixed cash dividends. Common stockholders have the right to receive dividends once the Board of Directors declares a dividend, but dividends are not a right until declared and are not fixed. Dividends on preferred stock are for a fixed percentage or dollar amount and are expected, but are not mandatory. Common shareholders have the right to vote on important matters, inspect corporate books and records, and receive a stock certificate. Remember that preferred shareholders do not normally have the ability to vote, but do get a higher claim on assets than common shareholders.

A common stockholder in a corporate liquidation has: [A] A priority claim on the assets. [B] A claim on the assets prior to preferred stockholders. [C] A residual claim on the assets. [D] A claim on the assets prior to subordinate lenders but after secured creditors

[C] A residual claim on the assets. Common Stock holders have a residual claim on the corporate assets. If liquidation occurs common stockholders would be the last to be paid.

Which two of the following are true about REITs (Real Estate Investment Trusts)? They are set up as Limited Partnerships They are generally set up as publicly traded companies They could be subject to double taxation They pass-through both profits and losses [A] I and III [B] I and IV [C] II and III [D] II and IV

[C] II and III Choices II and III are true of REITs. They could become subject to double taxation if they do not distribute at least 90% of its net earnings and most of them are publicly traded.

Which of the following are true regarding a limited partner who has invested in a limited partnership tax shelter? The limited partner flexibility concerning the types of investment made by the partnership Limited liability for the limited partners. Possible tax write offs against other passive income for the limited partner. The limited partner has considerable control over management. [A] I and II [B] III and IV [C] II and III [D] All

[C] II and III Limited Partners must be "silent" partners and would NOT have control over the types of investments made by the partnership and limited partners DO NOT have control over the management of the partnership. Limited Partners would have limited liability and the possibility of tax write-offs.

Place the following in order, highest to lowest, in terms of asset distribution if a corporation is liquidated: Preferred stockholders Owners of secured debt instruments Common stockholders Owners of unsecured debt instruments [A] I, II, III, IV [B] III, I, IV, II [C] II, IV, I, III [D] IV, II, III, I

[C] II, IV, I, III The order of asset distribution is taxes, secured debt, unsecured debt, preferred stockholders, and common stockholders. Common stockholders are last on the list and are considered residual owners in the event of a corporate liquidation.

A correct statement concerning the federal tax treatment of a "qualified" Real Estate Investment Trust (REIT) is that it is: [A] Permitted to carry over any operating losses. [B] Not subject to the pass-through tax treatment. [C] Must pay out a specified portion of its ordinary income as dividends. [D] Not taxed on retained earnings.

[C] Must pay out a specified portion of its ordinary income as dividends. REIT's require the pass through of 90% of ordinary income as dividends in order to qualify for special tax treatment. They do not allow the pass through of losses

A corporation is planning to distribute new shares of common stock to its existing shareholders. This would be described as a [A] Best Efforts Agreement [B] Secondary Distribution [C] Rights Offering [D] Private Placement

[C] Rights Offering The key is that the shares are being offered to the existing shareholders, which would be done through a Rights Offering.

All of the following are defensive stocks EXCEPT a: [A] Tobacco company. [B] Food chain. [C] Steel company. [D] Natural gas company.

[C] Steel company. Defensive stock (not defense) - means the company is theoretically not subject to normal business cycles.

All of the following are defensive stocks EXCEPT: [A] Stocks of public utilities. [B] Stocks in tobacco companies. [C] Stocks in cyclical industries. [D] Stocks in food companies

[C] Stocks in cyclical industries. Defensive stocks are those that are not affected by cycles in the economy. They generally supply non-durable goods necessary for daily life. By definition, cyclical cannot be defensive stocks.

Which would be a counter-cyclical industry? [A] The computer software industry [B] The pharmaceutical industry [C] The gold mining industry [D] The automobile industry

[C] The gold mining industry Counter-cyclical industries are industries that either perform equal or better during down times in the economy. Gold mining and silver mining companies are companies would likely remain stable or perform better during a down economy.

You are evaluating a number of preferred stocks with varying features. One of the preferred stocks that you are evaluating shows a pattern of increased market value in relation to increases in the market value of the common stock of the company. Of the following preferred stock features, which is the MOST LIKELY cause of this pattern? [A] The preferred stock likely carries a participating feature. [B] The preferred stock likely carries a cumulative feature. [C] The preferred stock likely carries a conversion feature. [D] The preferred stock likely carries a call feature.

[C] The preferred stock likely carries a conversion feature. Convertible securities (both bonds and preferred stock) normally fluctuate in price more than non-convertibles because the price of the convertibles typically maintains parity with the common stock (due to the conversion feature). Therefore if common stock increases in price, it would be normal to see a convertible preferred stock increase in price as well.

An investor is long 100 shares of ABC common stock trading at $60 per share. ABC announces a 5 for 1 split. After the split, this investor would [A] own 250 shares with a value of $24 per share. [B] own 500 shares with a value of $60 per shares. [C] own 500 shares with a value of $12 per share. [D] own 250 shares with a value of $12 per share.

[C] own 500 shares with a value of $12 per share. When calculating a stock split you would multiply the ratio of the stock split (5/1) by the number of shares owned (100/1) to arrive at the new number of shares: 5/1 X 100/1 = 500/1 = 500 shares after the split Next, you would take the former total value ($60/share x 100 shares = $6000) and divide this by the new number of shares (500 shares after the split) to find the new market value: $6000 divided by 500 shares = $12 new market value per share after the split

Which of the following companies is most likely to pay a stock dividend? [A] A company with 25% of its assets in cash and no growth in earnings [B] A company with earnings growing at 3% per year [C] A company with 20% of its assets in cash and earnings growing at 5% per year [D] A company with a small cash balance and earnings growing at 20% per year

[D] A company with a small cash balance and earnings growing at 20% per year A company with a small cash balance would be the company most likely to pay a stock (shares of stock) dividend.

Which of the following is most likely to fluctuate in value during a period of stable interest rates? [A] Cumulative preferred stock. [B] Participating preferred. [C] Senior preferred. [D] Convertible preferred.

[D] Convertible preferred. 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 two of the following represent ownership in a corporation? convertible bonds mortgage bonds preferred stock common stock [A] I and II [B] II and III [C] II and IV [D] III and IV

[D] III and IV Bonds are debt securities and do not represent ownership, therefore only the choices of common and preferred stock represent ownership (equity).

All of the following are common features of preferred stock EXCEPT: [A] If a company desires, it can issue more than one class or series of preferred stock, each of which have different characteristics. [B] A company must pay preferred stock dividends before it can pay common stock dividends. [C] A company may be required to establish a sinking fund for the retirement of callable preferred stock [D] Large stock price fluctuations

[D] Large stock price fluctuations Preferred stock price fluctuations are generally small because the dividend is fixed and there is little upside potential or downside risk.

All the following are true about REITs EXCEPT: [A] They are required to distribute at least 90% of their earnings to shareholders. [B] They must be registered with the SEC if offered to the public. [C] A minimum of 75% of the gross assets must be in Real Estate related activities. [D] They are recognized as direct participation programs.

[D] They are recognized as direct participation programs. REITs are structured like a corporation and have shareholders; they are not structured as Limited Partnerships

All of the following are characteristics of REITs EXCEPT: [A] They are publicly-traded securities and can be traded on an exchange or OTC. [B] They generally own income-producing properties like apartment buildings. [C] They distribute 90% of their income to shareholders. [D] They must be registered under the Investment Company Act of 1940.

[D] They must be registered under the Investment Company Act of 1940 REITs are not investment companies and do not have to be registered under the Investment Company Act of 1940.

Which of the following would NOT be considered an advantage when investing in Real Estate Investment Trusts (REITs)? [A] Potential appreciation in property values [B] Dividend income with competitive yields [C] Provides a liquid investment in an illiquid investment area [D] Weakening demand for real estate

[D] Weakening demand for real estate If property demand was slowing down, that would reduce interest in investments in REITs.

A Preemptive Rights clause in a corporate charter includes all of the following characteristics except: [A] allows the existing shareholders first right of refusal on the newly issued shares [B] protects the existing shareholders from dilution of shares [C] allows the existing shareholders control over newly issued shares [D] requires the corporation to repurchase shares from existing shareholders at predetermined intervals

[D] requires the corporation to repurchase shares from existing shareholders at predetermined intervals A preemptive rights clause allows existing shareholders first choice on newly issued shares and protects the existing shareholders from dilution.

Preferred Stock could have all of the following characteristics EXCEPT: [A] dividends paid quarterly [B] convertible [C] cumulative [D] voting

[D] voting

Direct Participation Program (DPP)

a program which allows investors certain tax advantages for the underlying asset

cumulative preferred stock

all current and overdue dividends must be paid before dividends for common shareholders can be declared. Overdue dividends are referred to as dividends in arrears

Common stock

an equity security that represents ownership in a corporation. Those who purchase it are referred to as shareholders and have equity in the corporation

Special situation stock

can be undervalued and have price increases suddenly due to a number of reasons

Stock split

causes an increase in the number of outstanding shares of a corporation and a decrease in the market price of the stock but does NOT change the proportionate equity ownership of shareholders

Limited partners

liability is limited to the amount of their "at risk" investment in the entity

Calculation of the new number of rights needed to buy one new share of stock

outstanding shares/new shares

Outstanding shares formula

outstanding stock = issued stock - treasury stock

callable preferred stock

preferred stock that may be called/redeemed by the issuer at a set premium over the par value after a specified date

Growth stock

stock issued by a company that is expected to have above-average increases in revenues and earnings. It generally pays little or no dividends

Payable date

the date on which a declared dividend is paid

Record date

the date on which the corporation closes the updating of the stock record book

ex-dividend date

the date on which the stock begins to trade without a declared dividend. When buying on or after the ex-date, new owners are not entitled to the dividend

Treasury stock

when a company repurchases its own outstanding common shares in the open market