Lesson 1 Practice Q

Rule 144 applies to the sale of all of the following except

registered securities by a nonaffiliated shareholder of the issuer. Rule 144 applies to the sale of unregistered securities owned by affiliates or nonaffiliates and the sale of control stock. It does not apply to the sale of registered securities by nonaffiliated persons.

Which of the following statements about restricted stock is correct?

C. Volume limits generally apply to sales by control (Affiliated) persons All purchases of restricted stock generally have a holiday period requirement of 6 months, not one year. When reselling that stock, the sale must be accompanied by form 144. Once the 6 months is over, non affiliated persons have no further restrictions, while control (affililates) generally have a volume limit.

Rule 144 applies to the sale of all of the following except ***

registered securities by a nonaffiliated shareholder of the issuer. Rule 144 applies to the sale of unregistered securities owned by affiliates or nonaffiliates and the sale of control stock. It does not apply to the sale of registered securities by nonaffiliated persons.

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee

is taxed on $10 per share as if it were salary. In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.

Which two of the following risks would be the greatest concern to the holder of an ADR

B. Currency and Market ADRs represent ownership in a foreign security, so there is always going to be currency risk (Currency). These ADR trades in the market and have market risk (Market). B/c most ADRs are traded in exchanges there is little liquidity risk and because they represent equity they are usually a good hedge against inflation

One of your customers owns 300 shares of the 5% $100 par cumulative preferred stock issued by the Northern Atlantic Railroad (NAR). The cumulative feature provides that

all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock. When a preferred stock is cumulative, any prior-year dividends that have been skipped must be paid in full along with the current year's before a dividend payment may be made to common stockholders. Don't confuse the cumulative feature here with cumulative voting that applies to common stock. Any debt security has priority over an equity security. Although it is true that a 5% $100 par stock pays dividends at an annual rate, that has nothing to do with the subject of the question: the cumulative feature.

A company's dividend on its common stock is:

determined by its board of directors

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?

$24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends, in addition to $8 this year, for a total of $24.

An investor who has purchased preferred stock with the goal of receiving steady quarterly income would be most interested in?

B. ability of the company to continue paying the stated dividend All preferred stock is nonvoting, and it makes no difference if the par value is $10, $25,, or $100 b/c the dividend is fixed as a percentage return. The fact that the preferred stock has seniority over the common is important, but that concept is included in the ability of the company to pay its dividend

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders this year, each preferred share must be paid a dividend of

$10 This stock has a par value of $100 and a dividend rate of 10%. That means the annual dividend will be 10% of the $100 par, or $10. Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shareholders. Any dividends from previous years that were not paid are ignored. If this had been a cumulative preferred stock, all of the dividends in arrears (past unpaid) would have to be paid before the common shareholders could get a dividend. In that case, it would have been $10 for two years ago, $5 for the balance of last year's dividend, and $10 for this year's (a total of $25).

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except

the recipient of the grant of the ISO has no income tax consequences at the time of the grant. Whether the grant is of an ISO (qualified) or an NSO (nonqualified), there are no tax consequences to the recipient at the time of the grant. It is only after exercise (NSO) and sale after exercise (ISO) that the recipient of the grant has tax consequences. Each of the other choices represents a difference. ISOs can only be granted to employees, while the NSO can also be granted to members of the board of directors and even to vendors. With an ISO, capital gain (loss) treatment is available upon the sale of the stock if the recipient holds the stock purchased through exercise at least one year from the date of exercise and at least two years from the date of the grant. With an NSO, the recipient can only have ordinary income (loss) based on the difference between the exercise price and the market value when the option is exercised. Finally, if the recipient of an ISO does not exercise the option within 10 years of the grant, it is treated as an NSO for tax purposes.

Which of the following statements regarding ADRs are true? I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities.

I. & III. I. They are issued by large domestic commercial banks. They facilitate U.S. trading in foreign securities ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?

Stock acquired on the NYSE by a corporate affiliate The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.

An investor owns 15% of the stock of a publicly traded company. This investors spouse owns 5% of the stock of the same company. If the spouse wishes to sell the shares representing that 5% ownership, which of the following statements are true?

Both the investor and the spouse are control persons and the spouse must file a Form 144 Reason: the investors 15% ownership is control. Rule 144 includes in the definition of control person "any relative or spouse of such person or any relative of such spouse any one of whom has the same home as such person." Unless stated otherwise the assumption on the exam is that spouses reside together making both of them control persons. All sales of control stock (unless exemption applies) must be accompanied by a Rule 144 filing on form 144 by the selling party. Although both are control persons the spouse is the one selling and, therefore the one required to file

Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues?

Exchange rate risk An investor who invests in foreign stocks is subject to many of the same risks associated with domestic stock investment, but a unique risk faced by investors in foreign stocks is exchange rate risk, sometimes called currency risk. Someone who invests in foreign stocks has as much invested in the currency of the foreign stock as in the stock itself. Exchange rate risk is not necessarily a bad thing, but it is one more significant factor that investors in foreign stocks must take into account. Credit risk never applies to stock; only debt securities and both domestic and foreign issues are subject to business risk.

Which of the following statements regarding foreign investing is (are) true? I. Foreign financial markets are more efficient than the U.S. market. II. Most foreign investment entails foreign exchange or currency risk. III. Adding foreign-issued securities to a portfolio provides the greatest diversification when the foreign stock market has a 1.0 correlation relative to the U.S. market. IV. Foreign securities markets are more highly regulated than the U.S. market.

II only Most foreign investment entails foreign exchange or currency risk. Foreign markets entail foreign exchange risk (currency risk). It's possible that the foreign market value of the investment increases while the value of that currency decreases against the U.S. currency. Most foreign markets are not more efficient than the U.S. market. The U.S. market is among the most highly regulated markets in the world. A 1.0 correlation offers no diversification.

Preferred Stock:

VIP STOCK V for Voting Rights: Preferred stockholders usually don't have voting rights in the company, just like how VIPs often don't have a say in how an event is organized. I for Income Preference: Preferred stockholders have a preference when it comes to receiving dividends. They get their share of profits before common stockholders, just as VIPs get special treatment and privileges. P for Priority Claims: In case the company goes bankrupt or is liquidated, preferred stockholders have a priority claim on the company's assets over common stockholders. This is similar to how VIPs often get priority access or treatment at events. - preferred stock is like "VIP stock" because it gives stockholders certain privileges and preferential treatment in terms of dividends and claims on company assets.

Owners of a corporations equity securities:

c. have Limited Liability One of the benefits of being an owner of a corporations equity securities is limited liability. This means, no matter what happens to the companys fortunes the investor can never lose more than the original investment. The companys creditors cannot come after the stockholders and make a claim. although owners of common stock always have voting rights, owners of preferred stock (the other equity security) almost never do. dividends are not guaranteed, and even if the company shows a large profit, there is no obligation to make a dividend payment. Remember as a holder of a companys equity securities one is an owner not a creditor.

One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote,

ownership must be established by the record date. Only stockholders who are on the company's books by the record date are eligible to vote.

A company that has issued cumulative preferred stock

Pays past and current preferred dividends before paying dividends on common stock

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?***

$24

Investments in which of the following offer the best long-term protection against inflation?***

Common Stocks

Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues?***

Exchange rate risk

All of the following represent ownership in a corporation except***

Mortgage Bonds Ownership in a corporation resides in its equity securities. All stock is equity, while all bonds are debt.

Which of the following statements best describes cumulative preferred stock?

Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock. Owners of cumulative preferred stock have a continuing claim to their dividends, even when the directors pass a dividend. Their claim accumulates, which means that all past dividends (arrears), as well as current dividends, must be paid before any dividend can be paid on common stock. By contrast, the owners of noncumulative preferred stock lose their claim to dividends that are not paid in any one year.

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee...****

is taxed on $10 per share as if it were salary.

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has

no effective change in the value of the position. When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same.

All of the following statements regarding incentive stock options (ISOs) are correct except

the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

An investor may expect to receive dividends from

ADR -An American Depositary Receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock.

Four years ago, Susan was granted enough nonqualified stock options (NQSOs) to purchase 500 shares of her employers stock at $20 per share. Assuming Susan exercises all of her options when the fair market value of the stock is $30 per share and her ordinary income tax rate at the time is 28%, how much income tax will be due?

B. 1,400 500 shares * $20 per share = $10,000 [( $30 FMV (fair market value) - $20 exercised price)* 500 shares x 28%] She will have to pay ordinary income taxes of $1400 on the bargain element. In addition, that $10,000 will also be subject to the same taxes as her regular salary (social security tax).

Among the benefits of owning common stock are:

B: historical hedging against inflation, voting rights, and dividends Reason: One does not have access to insider information solely by becoming shareholder. Even if one did receive material nonpublic information such as prior access to earnings, no benefit may be received from that information. all of the other choices are among the reasons to purchase common stock

Which of the following has the least exposure to inflation risk?

Common Stock The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed-income instruments.

Investments in which of the following offer the best long-term protection against inflation?

Common Stocks Common stocks have historically offered returns that outpace inflation over the long term. Investments paying a fixed return, such as bonds and fixed annuities, have the greatest inflation risk.

Which of the following has the least exposure to inflation risk?***

Common stock The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed-income instruments.

ADRs are used to facilitate

D. Domestic trading of foreign securities B/C everything is in US dollars and in english. ADRs make trading in foreign securities much easier for those who live here

Which of these is among the advantages of including preferred stock in an investor's portfolio?

Dividends must be paid before any distribution to common stockholders. Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income. Finally, unlike debt securities, preferred stock is not issued with a maturity date. Nothing has been borrowed so there is no future repayment date.

Which of the following have equity positions in a corporation? Common stockholders Preferred stockholders Convertible bondholders Mortgage bondholders

I and II Common stockholders Preferred stockholders Common and preferred stockholders have equity or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners.

Which of the following statements regarding ADRs are true? I. The securities are vehicles used to facilitate U.S. trading of foreign securities. II. Dividends are received in the foreign currency. III. Holders have foreign currency risk. IV. The receipts are issued by a foreign branch of a domestic bank.

I and III ADRs are vehicles that facilitate U.S. trading of foreign securities. They are issued in English in the United States by domestic banks. Dividends are declared in the foreign currency but are payable to holders in U.S. dollars, which means that ADR holders are subject to foreign currency risk.

Investing in emerging market stocks is least likely to expose your client to which of the following risks?

Interest rate Interest rate risk applies primarily to fixed income securities. Stock, unless it specifies preferred stock, are not normally considered to have interest rate risk. However, any foreign investment incurs currency risk and, when dealing with emerging markets, there is a higher degree of liquidity and political risk than with developed economies.

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?

They are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best-known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC.

An investor in an equity security:

acquires an ownership interest in the company. Equity means ownership, and this is a characteristic shared by both common and preferred stock. Holders of debt securities are creditors, and there are no guarantees when it comes to returns on equity securities. Only common stockholders have voting rights, but even then, those rights don't deal with daily operations because the vote is generally used at the annual meeting to vote for members of the board of directors.

The primary defining characteristic of an equity security is

it represents ownership in a corporation. What does the term equity mean? It means ownership and that is the single most significant fact about an equity security, whether common or preferred stock. Many pay dividends, but that is not at the core of being an equity security. Equity securities include preferred stock, which, with its fixed dividend, does not offer inflation protection and does not have voting rights.

All of the following represent ownership in a corporation except

mortgage bonds. Ownership in a corporation resides in its equity securities. All stock is equity, while all bonds are debt.

One of the rights of being a common stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to vote is...

the record date.

Which of these is among the advantages of including preferred stock in an investor's portfolio?***

Dividends must be paid before any distribution to common stockholders.

An investor holding which of the following equity securities would not expect to have preemptive rights?

Preferred stock Preferred stockholders do not have preemptive rights. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.