Series 66 Unit 1 Checkpoint Exam

The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 was a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A) $8 B) $16 C) $12 D) $6

D) $6 Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share

One characteristic found in equity securities issued by a corporation is A) cumulative dividends B) a history of keeping pace with inflation C) preemptive rights D) limited liability

D) limited liability Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends.

The residual right of common stockholders refers to their right to A) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid B) examine the corporation's annual reports and other reports, and take legal action if irregularities are found C) vote in elections for the board of directors and in other important business decisions, such as changes to the charter D) receive all announced dividends in accordance with the number of shares held

A) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid The residual right of common shareholders refers to their position in the event of bankruptcy.

Ownership in a corporation is evidenced by holding shares of the company's A) common of preferred stock B) bonds with a first mortgage on the property C) common stock only D) warrants

A) common or preferred stock If you have equity in a corporation, it means you have an ownership interest. Equity securities (common and preferred stock) represent ownership in a corporation. A mortgage bond is a debt security, and a warrant gives the holder the right to acquire equity, but, in itself, is not equity.

A common stockholder's rights include all of the following expect A) electing the board of directors B) preemptive rights C) the right to determine the par value of the stock D) the receipt of dividends, if declared by the board of directors

C) the right to determine the par value of the stock Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation.

In a portfolio containing common stock, straight-preferred stock, convertible preferred stock, and adjustable-rate preferred stock, changes in interest rates would most likely affect the market price of the A) convertible preferred stock B) straight preferred stock C) common stock D) adjustable-rate preferred stock

B) Straight Fixed income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.

For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A) convertible B) common C) cumulative D) participating

C) cumulative Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed and, regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock.

One difference between common stock and preferred stock is that common stockholders A) have a priority claim on earnings B) receive dividends when declared by the board of directors C) own equity in the company D) have voting rates

D) have voting rights It is rare to find a preferred stock with voting rights and ever rarer to find a common stock without them. Both receive dividends when, and if, declared by the BOD and they are usually paid quarterly. Both are equity securities, and preferred has the prior claim.