Series 7 - Special Securities and Financial Listings

PDQ Company $1 par common stock currently trading at $55. PDQ is currently paying a quarterly common dividend of $1.10 per share. The current yield of PDQ stock is: A 2.0% B 4.4% C 8.0% D 44.0%

The best answer is C. Yields are based on annual return. The formula for current yield is: $4.40/$55 = 8%

All of the following terms describe rights EXCEPT: A exercisable B negotiable C giftable D redeemable

The best answer is D. Rights are not redeemable with the issuer. The rights have a value based upon the lower subscription price available to the holder of the rights than the current market price. The holder of the rights has a number of choices as to their disposition. The holder can sell them in the market at this value, since the rights are negotiable. The holder can exercise the rights, buying the stock at the subscription price. Finally, the holder can give the rights as a gift to someone else.

A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 15 shares by paying $360 B The shareholder can buy a maximum of 16 shares by paying $384 C The shareholder can buy a maximum of 17 shares by paying $408 D The shareholder can buy a maximum of 18 shares by paying $432

The best answer is D. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.

If a corporation wishes to sell additional shares, which of the following persons can subscribe using pre-emptive rights? A Common stockholders B Preferred stockholders C Convertible preferred stockholders D Bondholders

The best answer is A. Only common stockholders have pre-emptive rights. Holders of senior securities (preferred stock and bonds) do not have pre-emptive rights; nor do warrant holders since they do not own the common stock unless the warrants are exercised.

PDQ Company $10 par common stock is currently trading at $40. PDQ is currently paying a common dividend of $.20 per share quarterly. The current yield of PDQ stock is: A 0.5% B 2.0% C 5.0% D 8.0%

The best answer is B. Yields are based on annual return. The formula for current yield is: $.80/$40 = 2.00%

Which of the following statements about warrants are TRUE? I At issuance, warrants have intrinsic value II Warrant valuation is directly influenced by the market price of the common stock III Warrant valuation reflects market expectations for future earnings of the company IV Warrant valuation reflects the life of the instrument A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. At issuance, warrants typically have exercise prices well above the current market price of the common stock. Thus, for the warrant to have real value, the market price of the common must rise above the exercise price of the warrant. Warrant valuation is directly influenced by the common stock price, the life of the warrant, and expectations for future corporate earnings.

Which source could be consulted to find the trading symbol of a stock? A New York Times B Business Week C Stock Exchange web site D Fortune magazine

The best answer is C. To find the symbol of a stock, one could consult (among other sources) the Standard and Poor's Stock Guide, which is now part of an S&P web service called Net Advantage. It gives capsule summaries of company history and performance. Of course, the easiest way is just to "Google" the stock symbol or go to a finance portal on the web. The exchange web site on which the security is traded also will have a search function for stock symbols. Fortune and Forbes are general interest business publications and do not have stock symbols. Finally, general interest newspapers no longer publish stock symbols.

A company's common stock is selling in the market at a "multiple" of 15. If the market price of the common stock is currently $15, what is the earnings per share? A $.10 B $.15 C $.30 D $1.00

The best answer is D. When a stock is selling at a "multiple" of 15, this means that the market price is 15 times the current earnings per share. Since the market price is at $15 and the P/E ratio is 15, earnings per share is $1.00. · P/E Ratio (multiple) = market price of security / EPS o Multiple x EPS = market price of security o EPS = Market price of security / multiple

XYZZ ADR represents 10% of the value of an XYZZ ordinary share. The ordinary shares trade on the London Stock Exchange, where the current price is 400 British Pounds (BP). The current exchange rate for the British Pound against the U.S. Dollar is $1.40. The ordinary share pays an annualized dividend of 12 BP, with payment made semi-annually. The XYZZ ADR is listed on the NYSE. If a customer places an order to buy $560,000 of the ADR on the NYSE, how much will the customer receive in each dividend payment? A $8,400 B $10,000 C $16,800 D $33,600

The best answer is A. Because the XYZZ ordinary share trades for 400 BP in London, and the BP is worth $1.40, each ordinary share is worth 400 x $1.4 = $560. The ADR created for the U.S. market is 1/10th of this amount, or $56 per U.S. ADR. A customer who invests $560,000 will buy $560,000 / $56 = 10,000 ADR shares. The annual dividend rate per ordinary share is 12 BP, so the semi-annual payment is 6 BP. Since the ADR is worth 1/10th of an ordinary share, this becomes .6 BP per ADR share x $1.40 exchange rate = $.84 per ADR share x 10,000 shares = $8,400.

Which statement is TRUE about non-sponsored ADRs? A These ADRs are created without the participation of the foreign corporation B These ADRs are sponsored by the country in which the foreign corporation resides C These ADRs must provide financial statements to the ADR holder in English D These ADRs are typically NASDAQ or NYSE listed

The best answer is A. Non-sponsored ADRs are assembled without the participation of the issuer and trade over-the-counter. These trade over-the-counter while sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. Non-sponsored issued may provide reports in the issuer's native language. NYSE, AMEX (NYSE American) and NASDAQ will only list sponsored ADRs.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have: A 100,000 preferred shares and 25,000 common shares B 100,000 preferred shares and 50,000 common shares C 200,000 preferred shares and 100,000 common shares D 20,000 preferred shares and 200,000 common shares

The best answer is A. Since each unit consists of 1 preferred issue, 100,000 units X 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units X 1/4 = 25,000 common shares issued if the warrants are exercised.

American Depositary Receipts pay dividends in: A U.S. Dollars only B Eurodollars C European Currency Units D Foreign Currency or U.S. dollars based on the investor's preference

The best answer is A. American Depositary Receipts pay dividends in U.S. Dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend that was received in the foreign currency into U.S. Dollars and pays this to the U.S. ADR holders.

Which statement is TRUE about the time value and intrinsic value of rights and warrants when issued? A Both have time value and intrinsic value at issuance B Warrants have time value and rights have intrinsic value at issuance C Warrants have intrinsic value and rights have time value at issuance D Neither has time value or intrinsic value at issuance

The best answer is B. Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value." Rights are very short term options (30-60 days) granted to existing shareholders that allow them to buy the stock at a discount to the current market price. The discount is the "intrinsic value" of the right. However, because they are so short term, they have virtually no "time value."

All of the following statements about warrants are true EXCEPT? A Warrants are issued to make corporate senior securities offerings more attractive to investors B Warrants typically give the holder a perpetual interest in the issuer's underlying common stock C Warrants trade separately from the stock of the company D Warrants have a longer term than rights

The best answer is B. Warrants are typically attached to debt and preferred stock offerings (these securities are "senior" to the common stock of the issuer) to make the securities more attractive to purchasers. Warrants trade separately from the stock of the company. And lastly, warrants typically have a fixed life of 5 years or less and then expire (this is longer than the expiration of rights). Perpetual means everlasting. Companies can issue perpetual warrants, but rarely do so.

ADRs are used to: A facilitate trading of domestic securities in foreign countries B facilitate trading of foreign securities in the United States C allow trading of rights on exchanges D allow trading of warrants on exchanges

The best answer is B. American Depositary Receipts are the means by which foreign securities are traded in the United States.

Which statement is TRUE regarding ADRs? A ADRs are vehicles for trading United States securities in foreign countries B ADRs are vehicles for trading foreign securities in other overseas markets C ADR market prices are influenced by foreign currency exchange fluctuations D ADRs must be redeemable with the sponsor

The best answer is C. ADRs are vehicles for trading foreign securities in the United States. Foreign companies do not want to list their actual shares for trading in the U.S. because the shares would then have to be registered with the SEC and the company would have to comply with U.S. financial reporting rules (and all of that is expensive). Since dividends on ADRs are declared by the foreign company in local currency, and are then converted into U.S. dollars and remitted to the receipt holders by the depositary bank, market prices of ADRs will be influenced not only by the performance of the company's stock, but also by foreign currency exchange fluctuations. ADRs are not redeemable - they trade like any other stock.

A corporation wishes to raise funds to build a new manufacturing facility. Which method is suitable for the issuer to obtain financing? A Force conversion of outstanding convertible preferred B Split the outstanding shares of common stock 2 for 1 C Issue rights to outstanding shares of common stock D Call outstanding convertible preferred

The best answer is C. The only method listed that will raise new funds for the corporation is to sell additional common shares through a rights offering. Forcing conversion of outstanding convertible preferred does not raise new capital. It simply converts preferred stock into common stock. Splitting shares does not raise new capital. After the split, the company has more shares outstanding, worth half the original amount. Calling outstanding preferred uses cash and reduces capital.

All of the following statements are true about ADRs EXCEPT: A ADRs trade on national stock exchanges B ADR holders receive dividends C ADR holders can vote for the Board of Directors D ADR holders receive the cash value of pre-emptive rights

The best answer is C. ADRs do not vote. The bank that actually owns the shares votes. The bank passes through dividends to receipt holders and sells off pre-emptive rights, sending the cash to the receipt holders. ADRs are listed on stock exchanges and trade like any other stock.

All of the following statements are true regarding warrants EXCEPT: A warrants allow the holder to buy the stock of that issuer at a fixed price B warrants give the holder a long term option to buy the stock C warrants are attractive to speculators because of the leverage that they offer D warrant holders have pre-emptive rights

The best answer is D. Warrants are an equity-related security that give the holder the right to buy the stock of that issuer at a fixed price, typically with a 5-year life from issuance. Warrant holders do not receive dividends, nor do they have other shareholder rights such as the right to vote or the pre-emptive right. Warrants are much cheaper than the actual stock, because they only have value if the underlying stock rises. Thus, they give the holder greater leverage if the common stock does appreciate in value.

Which of the following statements about warrants are TRUE? I At issuance, warrants are "out of the money" II Warrant valuation is influenced by the life of the instrument III Warrant valuation is directly influenced by the valuation of the company's common stock IV Warrant valuation reflects market expectations for future earnings of the company A I and IV only B II and III only C I, II, IV D I, II, III, IV

The best answer is D. At issuance, warrants typically have exercise prices well above the current market price of the common stock, and therefore are "out of the money". The other statements are true. Warrant valuation is directly influenced by its life - the longer the warrant, the greater its value. It is also influenced by the valuation of the company's common stock price - the higher the market value of the common, the higher the warrant's value. Finally, it is influenced by market expectations for future corporate earnings, and hence the future price of the common stock.