Unit 1 Quiz 2

If a common stock is currently selling for $75 per share with a quarterly dividend of $.75, the current yield for the stock is: A) 4%. B) 10%. C) 3%. D) 1%.

A) 4% The current yield formula is annual dividend divided by current price. In this case, $3 ($.75 × 4) / $75 = 4%.

The last day that stocks can be bought for cash and still receive the dividend is: A) the record date. B) the business day prior to the regular way ex-date. C) on the ex-date. D) the day after the record date.

A) the record date.

REITs can distribute all of the following to their shareholders EXCEPT: A) cash dividends. B) capital losses. C) capital gains. D) stock dividends.

B) capital losses

A new bond issue will include warrants to: A) increase the price of the issue to the public. B) increase the attractiveness of the issue to the public. C) increase the spread to the underwriter. D) increase the capital raised by the issuer through the bond offering.

B) increase the attractiveness of the issue to the public.

In general, a corporation assumes the least risk when it obtains funds from: A) sale of income bonds. B) sale of preferred stock. C) a commercial bank. D) sale of debentures.

B) sale of preferred stock.

GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right? A) 15. B) 5. C) 3. D) 2.5.

C) 3 Since the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3).

Which of the following securities is subject to the greatest risk? A) BAA-rated ABC convertible bond. B) A-rated municipal bond. C) XYZ Inc., common stock. D) Series EE bond.

C) XYZ Inc., common stock

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 1 round lot. B) 25 odd lots. C) 1 odd lot. D) 25 round lots.

D) 25 round lots

Which of the following securities typically carries the highest dividend rate? A) Convertible preferred. B) Participating preferred. C) Straight preferred. D) Callable preferred.

D) Callable preferred

The rate on an adjustable preferred stock may be indexed to the: A) Producer Price Index. B) Dow Jones Industrial Average. C) Consumer Price Index. D) Treasury bill rate.

D) Treasury bill rate.

Which of the following securities carries the greatest amount of risk? A) Common stock. B) Corporate bonds. C) Preferred stock. D) Debentures.

A) Common stock

All of the following are true of REITs EXCEPT: A) they must pass along losses to shareholders. B) they must to qualify under Subchapter M, distribute at least 90% of their net investment income. C) they must invest at least 75% of their assets in real estate-related activities. D) shares are publicly traded.

A) they must pass along losses to shareholders.

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above: A) $125 per share. B) $175 per share. C) $200 per share. D) $150 per share.

B) $175 per share.

New Offering: 800,000 units at $6 per unit. Each unit has 2 shares of common stock and 1 warrant. Each warrant is to purchase ½ share of common stock. Based on the information above, how many shares of stock will be sold, and how many warrants will be sold? A) 800,000 shares and 400,000 warrants. B) 1.6 million shares and 800,000 warrants. C) 800,000 shares and 200,000 warrants. D) 1.6 million shares and 400,000 warrants.

B) 1.6 million shares and 800,000 warrants. Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains 2 shares, 1.6 million shares are being distributed. As each unit also includes 1 warrant, 800,000 warrants are being distributed.

Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue? A) FINRA. B) Registrar. C) Transfer agent. D) SEC.

B) Registrar

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Noncumulative. B) Callable. C) Convertible. D) Cumulative.

C) Convertible

Which of the following terms or phrases does NOT apply to REITs? A) Dividends taxed at full ordinary income rates. B) Managed. C) Redeemable. D) Secondary market.

C) Redeemable

Holders of common shares may generally vote on: A) whether a cash dividend is to be declared. B) which member of the board of directors should be chairman. C) whether an administrative assistant should be promoted to management. D) whether the company should issue additional preferred stock.

D) whether the company should issue additional preferred stock.

A company may pay dividends in which of the following forms? I. Preemptive rights. II. Cash. III. Its own stock. IV. Its own bonds.

II and III

Common stockholders have all of the following rights and privileges EXCEPT: I. Voting on the composition of the board of directors. II. Voting on routine decisions in the company's operations. III. Receiving par value at liquidation. IV. Receiving a dividend when declared.

II and III

Which of the following must be paid before a corporation may pay its cumulative preferred stock arrearages? I. This year's preferred dividends. II. Bond interest. III. Corporate taxes. IV. Common stock dividends.

II and III

Which of the following statements regarding holders of common stock are TRUE? I. They must approve the payment of dividends. II. They are entitled to declared dividend distributions in proportion to their ownership. III. They have residual rights to corporate assets on dissolution. IV. They have unlimited liability.

II and III

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is A) 10% B) 5% C) 15% D) 2%

B) 5% The current yield formula is annual dividends per share divided by current market price. The dividends per share are $36 million / 20 million shares = $1.80 per share. Current yield is $1.80 / $36.00 = 5%.

Dividends may be paid to holders of: A) treasury stock. B) American depositary receipts. C) rights. D) warrants.

B) American depositary receipts.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 15 B) 3 C) 10 D) 5

C) 10 The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10.

A corporation must have stockholder approval to: A) declare a 15% stock dividend. B) declare a cash dividend. C) issue convertible bonds. D) repurchase 100,000 shares of stock for its treasury.

C) issue convertible bonds

A company is offering investors the opportunity to purchase shares for the next 5 years at a fixed price slightly above today's market price. The company is issuing: A) futures. B) call options. C) a letter of intent. D) warrants.

D) Warrants

Which of the following have equity positions in a corporation? I. Common stockholders. II. Preferred stockholders. III. Convertible bondholders. IV. Mortgage bondholders.

I and II

ADRs are used to facilitate the: A) domestic trading of foreign securities. B) foreign trading of U.S. government securities. C) domestic trading of U.S. government securities. D) foreign trading of domestic securities.

A) domestic trading of foreign securities.

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of: A) 60. B) 600. C) 15. D) 150.

B) 600 The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.

Which of the following is an equity security? A) Mortgage-secured bond. B) Real estate investment trust share. C) Collateralized mortgage obligation. D) Government National Mortgage Association pass-through certificate.

B) Real estate investment trust share.

ABC, a publicly held Corporation, decides to issue shares in an additional public offering. If the APO is for an additional 1 million shares and 60% of the shares are subscribed to in the preemptive rights offering, how many shares will the standby underwriter for this offering have available to sell to the public? A) 100,000. B) 600,000. C) 400,000. D) 110,000.

C) 400,000 If 60% of the additional shares are subscribed to by existing shareholders, then 40% of the additional shares will be available to be sold to the public through a standby (firm commitment) underwriting (1,000,000 × 40% = 400,000).

If a stock is sold on November 30 when the record date for a dividend distribution is December 1, the seller is: I. entitled to the dividend if the trade is done regular way. II. not entitled to the dividend if the trade is done regular way. III. entitled to the dividend if the trade is done with cash settlement. IV. not entitled to the dividend if the trade is done with cash settlement.

I and IV

The issuer of an ADR is a: A) foreign branch of a domestic bank. B) foreign branch of a foreign bank. C) domestic branch of a foreign bank. D) domestic branch of a domestic bank.

A) foreign branch of a domestic bank

A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 15%. B) 10%. C) 1%. D) 5%.

D) 5% The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield).

An ADR is used to: A) finance foreign trade in which U.S. citizens are engaged. B) sweeten a bond offering. C) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. D) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States.

D) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States.

Which of the following statements regarding a 2-for-1 stock split are TRUE?I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles.

I and IV

Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will he own? I. 125 shares. II. 100 shares. III. Cost of $25. IV. Cost of $20.

I and IV Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment: 125 shares × $20 = $2,500, and 100 shares × $25 = $2,500

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? I. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. II. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. III. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. IV. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

I, II, III, IV

Which of the following characteristics are applicable to real estate investment trusts (REITs)? A) Dividends from REITS are taxed as ordinary income. B) Any losses from the real estate portfolio flow through to the REIT shareholders. C) REIT shares cannot be bought or sold in the secondary market and are, therefore, considered illiquid. D) REITs have guaranteed minimum dividends.

A) Dividends from REITS are taxed as ordinary income.

ADR owners have all the following rights EXCEPT: A) the right to sell the ADR in the foreign market. B) the right to sell in the secondary market. C) the right to receive dividends in U.S. dollars. D) the right to receive the underlying foreign security.

A) the right to sell the ADR in the foreign market.

Which of the following securities CANNOT pay a dividend? A) Class B common stock. B) Convertible preferred stock. C) Warrant. D) ADR.

C) Warrant

All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT: A) ADRs fall under the oversight of the SEC. B) transactions are done in U.S. currency. C) currency risk is virtually eliminated. D) dividends are received in U.S. currency.

C) currency risk is virtually eliminated.

A tombstone for a new bond issue announces that 5-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer? A) To improve the marketability of the bond issue. B) To decrease the dilution of the current shareholders. C) To increase the dilution of the current shareholders. D) To make the bonds convertible into the issuer's common stock.

A) To improve the marketability of the bond issue.

Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into ½ share of common. The preferred stock is selling at $17.50 and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 3 million. B) 2.5 million. C) 2 million. D) 500000.

B) 2.5 million. One million shares of preferred, each converted to ½ share of common, is 500,000 common shares. Five hundred thousand shares after conversion added to 2 million shares of common previously outstanding equals 2.5 million common shares.

A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as "plusses" or advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is NOT an advantage of investing in REITs? A) Using real estate as a potential hedge against the movement of other equity securities the customer owns B) Dividend treatment C) Being able to divest of the shares easily D) Having a professionally managed portfolio of commercial real estate assets

B) Dividend treatment

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Cumulative. B) Straight. C) Callable. D) Convertible.

C) Callable

Which of the following statements regarding preferred stock is NOT true? A) Unlike debt, preferred stock has no set maturity date. B) Because there is no set maturity value or redemption date, the holder of preferred stock has to sell his shares in the open market to close out his position. C) Voting rights of preferred shareholders take precedence over those of common shareholders. D) The dividend is fixed except in the case of adjustable preferred.

C) Voting rights of preferred shareholders take precedence over those of common shareholders.

An informal network of market makers that offers to trade securities NOT listed on an exchange is called: A) National Daily Quotation Service. B) Archipelago Exchange (ArcaEx). C) the over-the-counter market. D) National Association of Securities Dealers Automated Quotations.

C) the over-the-counter market.

A similarity between common and preferred stock is: A) the dividend is fixed. B) both are evidence of corporate indebtedness. C) they have an equal vote. D) the dividend must be declared by the board of directors.

D) the dividend must be declared by the board of directors.