Unit 1 Series 65

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer A) incentive stock options. B) portable stock options. C) listed stock options. D) nonqualified stock options.

A

An investor holding which of the following equity securities would not expect to have preemptive rights? A) Preferred stock B) Common stock C) Control stock D) Common stock acquired in a private placement

A

An investor in an equity security A) acquires an ownership interest in the company. B) becomes a creditor of the company. C) has a say in the day-to-day operations of the business. D) is assured of a minimum rate of return.

A

All of the following statements regarding incentive stock options (ISOs) are correct except A) 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 B) if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain C) the exercise of ISOs does not create taxable income D) upon the exercise of an ISO, income for AMT purposes is created

A 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.

If a customer owns 7% of a publicly traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true? A) The spouse is an affiliate and Rule 144 does not apply. B) The spouse is an affiliate and Rule 144 applies. C) The spouse is not an affiliate and Rule 144 does not apply. D) The spouse is not an affiliate and Rule 144 applies.

B

The primary defining characteristic of an equity security is A) the ability to keep pace with inflation. B) it represents ownership in a corporation. C) it pays dividends, usually quarterly. D) voting rights.

B

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

B 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.

Which of the following statements regarding preemptive rights is true? A) Neither common nor preferred stockholders have the right to subscribe to a rights offering. B) Preferred stockholders do not have the right to subscribe to a rights offering. C) Common stockholders do not have the right to subscribe to a rights offering. D) Both common and preferred stockholders have the right to subscribe to a rights offering.

B Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? I. Registered securities held by a control person II. Unregistered securities held by a noncontrol person III. Registered securities held by a noncontrol person IV. Unregistered securities held by a control person A) II and III B) II and IV C) I and III D) I and IV

B The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.

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 A) the customer has 300 votes times the number of directors being elected and can vote them in any manner desired. B) all unpaid dividend arrearage must be brought current before a dividend may be paid on NAR's common stock. C) the annual dividend is $5 per year. D) all unpaid dividend arrearage must be brought current before interest may be paid on NAR's subordinated debentures.

B 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 A) mandatory if the company is profitable. B) voted on by shareholders. C) determined by its board of directors. D) specified in the company charter.

C

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

C An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

Under Rule 144, which of the following sales are subject to volume limitations? Control person selling registered stock held for one year Control person selling restricted stock held for two year Nonaffiliate selling registered stock held for one year Nonaffiliate selling restricted stock held for two year A) III and IV B) II and IV C) I and II D) I and III

C Control persons are always subject to volume limitations.

A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) Information regarding the foreign company is more easily attainable than if directly purchased. B) ADRs are denominated and pay dividends in U.S. dollars. C) They are not subject to exchange rate, or currency, risk. D) ADRs are both liquid and marketable.

C Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock.

Rule 144 applies to the sale of all of the following except A) unregistered securities by a nonaffiliated shareholder of the issuer. B) registered securities by an officer of the issuer. C) registered securities by a nonaffiliated shareholder of the issuer. D) unregistered securities by an officer of the issuer.

C 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.

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 A) the last day of the company's fiscal year. B) the ex-dividend date. C) the record date. D) the election date.

C The record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently two business days.

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has A) a proportionately decreased interest in the company. B) a proportionately increased interest in the company. C) greater exposure. D) no effective change in the value of the position.

D

Which of the following has the least exposure to inflation risk? A) Cash B) Fixed annuity C) Preferred stock D) Common stock

D 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.

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 A) at the time of the grant, the recipient of the grant of the ISO has no income tax consequences while the recipient of the NSO treats the bargain element as compensation. B) ISOs may only be granted to employees, while NSOs may be given to virtually anyone. C) there is a maximum 10-year limit for exercising an ISO; no such time limit exists for an NSO. D) the holder of an ISO can recognize capital gain (loss) as a result of exercise and sale, whereas ordinary income (loss) is the result with an NSO.

A

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that A) the bargain element of the ISO is an AMT preference item. B) there is a maximum five-year limit for exercise on the ISO, while the time limit on the NQSO is 10 years. C) gains on an ISO are always short term, while those on an NQSO are long term. D) the bargain element of the ISO is reported as wages on the tax returns of the employer and the employee.

A

Which of the following statements about equity securities is not true? A) Preferred stock is an equity security while common stock is a hybrid. B) Preferred stock pays a fixed dividend. C) Preferred stock is usually nonvoting. D) Common stock is less sensitive to interest rate risk than preferred stock.

A

Three years ago, an investor purchased 1,000 shares of stock in the Equity Protective Life Insurance Company (EPLIC). The purchase price was $53 per share. The current market value of EPLIC stock is $79 per share. If the investor is in the 24% federal income tax bracket, it is correct to state that A) no tax is owed by the investor. B) the investor owes tax on a $26,000 short-term capital gain. C) the investor owes tax on a $26,000 long-term capital gain. D) the investor's tax liability is $3,900.

A Because the investor has not sold the EPLIC stock, the gain is unrealized. It is only when a gain (or loss) is realized that there are tax consequences. Had the stock been sold, it would have been a long-term capital gain, which is taxed at 15% rather than the investor's marginal rate.

Which of the following have equity positions in a corporation? I. Common stockholders II. Preferred stockholders III. Convertible bondholders IV. Mortgage bondholders A) I and II B) II and IV C) III and IV D) I and III

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

Investments in which of the following offer the best long-term protection against inflation? A) Common stocks B) Government bonds C) Fixed annuities D) Corporate bonds

A 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 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. A) II only B) II and IV C) I and II D) I, II, III, and IV

A 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.

If a woman owns 9% of the common shares of XYZ and her spouse owns 2% and wishes to sell his shares, which of these is true? I. He is considered an affiliate. II. He is not considered an affiliate. III. He must file a Form 144 to sell. IV. He does not have to file a Form 144 to sell. A) I and III B) I and IV C) II and IV D) II and III

A If a married couple (either individually or jointly) owns a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. For exam purposes, assume spouses share the same residence.

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? A) $24 B) $8 C) $16 D) $0

A 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 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 A) is taxed on $10 per share as if it were salary. B) has a capital gain of $10 per share. C) is taxed on $20 per share as if it were salary. D) is taxed on $30 per share as if it were salary.

A 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 of these is among the advantages of including preferred stock in an investor's portfolio? A) Dividends must be paid before any distribution to common stockholders. B) There is an opportunity for increased income if the issuer's profits increase. C) The maturity date is likely shorter than that of debt securities offered by the same issuer. D) The rate of return is likely to keep pace with inflation.

A 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 is not a characteristic of American depositary receipts (ADRs)? A) ADR holders may surrender ADRs in exchange for receiving the shares of the non-U.S. company. B) Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated. C) Because ADRs are traded on the exchanges, they are relatively liquid and marketable investments. D) ADRs are denominated and pay dividends in U.S. dollars, not foreign currencies, thus saving the investor transaction costs with respect to converting currencies.

B ADRs are receipts issued by a U.S. bank for shares of a foreign company purchased and held by a foreign branch of the bank. Dividends are declared in the local currency, so exchange rate, or currency, risk is not completely eliminated. They are generally traded on one of the major exchanges ensuring liquidity. They are an alternative to investing directly in foreign companies or foreign mutual funds. If the investor desires the foreign shares, the ADR may be surrendered and the exchange made.

An American depositary receipt (ADR) is A) a document used with interest rate swaps. B) a certificate representing ownership of a foreign security that is on deposit at a U.S. bank. C) a certificate representing ownership of a U.S. security that is deposited in a foreign bank. D) a type of derivative used to speculate in foreign currencies.

B An American depositary receipt (ADR) is a certificate representing ownership of foreign securities that are on deposit at a U.S. bank. ADRs can be traded on U.S. stock exchanges, are quoted and pay in dividends in U.S. dollars, and receive all the shareholder protections of U.S. securities.

Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues? A) Business risk B) Exchange rate risk C) Market risk D) Credit risk

B 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.

A company that has issued cumulative preferred stock A) pays the preferred dividend before paying the coupons due on its outstanding bonds. B) pays past and current preferred dividends before paying dividends on common stock. C) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.

B Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.

Which of the following statements about dividends on common stock is not true? A) Dividends represent a pro rata distribution of corporate profits to shareholders. B) Corporations are contractually obligated to pay dividends to their shareholders each year. C) Only those who are owners of the stock on the record date will receive dividends. D) Dividends may be paid in cash, property, or stock.

B Dividends are the share of a corporation's profits that the corporation pays to shareholders as owners of the corporation. Dividends are not paid to shareholders automatically, and shareholders have no contractual right to receive dividends. Instead, dividends must be declared by the corporation's board of directors. The board of directors may elect to pay a dividend in cash, property, or stock.

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? A) ADRs are denominated and pay dividends in U.S. dollars. B) They are not subject to exchange rate, or currency, risk. C) Information regarding the foreign company is easily attainable. D) ADRs are traded on exchanges and the OTC markets.

B 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.

Which of the following statements regarding a 100% stock dividend 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. A) II and IV B) I and IV C) I and III D) II and III

B In a 100% stock dividend, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.

Investing in emerging market stocks is least likely to expose your client to which of the following risks? A) Political B) Interest rate C) Currency D) Liquidity

B 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.

Reasons why a corporation might issue a convertible preferred stock would include A) tax savings to the issuer. B) giving those shareholders an opportunity to participate in the future success of the company. C) giving those shareholders the ability to convert into the issuer's bonds. D) a lower cost to the issuer than would be incurred by the issuance of convertible bonds.

B The benefit of any convertible security, debt security, or preferred stock is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.

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 A) $25. B) $10. C) $5. D) $15.

B 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).

An investor may expect to receive dividends from A) a put option. B) a call option. C) an ADR. D) a warrant.

C 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; one must own the security itself to be entitled to the dividend.

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? I. Loss of principal can occur. II. Price volatility of preferred stock is closely related to interest rates. III. Preferred stock cannot be traded as readily as bonds. IV. If the stock is callable, the client's income can be suddenly lowered. A) I and II B) I, II, III, and IV C) I, II, and IV D) III and IV

C Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value, as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares anytime after the call protection period (if any) is over. This usually happens when interest rates have declined, so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse).

The board of directors of DDC omitted dividends in 2020 on their $100 par 6% noncumulative preferred stock. In 2021, a $2 preferred dividend was paid. For DDC, 2022 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2022 in order to pay a common dividend? A) $12 B) $16 C) $6 D) $8

C 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.

Which of the following statements regarding international investing is not correct? A) International investing offers diversification and potentially higher returns. B) An international investor faces the additional risks of foreign currency risk and country risk. C) An emerging market is a market in a highly developed foreign economy with stable political and social institutions. D) One method to engage in international investing is through American depositary receipts.

C Emerging markets are markets in lesser-developed countries. As a result, the political risk tends to be higher than with developed economies. Whether it is emerging or developed, a U.S.-based investor will always face currency risk, and all countries have some degree of country risk. A way to simplify things is to invest in ADRs rather than the foreign stock itself. International equity is a subclass of equities when allocating assets, and the addition of them tends to offer diversification and potentially higher returns because foreign markets are not necessarily correlated to the U.S. ones.

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, A) the stock must be paid for in full before the annual meeting. B) the company must be current on its dividends to preferred stockholders. C) ownership must be established by the record date. D) the stockholder must be a natural person.

C Only stockholders who are on the company's books by the record date are eligible to vote.

An investor wishing to add some diversification to his portfolio wants to purchase 200 shares of an ADR for a Japanese electronics manufacturer. The ADR is listed on the NYSE. Which of the following risks should be of most concern to this investor? i Business ii Currency iii Inflation iv Liquidity A) II and III B) I and IV C) I and II D) III and IV

C Owning stock in any corporation always subjects the holder to business risk—the uncertainty that the entity might fail to meet its economic goals. Whenever one invests internationally, whether directly or through the vehicle of an ADR, one is subject to currency risk, sometimes called exchange rate risk. Inflation risk is of concern to those who purchase fixed-income investments, and any security listed on the NYSE has little or no liquidity risk.

A corporation would like to offer their employees an opportunity to participate in the future growth of the company. Among the methods you might suggest are A) preemptive rights. B) subordinated debentures. C) voting trust certificates. D) employee stock options.

D

All of the following represent ownership in a corporation except A) preferred stock. B) common stock. C) convertible preferred stock. D) mortgage bonds.

D

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? 125 shares 100 shares Cost basis of $25 Cost basis of $20 A) II and III B) I and II C) II and IV D) I and IV

D

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. A) II and III B) II and IV C) I and IV D) I and III

D ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.

One of the features of convertible preferred stock is that A) the dividend is paid ahead of all other securities. B) the holder is able to select the conversion price. C) the owner has the opportunity to convert the stock into the issuer's bonds. D) the owner has the opportunity to participate in the growth of the company.

D Any convertible security, preferred stock, or debenture is convertible into the issuer's common stock. As a result, if the business is successful, the common stock's price will rise to the point where conversion is a wise idea. Although the investor can generally select when to convert, the conversion price or ratio is set at the time of issuance. Interest on debt securities is paid before the dividends on any stock. When it comes to preferred stock, there is frequently a pecking order, such as a prior lien preferred or first preference preferred that would come ahead of the other preferred shares.

Which of the following statements concerning equity securities is not correct? A) Common stock is an equity security representing an ownership interest in a corporation. B) Preferred stock is an equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings. C) Equity securities provide a residual claim, after payment of all obligations to fixed-income claims, on the income and assets of a corporation. D) Equity securities represent a lending interest in a corporation.

D Equity securities represent an ownership interest in a corporation. Preferred stock, as a senior security, has a claim ahead of common but behind debt securities.

Which of the following statements concerning international direct investing is correct? A) Foreign markets are usually mature and offer no growth advantages. B) The addition of foreign securities to a portfolio may result in increased portfolio risk due to the different movements of foreign markets and U.S. markets. C) The rates of return on foreign securities are generally less than those available from U.S. markets. D) Information is not as readily available on foreign investments as on domestic ones.

D In general, foreign investments don't have the transparency of domestic ones. Rather than directly investing in the foreign security, trading the ADR has the advantage of the full disclosure requirements of the SEC. Investors may earn higher returns in foreign markets, and including foreign securities in an investment portfolio may lower risk through greater diversification. This is because there may be a low correlation with U.S. markets. Although securities markets in most developed economies are mature, that doesn't mean they can't grow, and the markets in emerging economies offer great potential growth commensurate with their greater risk.

Which of the following statements best describes cumulative preferred stock? A) Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend. B) Owners are allowed to vote for directors using the cumulative voting procedures. C) Owners lose any claim to dividends that are not paid in any one year. D) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.

D 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.

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Unregistered stock acquired by a corporate affiliate in a stock option program B) Unregistered stock acquired by a nonaffiliate under an investment letter C) Stock acquired by a corporate affiliate in a private placement D) Stock acquired on the NYSE by a corporate affiliate

D 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.