Unit 2

In 2016, RST Corporation had both common stock and $100 par value 4% noncumulative preferred stock outstanding. The preferred, like the common stock, pays dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2016. After resolving its problems in 2020, the company resumed dividend payments in 2021. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of

$1

Two years ago Joshua Ryan bought 100 shares of XYZ at $60 per share. While he held the stock, it paid dividends of $1 the first year and $1.50 the second year. Joshua sold the shares at $40 per share after a 2:1 stock split. How much gain or loss did he incur per share for tax purposes?

$10 gain per share dividends are not part of the calculation for gain or loss

DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past three years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders

$4

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days?

1%

An investor owns 200 shares of MNO common stock. The company's management has proposed a 2:1 stock split. If the price of the stock at the time of the split is $50, what would the investor's adjusted position be?

400 shares at $25

Your customer owns 300 shares of BigCo, Inc., common stock. In the upcoming election there are three open board seats. If BigCo operates under a cumulative voting system, how many votes does the customer have in that vote?

900 votes that may be cast among the seats in any way they choose

Your customer owns 300 shares of BigCo, Inc., common stock. In the upcoming election there are three open board seats. If BigCo operates under a statutory voting system, how many votes does the customer have in that election?

900 votes, no more than 300 for any one seat

All of the following are considered unique or nonstandard corporate actions except A) 3:1 stock split. B) takeover. C) tender offer. D) merger.

A

All of the following could be characterized as benefits to owning common stock except A) low dissolution priority. B) income potential via the receipt of dividends. C) capital gains via increases in share price. D) limited liability.

A

An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances? A) The investor is an established customer. B) The investor is already exempt from the risk disclosure requirements. C) The investor has already received the risk disclosure statement. D) The investor's account is approved for margin purchases.

A

Each of the following are likely benefits of owning shares of common stock except A) interest payments. B) dividend payments. C) limited liability. D) voting rights.

A

Each of the following is considered a control person under Securities and Exchange Commission (SEC) Rule 144 except A) those persons who own 5% or more of the total beneficial interest of a company's common stock. B) another company that owns 10% or more of the company's equity securities. C) those persons who own 10% or more of the total beneficial interest of a company's common stock. D) corporate officers and directors.

A

Rule 144 covers all of the following transactions except A) non-affiliate trades on an exchange. B) trades on an affiliate in the over-the-counter market. C) trades of a newly issued nonregistered security. D) trades by an affiliate on an exchange.

A

Under Rule 144, which of the following sales are subject to volume limitations on the number of shares sold? I. Control person selling registered stock held for one year II. Control person selling restricted stock held for two years III. Non Affiliate selling registered stock held for one month. IV. Non affiliate selling restricted stock held for more than six months A. I and II B. I and III C. I and IV D. III and IV

A

Which of these would most likely require shareholder approval? A) Changing the corporation's name B) Firing the CEO C) Declaring a dividend D) Hiring a new CFO

A

All of the following statements regarding penny stocks are true except A) penny stock rules apply to both solicited and unsolicited transactions. B) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document. C) established customers of the firm need not sign a suitability statement. D)if an account holds penny stocks, broker-dealers must provide a monthly account statement to the customer.

A only apply to solicited transactions

All of the following are true for ADRs except ADRs are U.S.-issued securities ADRs pay dividends in U.S. dollars ADRs are not subject to currency risk ADRs represent a foreign security in the domestic market

ADRs are indeed subject to currency risk

An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor A) must wait six months before any sales can be made. B) can sell the shares unrestricted at any time. C) must wait six months before selling shares subject to volume limits. D) can only sell subject to volume limits.

B

An investor interested in quarterly income should invest in A) Treasury notes. B) a common stock paying a high dividend. C) a variable annuity. D) a corporate bond.

B

Each of the following activities would be deemed by market regulators to be manipulative behavior except A) front running. B) proxy solicitation. C) marking the open or the close. D) capping.

B

MMS Corporation has 7% callable preferred shares outstanding. Over the past few years, benchmark interest rates have declined and hovered close to 3%. Which of the following is true? A) The issuer will covert these shares to common stock. B) The 7% shares are likely to be called. C) More 7% callable shares should be issued. D) The issuer is likely to reduce the fixed dividend to 3%.

B

The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for all of the following except A) a reverse split on the issuer's common stock. B) interest payments on the issuer's debt instruments. C) dividend payments on the issuer's common stock. D) the issuance of warrants to be attached to a bond offering.

B

Which of the following is a taxable event for an investor when it occurs a. Stock dividend distribution b. Cash dividend distribution c. Forward split d. Reverse split

B

Included under the term equity security would be A) equipment trust certificates. B) participating preferred. C) collateral trust certificates. D) debentures.

B preferred = equity security

Your customer is aware that a corporate action has taken place where the adjustment to the number of shares owned and the stock price will not be standardized but instead is unique to fit the circumstances and terms of the corporate action. Of those listed, which is most likely to be such an action? A) Stock dividend payment B) Merger or acquisition C) Uneven reverse split D) Forward stock split

B standardized for the other 3

All of the following are advantages of using American depositary receipts (ADR) when investing in the stock of a foreign corporation except A) ADR issuers provide financial reports in English. B) ADRs make it significantly easier to invest in a foreign security. C) ADRs provide a hedge against currency risk. D) ADRs pay dividends in U.S. dollars.

C

All of the following are possible actions of an investor who has received stock rights except A) allow the rights to expire unexercised. B) sell the rights for a short-term capital gain or loss. C) hold the rights for a possible long-term capital gain. D) exercise the rights to purchase the new stock at a discount.

C

All of these dates are declared by the board of directors of a corporation except A) the declaration date. B) the payable date. C) the ex-dividend date. D) the record date.

C

American Liquidators Corporation (Ticker LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to accomplish this, they would a. offer warrants to existing shareholders b. suggest that existing shareholders go to the market and double their existing position c. offer stock rights to existing shareholders d. perform a stock split

C

An investor purchased 100 shares of MJS on June 19, 2015 at a price of $40 per share. On June 1, 2016, MJS declared a 25% stock dividend. On July 1, 2016, the investor sold 50 shares of the MJS at $50 per share. Which of these statements is correct? I. The adjusted cost basis of the shares is $30. II. The adjusted cost basis of the shares is $32. III. There is a short-term capital gain on 25 shares and long-term gain on the other 25 shares. IV. There is a long-term capital gain on all of the shares sold. A) I and IV B) I and III C) II and IV D) II and III

C

For restricted stock (unregistered) held by a nonaffiliated, which of the following applies? A) No holding period, but volume limits always apply B) Six-month holding period, with volume limits thereafter C) Six-month holding period, with sales allowed freely thereafter D) No holding period or any volume restrictions

C

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A) 900 votes he can divide any way he wants among the three seats. B) 300 votes each for the open seats. C) no voting rights. D) 300 votes total to spread among the three open seats.

C

Jones bought an American depositary receipt (ADR) in a South Korean company at $22.00 and recently sold the shares for $36.88. What are the tax consequences of this transaction? A) The profit is not taxed because ADRs are tax-exempt securities. B) The profit is taxed as income of $14.88 by the government of South Korea. C) The profit is taxed as a capital gain of $14.88 in the United States. D) The profit is taxed as income in the United States.

C

Mr. Smith purchases 2% of MES Corporation's common stock. Four years later Mrs. Smith purchases 9% for her own account. Which of the following is true? A) Neither Mr. or Mrs. Smith is considered a control person. B) Because she owns more shares, only Mrs. Smith is considered a control person. C) Both Mr. and Mrs. Smith are considered control persons. D) Only Mr. Smith, as the initial shareholder, would be considered a control person.

C

Which of the following is true regarding taxation of dividends paid by American depositary receipts? A) The dividends may be subject to withholding by the U.S. government. B) Any funds withheld may be paid to the investor by the foreign government. C) The dividends may be subject to withholding by the foreign government. D) Dividends are received tax free by U.S. investors.

C

Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares? A) Participating B) Adjustable rate C) Convertible D) Callable

C

Which of the following statements about warrants is false? A) The warrant is long term, typically five years or more until expiration. B) Warrants are most often issued with bonds as an added incentive to purchase the bond. C) The warrant allows the holder to exercise to purchase the underlying stock at a price lower than the market price at the time of the warrant's issue. D) The warrant allows the holder to exercise to purchase the underlying stock at a price higher than the market price at the time of the warrant's issue.

C

Which of the following statements is correct concerning the pricing of American depositary receipts (ADRs)? A) ADR pricing is dollar-based using an end of day public offering price (POP). B) ADRs are priced in foreign currency. C) ADR pricing is dollar-based and fluctuates throughout the day. D) ADR pricing is dollar-based using an end of day net asset value (NAV).

C

Your customer owns 2,200 shares of LMN common stock. LMN Corporation issues stock rights related to an additional offer of shares that will increase the company's common shares by 20%. How many rights will your customer receive? A) 220 rights B) 440 rights C) 2,200 rights D) The number cannot be determined.

C

Your customer, MJ, has a strong preference for investing in equity securities; however, she is hoping to increase the amount of current income her portfolio generates. Which of these is the least suitable for her? A) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments B) Long Beach Electric, a utility C) Duratech common stock, an exciting new tech manufacturer D) Generic Motors, Inc., 4 ¾% preferred stock

C

utility stock

Company has stable earnings and the stock is less risky than most stocks (has a low beta) High dividend payout

An American depositary receipt is a A) domestic security trading in foreign markets. B) foreign security trading in U.S. markets. C) foreign security representing a domestic security in foreign markets. D) domestic security representing a foreign security in U.S. markets.

D

MJS Corporation has called in its 6% preferred shares. Owners of these shares should expect that A) dividend payments will continue until the owner chooses to turn in the shares. B) the shares will be resold to new investors. C) the shares will continue to trade in the open market. D) dividend payments will cease on the call date.

D

Penny stock rules I. apply to both solicited and unsolicited transactions. II. specify that established customers of the firm need not sign a suitability statement. III. mandate that an account holding penny stocks only need not be provided with a monthly statement. IV. require that prospects be given a copy of a risk disclosure document before their initial penny stock transaction. A) I and IV B) I and III C) II and III D) II and IV

D

Purchasers of common stock may generally look to all of the following risks associated with that investment except A) reduction in dividend payout. B) low priority. C) market risk. D) interest rate risk.

D

Regarding preferred stock, all of the following are true except A) preferred shareholders are paid before common shareholders in the event of a corporate bankruptcy. B) preferred shareholders have no preemptive rights that precede the preemptive rights of common shareholders. C) the right to vote on corporate issues is not available for preferred shareholders. D) a corporation issuing common shares must issue at least one class of preferred shares.

D

Regarding transferability for common shares, which of the following is true? A) Shares can be sold or given away but only with the permission of the corporation. B) Shares can be sold without the permission of the corporation but may never be simply given away. C) Shares can be sold but not given away, unless the permission of the corporation is received first. D) Shares can be sold or given away without the permission of the corporation.

D

Which of the following is a true statement about warrants? A) Warrants are issued to existing shareholders on a basis of one right for one existing share. B) The warrant allows the holder to exercise and purchase the stock at a price lower than the market. C) Warrants are short-term instruments, typically 30 to 45 days. D) The warrant allows the holder to exercise to purchase the underlying stock at a price higher than the market price at the time of the warrant's issue.

D

Which of the following would most likely require shareholder approval? A. Declaring a dividend B. Firing the CEO C. Hiring a new CFO D. Changing the company name

D

The rate on an adjustable preferred stock would most likely be indexed to

Dow Jones Industrial Average

BigBox Stores, Inc., declared a $1 per share dividend on Tuesday, September 13. The dividend will be paid to holders of record of BigBox common stock as of Tuesday, September 27 and will be delivered to shareholders on Wednesday, October 12. What is the declaration date for this dividend?

Tuesday, September 13

BigBox Stores, Inc., has declared a $1 per share dividend on Tuesday, September 13. The dividend will be paid to holders of record of BigBox common stock as of Tuesday, September 27, and will be delivered to shareholders on Wednesday, October 12. What is the record date for this dividend?

Tuesday, September 27

If a shareholder does not wish to attend an annual stockholders' meeting, but still wishes to vote, the shareholder may confer a limited power of attorney on another party to vote the shares. This power is known as

a proxy

RJN common stock is currently listed on the New York Stock Exchange. Poor operating results over the past several years have led to a sharp decline in RJN's stock price, putting the company at risk for failing to meet the minimum price requirements to remain listed on the NYSE. The corporate action most likely to be taken to preserve the listing would be

a reverse split

The price of a certain stock has diminished over the last several months to the point where it may be delisted by the exchange where it trades. An action the issuer could take in this case would be

a reverse split

By electing a board of directors (BOD), stockholders have

a say in the company's management but are not involved in the day-to-day

Squidco, Inc., is issuing 100 million dollars in 4 1⁄2% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 per share anytime in the next 10 years. Squidco common is currently tradin at $29.95 a share. This is an example of

a warrant

Restricted shares, those that are unregistered, meaning that they were not attained in a public offering, may be sold by a nonaffiliate

after holding them for six months and freely thereafter

Common shareholders have the right to receive an audited set of financial statements of the company's performance how often

annually

ABC Corporation cumulative preferred stock would pay dividends in what order?

arrears, current preferred, common

What is the primary purpose of an issuer sponsoring an American depositary receipt (ADR)?

attract a US investor base

Snowflake Resorts, Inc., has announced their intention to repurchase 5 million of the company's outstanding shares from the secondary markets. This is called a

buy back

Your client holds ADRs of Aion Motors, Inc., an automobile manufacturer based in Asia. All of the following are true about the position except a. they will receice dividends in U.S. dollars b. the security may be traded in U.S. markets c. they have the same voting rights as an owner of the common stock d. they have the right to request the underlying common shares be issued to them directly

c.

A preferred shareholder's priority claim on assets is the preferred shareholder's priority standing over

common shareholders

Which of the following securities would likely provide the greatest potential for capital appreciation? preferred stock US treasury STRIPS common stock corporate bond

common stock

another term for stocks and bonds

equity and debt

Mary owns 8% of Doyle Inc., a publically traded publishing company. She has recently married John, a doctor who owns 3% of Doyle. John wants to sell some of his shares to pay off the debt from the wedding and honeymoon. When he does so he will need to

file form 144, as they're a control person

The primary purpose of American depositary receipts (ADRs) is to facilitate the trading of

foreign stocks in US markets

In a stock buyback the shares are purchased by who

issuer of the shares

when interest rates, callable preferred shares are...

likely to be called

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has

no voting rights

On October 15 of last year, ABC Company declared a 3-for-1 reverse split. What are the tax consequences for this corporate action?

none

On August 20 of last year, when the stock was trading at $42 dollars, Seabird Airlines declared a 15% stock dividend, payable on September 15. On the close of trading, on the pay date, the stock was trading at $40. What would a customer who owned the stock all of last year report for tax purposes?

nothing -- no tax implications for a stock dividend

what is a shareholder's liability in case of bankruptcy?

only what they have previously invested

CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at

par value or higher

What best describes rights and warrants?

rights are short term warrants are long term

Restricted securities may not be sold until they have been held fully paid for

six months

A company's board of directors has voted to divest itself of all shares of a subsidiary to create a new company. This is a type of corporate action best characterized as

spinoff

for the securities held in street name, who is the beneficial owner

the customer

A customer has returned a signed proxy statement for stock held in street name by a member firm. He did not indicate how he wanted to vote for any issues listed on his ballot. What action, if any, is required of the memver firm?

the firm must vote in accordance with the recommendations made by the issuer of the stock

Who is the actual ex-dividend date declared by?

the market center for the particular stock

For those owning preferred classes of stocks, priority of asset dissolution refers to

the order in which preferred shareholders are paid in the event of a bankruptcy liquidation.

A preemptive right for existing shareholders is best described as

the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares.

In a 20% stock dividend, what happens to the number of shares and the share price?

the share price goes down, and the number of shares goes up

which of the following is not considered a risk of owning common stock The shares are transferable. The shares have a guaranteed value. Stocks generate a guaranteed income. Stocks have a high priority if the corporation dissolves.

the shares are transferable