Unit 4

A corporation with a 7% $100 par cumulative preferred paid $5 to preferred stockholders last year. Before the company can pay common dividends, how much must it pay each preferred share outstanding? A. $9.00 B. $15.00 C. $3.00 D. $7.00

A. A cumulative preferred must pay a.l unpaid cumulative preferred dividend amounts prior to payment to common stockholders. the company y had only paid $5 of the $7 due last year, so the $2 in arrears must be paid. the preferred shareholders will receive $9 ($7 + $2 = $9).

As interest rates fall, prices of straght preferred tock will: A. rise. B. remain unaffected C. fall D. become volatile

A. Preferred stock is integrate rate sensitive. As rates fall prices of preferred stocks tend to rise, and vice versa

Common stockholder rights include a I. Residual claim to assets at dissolution II vote for the amount of stock dividend to be paid III. vote in person at the annual meeting of shareholders IV. claim against dividends that are in default A. I only B. I and III C. II and III D. III and IV

B. A residual claim to assets at dissolution and a vote at the annual shareholder's meeting are common stockholder rights.

An investment in which of the following would expose the investor to the greater capital risk? A. Debentures B. Common stock C. Mortgage bonds D. Preferred stock

B. Capital risk is the risk of losing capital. Of the choices given, the greater risk of losing capital is the common stock, as common shareholders come last in liquidation under bankruptcy proceedings.

A company's dividend on its common stock is A. mandatory if the company is profitable B. determined by its board of directors C. voted on by shareholders D. specified in the company charter

B. Common stock's dividend payment and amount are determined by the company's board of directors.

An analyst using the dividend growth model would take into account all of the following factors EXCEPT: A. the growth of the dividend B. the current earnings per share C. the investor's required rate of return D. the current dividend

B. The dividend growth model is a stock valuation model that deals with dividend and their growth, discounted to today. the value of the stock equals next year's dividends divided by the different between the required rate of return and the assumed constant growth rate in dividends.

Which of the following represents(s) ownership in a company I. Corporate Bonds II. Common Stock III. Preferred stock IV. Mortgage bonds A. I and IV B. II only C. II and III D. I, II, III and IV

C. Owning either common or preferred stocks, represents ownership (or equity) in a corporation.

A corporation may distribute which of the following as dividend? I. Cash II. Stock III Stock of a subsidiary A. I only B. I and II C. II and III D. I, II and III

D. Corporations normally declare cash dividends, but corporations can also declare stock dividends in additional shares of the issuing corporation, shares of a subsidiary, or property dividends ( usually products of the company)

Technical or Fundamental analysis: Financial statements

Fundamental

Technical or Fundamental analysis: Industry performance

Fundamental

Technical or Fundamental analysis: PE ratios

Fundamental

An investor who has purchased preferred stock with the goal of receiving steady quarterly income would be most interested in the A. seniority of the stock compared to other securities B. ability of the company to continue paying the stated dividend C. voting power of the shares D. parity price of the shares

Investors in preferred stock with the goal of income are most concerned that the company will be able to sustain the dividend.

Technical or Fundamental analysis: Breadth of the market

Technical

Technical or Fundamental analysis: Market Timing

Technical

Technical or Fundamental analysis: Support and resistance

Technical

Limited liability regarding ownership in a U.S. corporation means all fo the following EXCEPT A. investors might lose more than the amount of their investment B. investors might lose their investment C. creditors of the corporation cannot seek relief from the shareholders D. investors are not liable to the full extent of their personal property

A. An advantage of owning stock is that an investor's liability is limited to the amount of money invested when the stock was purchased.

A company hat has issued cumulative preferred stock A. pays past and current preferred dividends before paying dividends on common stock B. pays the preferred dividend before paying the coupons due on its outstanding bonds C. pays the current dividends on the preferred, but no 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.

A. Current an d unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. bond interest is alway paid before dividends.

Which of the following statements best describes cumulative preferred stock? A. Owners have a continuing claim to dividends, and all arrears must be paid before any dividends are can be paid on common stock. 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 receive an extra dividend along with commons shareholders, in addition to the preferred dividend.

A. 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 contract the owners of non cumulative preferred tock lose their claim to dividends that are not paid in any one year.

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? I. As an inducement to make the bonds more marketable. II. To lower their interest cost on the issue. III. To increase the marketability of their common stock. IV. To increase the number of common shares outstanding. A. I and II B. I only C. I and IV D. I, II, III and IV

A. Warrants permit the purchase of common stock of the issuer at a fixed price. A bond with warrants attached has more value than a straight bond and is more attractive (marketable) to investors. Attaching warrants to a bond issue usually permits the bonds to be issued with a lower interest rate.

Which 2 of the following risks would be threats concern to the holder of an ADR? I. Currency II. Liquidity III. Market IV. Purchasing power A. I and II B. I and III C. II and IV D. III and IV

B. ADRs represent ownership in a foreign security so there is always going to be currency risk. these ADRs tradings in market and have market risk. Since most ADRs are traded in the exchanges, there is little liquidity risk and, because they represent equity, they are usually good hedge against inflation.

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

B. Because everything is in U.S. dollars and in English, ADRs make trading in foreign securities much easier for those who live here.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not bee paid this or for the 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A. $16 B. $24 C. $8 D. $0

B. If the company is goin 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.

Among the benefits of owning common stock are I. its has historically been a hedge against inflation II. voting rights III. Access, as owners, to information about corporate earning before the general public IV. dividends A. I and II B. I, II and IV C. II and IV D. I, II, III and IV

B. One does not have access to inserter information solely by becoming a shareholder. Even if one did receive material non public information, such as prior access to earnings, no benefit may be received from that information. All of the other choices are Among the reason to purchase common stock.

A common sthockholder's rights include all fo the following EXCEPT: A. Electing the board of directors B. the right to determine the par value of the stock C. preemptive rights D. the receipt of dividends if declared by the board of directors

B. 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 and owners of a corporation. This basilisks form of ownership entitles the to all fo 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 even of a liquidation.

When analyzing a preferred stock, an investment adviser would give the most credence to: A. the company's short-term debt obligations. B. the ability of the company to pay the stated dividend C. book value per share D. earnings per share

B. Preferred stock is purchase primarily as an income security base on its fixed dividend. Therefore, any analysis would tend to place the ability of the issuer to meet the dividend paramount. Earnings per share and book value per share are computations relevant to common stock only.

Which of the following statements regarding rights is TRUE? A. Common stockholders would not generally receive preemptive rights B. Preferred stockholders would not generally receive preemptive rights C. Both common and preferred stockholders would generally receive preemptive rights D. neither common nor preferred stockholders would generally receive preemptive rights

B. Preferred stockholder have no right to maintain a percentage of ownership when new shares are issued (no preemptive rights). However, they do receive preference in dividend payment and company liquidation.

Which of the following statements accurately describes the doctrine of limited liability? A. A shareholder of a corporation has some personal liability fro the corporation's debts. B. A shareholder of a corporation is not personally liable for the corporation's debts. C. A partner is not personally liable for the debts of the partnership D. the owner of a sole proprietorship is not personally liable for the proprietorship's debts

B. The owners of certain kinds of businesses such as sole proprietorships and partnerships have unlimited liability for the business' debts. The doctrine of limited liability means, however, that the owners of a corporation (the shareholders) are not personally liable for the corporation's debts.

When using the Dividend Discount model, A. a higher degree of accuracy in forecasting stock prices is obtained with preferred stock. B. Future expected dividends are discounted to compute the present value. C. the discount rate is generally lower than the expected rate of return D. best results are obtained from stocks that pay irregular dividends.

B. This method of common stock valuation takes the investor's expected future dividend returns and then discounts that amount by the expected rate of return to arrive at the supposed present value. Expected (or required) rate of return is component of both the Dividend Discount Model and the Dividend Growth Model, and neither Model is used for preferred stocks because the dividend can never increase. when using dividend model, the greater the regularity of dividends, the more accurate the forecast.

Which of the following statements regarding warrants is TRUE? A. Warrants are only offered to current shareholders. B. Warrants have longer terms than rights. C. Warrants do not trade in the secondary market. D. At the time of issuance, the exercise price of a warrant is typically below the market value of the underlying stock.

B. Warrants are issued with long-term maturities and may be used as sweeteners in an offering of the issuer's preferred stock or bonds. Unlike rights, warrants are not offered to current shareholders; they are attached to a new offering or purchased in the open market. the exercise price of a warrant is typically above the market values of the stock at the time of issue.

Investing in emerging market stocks primarily exposes your client to which of the following risks? I. Currency II. Inflation III Liquidity IV. Political A. I and IV B. II and III C. I, II, III and IV D. I, III and IV

C. Any investment in a foreign stock incurs currency risk. The nature of emerging markets is such that there is a higher political risk as well as potential limited liquidity. It is not unusual for merging markets to have a bout of raging inflation from time to time.

On July 15, 2013, an employee of KAPCO Manufacturing Company receives an incentive stock option to purchase 100 shares of KAPCO common stock at $21 per share when the current market price is $19. She exercise the option on June 30, 2014 and sell her shares on August 4, 2015 at $30 per share. For tax purposes, she has a A. $900 short-term capital gain B. $1,100 short term capital gain C. $900 long-term capital gain D. $1,100 long-term capital gain

C. As long as certain time restrictions are met any difference between the exercise (strike) price and sale price is considered long-term capital gain. the question is this: did she sell the stock more than two years after granting of the option? Yes because from July 15, 2013 until August 4, 2015 is more than two years. The second question is this: did she sell the stock more than one year after exercise? Yes, because August 4, 2015 is more than one year after June 30, 2014.

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 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. III and IV B. I and II C. I, II and IV D. I, II, 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 at any time 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 share, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse).

Which of the following types of preferred stock is most influenced by the price of an issuer's common stock? A. Cumulative B. Straight C. convertible D. Callable

C. Because convertible can be exchanged for common shares, its price is closely linked to the price of the issuer's common.

Amon the popular methods of valuing equity securities is the dividend growth model. Once could expect to see an analyst using this to value any of these EXCEPT A. common stock B. ADRs represent common. stock in foreign company C. Preferred stock D. non of these are exceptions

C. In order to use the dividend growth model, there must be a possibility of dividend growth. Because preferred stock dividends are fixed, this tool would not make any sense.

All of the following are considered to be risks of owning common tock EXCEPT A. Market risk B. possible decrease in dividend payments C. removal of voting rights D. low priority of claim at dissolution

C. Owning common stock subjects one to market risk, the possibility that dividends may be reduced, and the fact that they have the last priority in clams against the assets of the corporation. The right to vote cannot be taken away.

Which of the following types of preferred stock typically has the highest stated rate of dividend (all other factors being equal)? A. Convertible B. Straight C. Cumulative D. Callable

D. Callable preferred. When the stock is called, dividend payments are no longer made. To compensate for that possibility, the issuer must pay a higher dividend.

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

D. Preferred stockholders have a preference as to liquidation and distribution of dividends, but they have no right to maintain a percentage of ownership.