1 - EQUITY SECURITIES
ADR - American Depository Receipts
-On FOREIGN securities -Held in bearer form -by an American bank in the foreign country -Produce a dividend -Level 1: trade OTC; no SEC registration required Level 2&3: Require SEC registration to report on an exchange, also require regular reporting
All of the following are TRUE about the types or kinds of preferred stock
-Participating where shares may receive a dividend higher than the fixed dividend if the company's profits are larger than expected -Cumulative where shares accumulate dividends that were skipped in past years -Convertible where shares may be exchanged for shares of common stock at the option of the shareholder
ADR - American Depository Receipt
-Produce a dividend -Foreign securities held in bearer form by an American bank in a foreign country Level 1: Trade OTC; no SEC registration Level 2: Require SEC registration to trade on an exchange- this requires regular reporting
ABC Company declared a fifty cent ($0.50) per share dividend on August 15th to shareholders of record Friday, September 15th. On which two of the following days can an ABC Company stockholder sell his shares and still receive his fifty cent ($0.50) per share dividend? I.Monday, September 11 for regular way settlement. II.Wednesday, September 13 for regular way settlement. III.Friday, September 15 for cash settlement. IV.Monday, September 18 for cash settlement. [A] I and III [B] II and IV [C] I and IV [D] II and III
Usually dividend questions are asked from a buyer's point of view, - buy before ex-date to receive the dividend - but this question says the investor already owns the stock and wants to keep the dividend; when should they SELL. In this case the investor would wait until the ex-date before selling in order to keep the dividend. Ex-date for regular way settlement is 2 business days prior to record date - or II Sept 13. Ex-date for cash settlement is the business day after records - or IV Sept 18. Remember you must: Buy before the ex-date or Sell on or after the ex-date to receive the dividend.
Reasons a company would repurchase its own stock
-To increase EPS -To finance future acquisitions -To provide stock for employee stock option plans -To fight a takeover attempt
STOCK POINT
1 POINT = $1.00 (par value of $100.00)
Stock Point, basis point
1 pt. = $1.00 (Par value of stock is $100.00; $1.00 is 1/100th of this) Basis point is 1/100th of 1%, so a basis point on stock is $0.01.
Types of Stock
AUTHORIZED - Authorized by corporate charter, regulated by the State where the charter is filed ISSUED - Distributed to the public, publicly held TREASURY - Shares repurchased by the company and held by the company OUTSTANDING - Issued stock - Treasury stock = Outstanding stock. The more shares issued, the less the earnings per share.
Current Yield
Annual Dividend or Interest Income / Market Price
Dividend Calculation
Annual Dividend per Share = Par Value x % Annual Dividend Income = Annual Dividend per Share x Shares
Which of the following is most likely to fluctuate in value during a period of stable interest rates? [A] Cumulative preferred stock. [B] Participating preferred. [C] Senior preferred. [D] Convertible preferred.
Because convertible securities try to maintain parity with the Common Stock - Convertibles would fluctuate more than non-convertibles even when interest rates are stable.
HYBRID REITS
Combo of Mortgage and Equity REITS
You are evaluating a number of preferred stocks with varying features. One of the preferred stocks that you are evaluating shows a pattern of increased market value in relation to increases in the market value of the common stock of the company. Of the following preferred stock features, which is the MOST LIKELY cause of this pattern? [*X*] The preferred stock likely carries a participating feature. [B] The preferred stock likely carries a cumulative feature. [C] *The preferred stock likely carries a conversion feature.* [D] The preferred stock likely carries a call feature.
Convertible securities (both bonds and preferred stock) normally fluctuate in price more than non-convertibles because the price of the convertibles typically maintains parity with the common stock (due to the conversion feature). Therefore if common stock increases in price, it would be normal to see a convertible preferred stock increase in price as well.
Convertible Preferred Stock
Converts to Parity, fluctuates in price
Convertible preferred stock
Converts to parity; fluctuates in price
Corporations usually issue warrants in connection with which of the following types of new issues: [A] Common stock, to increase par value [B] *Debentures, to secure a lower interest rate* [C] Preferred stock, to lower par value [D] Convertible bond issues, to secure a higher interest rate
Corporations usually issue warrants in connection with the issuance of debentures in order to make the new issue more attractive to investors.
A 10% preferred stock has a market price of $80/share. What is the dividend yield on this stock? [A] 8% [B] 10% *[C] 12.5%* [D] 15%
Dividend Yield is the same as Current Yield. Both are calculated by taking the annual dividend divided by the market price. First, we have to find the annual dividend. To find the annual dividend we would take: Annual Dividend = Par Value X dividend rate(%) Annual dividend = $100 X .10 = 10 dollars annual dividend Next, we can do the Dividend yield formula (or current yield formula) Dividend Yield = Annual dividend / Stock Price Annual dividend $10 /stock price $80 = 12.5%
Treasury Stock
Doesn't vote or receive dividends Is not used in EPS Appears on balance sheet as a deduction from issued stock (to identify outstanding stock)
TYPES OF REITS
EQUITY MORTGAGE HYBRID
Types of REITS
Equity - Income from rents. These take equity position in real estate. Mortgage - Income from interest. These lend money to builders/developers and as such are usually highly leveraged. Hybrid - a combo of the above
When interest rates change which of the following securities would have the greatest reaction? [A] Rights [B] Warrants [C] Preferred Stock [D] Common Stock
Interest rates affect fixed income securities directly because of the inverse relationship that price has to interest rate fluctuation. Bonds and preferred stocks are considered fixed income securities, because they either pay interest (bonds) or dividends (preferred stocks) at a fixed rate. So when interest rates change, this has more of an impact on preferred stock as opposed to common stock, because the going rate of dividends paid out on new issues of preferred stock will either be going up or down. This will affect the market price of existing preferred stocks with established dividend rates.
A company has authorized 10,000,000 shares of common stock. 8,000,000 shares have been issued. 4,000,000 shares are treasury. This means: [A] 8,000,000 shares are outstanding [B] 10,000,000 shares are outstanding [C] 4,000,000 shares are outstanding [D] 14,000,000 shares are outstanding
Issued stock minus Treasury stock = Outstanding Stock Therefore, 8,000,000 issued - 4,000,000 Treasury would equal the 4,000,000 outstanding shares.
WARRANTS
Issued with debentures to get a lower interest rate
Stock Life
It is first Authorized, then Issued in a primary distribution. If the company repurchases some issued shares, it is then owned by the company and is held by the treasury of the company. ISSUED-TREASURY=OUTSTANDING. Outstanding shares are those held in the market. The more shares outstanding, the lower the EPS.
REIT
Must o - Pay out at least 90% of earnings annually to shareholders and o - have 75% of assets in real estate related investment ventures *LOSSES ARE NOT PASSED THROUGH
All of the following are common features of preferred stock *EXCEPT*: [A] If a company desires, it can issue more than one class or series of preferred stock, each of which have different characteristics. [B] A company must pay preferred stock dividends before it can pay common stock dividends. [C] A company may be required to establish a sinking fund for the retirement of callable preferred stock [D] *Large stock price fluctuations*
Preferred stock price fluctuations are generally small because the dividend is fixed and there is little upside potential or downside risk.
A correct statement concerning the federal tax treatment of a "qualified" Real Estate Investment Trust (REIT) is that it is: [A] Permitted to carry over any operating losses. [B] Not subject to the pass-through tax treatment. *[C] Must pay out a specified portion of its ordinary income as dividends.* [D] Not taxed on retained earnings.
REIT's require the pass through of 90% of ordinary income as dividends in order to qualify for special tax treatment. They do not allow the pass through of losses.
All of the following are characteristics of REITs *EXCEPT*: [A] They are publicly-traded securities and can be traded on an exchange or OTC. [B] They generally own income-producing properties like apartment buildings. [C] They distribute 90% of their income to shareholders. [D] *They must be registered under the Investment Company Act of 1940.*
REITs are not investment companies and do not have to be registered under the Investment Company Act of 1940.
Which two of the following are true about REITs (Real Estate Investment Trusts)? I.They are set up as Limited Partnerships II.They are generally set up as publicly traded companies III.They could be subject to double taxation IV.They pass-through both profits and losses
They are generally set up as publicly traded companies They could be subject to double taxation They could become subject to double taxation if they do not distribute at least 90% of its net earnings and most of them are publicly traded.
ABC Corp. has declared a cash dividend to owners of record July 17. The last date for the customer to buy the stock and still receive the dividend is: [A] July 11 [B] July 12 [C] July 16 [D] July 17
Using the month of July calendar, you would count back 2 business days from July 17, which tells you the ex-date is July 13, therefore to receive the dividend the investor would have to own the stock the day before ex-date or July 12th.
Which of the following statements regarding warrants is not true? [A] They allow the owner to purchase additional shares of common stock. [B] They can be used to increase the attractiveness of a new issue. [C] They are generally long-term. [D] *They are an obligation which must be issued by the corporation.*
Warrants are always "want to" by a corporation, not a "have to."
REGULAR/STATUTORY Voting RS=LARGE
*MOST BENEFICIAL TO LARGE STOCKHOLDERS.* One vote per share per director
BLOCK/CUMULATIVE Voting B/C=SMALL
*MOST BENEFICIAL TO MINORITY STOCKHOLDERS*. One vote per share times the number of directors being voted on
MORTGAGE REITS
-Income from Interest -Lend money to building developers and pass through interest in come received
EQUITY REITS
-Income from rents -Take equity positions in Real Estate
Reasons a company would repurchase its own stock to create treasury stock (repurchased stock held by the treasury of that company)
-Increase earnings per share -finance future acquisitions -provide stock for employee stock option plans -to fight a takeover attempt
Which of the following are true of warrants? [A] The market price of the stock is below the exercise price when they are issued. [B] All are perpetual. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.
Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
A client has a stock that is currently valued at $40 per share. The quarterly dividend of this stock is $0.10 per share. What is the current yield of this stock? [A] The current yield cannot be determined with the information provided. [B] The current yield is 0.25%. [C] *The current yield is 1%*. [D] The current yield is 10%.
Current yield is computed by dividing the annual return of the investment by the investment's current market value. Here, the stock has a quarterly return of $0.10 per share. This equates to $0.40 annually. $0.40 / $40 per share = 0.01 or 1% current yield
A client has a stock that is currently valued at $40 per share. The quarterly dividend of this stock is $0.10 per share. What is the current yield of this stock? [A] The current yield cannot be determined with the information provided. [B] The current yield is 0.25%. [C] The current yield is 1%. [D] The current yield is 10%.
Current yield is computed by dividing the annual return of the investment by the investment's current market value. Here, the stock has a quarterly return of $0.10 per share. This equates to $0.40 annually. $0.40 / $40 per share = 0.01 or 1% current yield.
A 10% preferred stock has a market price of $80/share. What is the dividend yield on this stock? [A] 8% [B] 10% [C] *12.5%* [D] 15%
Dividend Yield is the same as Current Yield. Both are calculated by taking the annual dividend divided by the market price. First, we have to find the annual dividend. To find the annual dividend we would take: Annual Dividend = Par Value X dividend rate(%) Annual dividend = $100 X .10 = 10 dollars annual dividend Next, we can do the Dividend yield formula (or current yield formula) Dividend Yield = Annual dividend / Stock Price Annual dividend $10 /stock price $80 = 12.5%
Each of the following can be passed through to an investor who has purchased REIT shares: [A] Dividend received [B] Interest received [C] Rents from property
REITs receive special tax treatment because of requirements associated with investing in real estate as well as passing through the majority of income. Though they do pass through profits and earnings to investors, REITs do NOT pass through losses. This is one key differentiation between REITs and limited partnerships (DPPs).
ABC Company declared a fifty cent ($0.50) per share dividend on August 15th to shareholders of record Friday, September 15th. On which two of the following days can an ABC Company stockholder *sell* his shares and still receive his fifty cent ($0.50) per share dividend? I. Monday, September 11 for regular way settlement. II. *Wednesday, September 13 for regular way settlement.* III. Friday, September 15 for cash settlement. IV. *Monday, September 18 for cash settlement.* D = 8/15 E = 9/13* R = 9/15** P = NA
Remember, to receive the dividend you must: Buy before the ex-date or Sell on or after the ex-date. *Ex-date for regular way settlement is 2 business days prior to record date - or II Sept 13. **Ex-date for cash settlement is the business day after records - or IV Sept 18. Usually dividend questions are asked from a buyer's point of view, - buy before ex-date to receive the dividend - but this question says the investor already owns the stock and wants to keep the dividend; when should they SELL. In this case the investor would wait until the ex-date before selling in order to keep the dividend.
A single 25-year-old investment banker has income of $300,000 and net worth in excess of a million dollars. Her investment objective is capital appreciation. All of the following would be appropriate for this investor except: [A] equities in emerging markets [B] small cap equity securities [C] high yield preferred stocks [D] aggressive growth funds
Since her objective is capital appreciation, the high yield preferred stock would be the least appropriate since preferred stocks are generally less volatile than common stocks.
ABC Company declared a fifty cent ($0.50) per share dividend on August 15th to shareholders of record Friday, September 15th. On which two of the following days can an ABC Company stockholder *sell* his shares and still receive his fifty cent ($0.50) per share dividend? I. Monday, September 11 for regular way settlement. II. Wednesday, September 13 for regular way settlement. III. Friday, September 15 for cash settlement. IV. Monday, September 18 for cash settlement. [A] I and III [B] *II and IV* [C] I and IV [D] II and III
Usually dividend questions are asked from a buyer's point of view (buy before ex-date to receive the dividend), but *this question says the investor already owns the stock* and wants to keep the dividend... when should they SELL. In this case the investor would wait until the ex-date before selling in order to keep the dividend. Ex-date for regular way settlement is 2 business days prior to record date - or II Sept 13. Ex-date for cash settlement is the business day after records - or IV Sept 18. Remember you must: Buy before the ex-date or Sell on or after the ex-date to receive the dividend.
All of the following are common features of preferred stock:
[A] If a company desires, it can issue more than one class or series of preferred stock, each of which have different characteristics. [B] A company must pay preferred stock dividends before it can pay common stock dividends. [C] A company may be required to establish a sinking fund for the retirement of callable preferred stock Preferred stock price fluctuations are generally small because the dividend is fixed and there is little upside potential or downside risk.
