Equities: Common Stock
Which of the following are functions of a corporation's Board of Directors? I Mailing dividend payments to shareholders II Canceling old shares and issuing new shares III Preparing and mailing proxies IV Setting the Declaration Date A. IV only B. I, III, IV C. I, II, III D. I, II, III, IV
The best answer is A. The declaration date is set by the Board of Directors of the company, not by the transfer agent. The transfer agent mails voting materials (proxies), annual reports, dividend payments to the shareholders, and cancels old shares and issues new shares.
Which function would be performed by the registrar? A. verifying the record of all shareholder names and addresses B. acting as disbursement agent for the corporation C. issuing new stock certificates D. canceling old stock certificates
The best answer is A. The transfer agent cancels old shares and issues new shares. It is the responsibility of the registrar to maintain the integrity of the shareholder list, and to ensure that the number of shares transferred from one shareholder to another always matches. The transfer agent typically performs the role of paying agent as well. When a corporation makes a distribution, the paying agent actually prepares and mails the checks (using the current shareholder list provided by the registrar).
ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of Wednesday, December 1st, the stock is trading at $30. The value of the right is: A. $.90 B. $1.00 C. $1.10 D. $1.25
The best answer is B. Since the record date is Friday, December 10th, a customer buying on Wednesday, December 1st would settle on Friday, December 3rd (2 business days later) and would be on the record books for the distribution. Therefore, the stock is trading cum rights. The value of a right "cum rights" is: Adjusted Market Price - Subscription Price/N + 1 = Value "Cum Rights" 30-19/10+1= 11/11 = $12 value " Cum Rights"
ABC Corporation has declared a cash dividend to stockholders of record on Friday, December 10th. The last day to buy ABC shares BEFORE they go ex dividend is? A. Tuesday, December 7th B. Wednesday, December 8th C. Thursday, December 9th D. Friday, December 10th
The best answer is B. The regular way ex date is 1 business day prior to the record date for cash dividends. The record date is Friday, December 10th, therefore the ex date is Thursday, December 9th. To buy the shares before they go ex dividend, the shares must be purchased before December 9th, meaning they must be purchased on Wednesday, December 8th.
ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of the ex date, the stock is trading at $24. The value of the right is: A. $.45 B. $.50 C. $.55 D. $1.00
The best answer is B. The value of a right "ex rights" is: Adjusted Market Price - Subscription Price/N = Value "Ex Rights" 24 - 19/10 = 5/10 = .50 Value "ex rights" Notice that the market price of $24 was already adjusted on the ex date by the exchange where the stock trades. Do not try and reduce the price again!
Which of the following statements are TRUE regarding Treasury Stock? I Treasury Stock receives dividends II Treasury Stock votes III Treasury Stock reduces the number of shares outstanding IV Treasury Stock purchases are used to increase reported Earnings Per Share A. I and II B. III and IV C. II, III, IV D. I, II, III, IV
The best answer is B. Treasury stock does not vote nor receive dividends. Treasury stock is deducted from outstanding shares, and since outstanding shares are reduced, Earnings Per Share increases.
A corporation is attempting to sell additional shares to its existing shareholders through a rights distribution. A shareholder who wishes to subscribe must send the purchase amount with the rights certificate to the: A. transfer agent B. stand-by underwriter C. rights agent D. corporate controller
The best answer is C. A rights agent is hired to handle the mechanics of a rights offering. To subscribe, the existing shareholders submit their rights with the subscription dollar amount to the rights agent.
PDQ Corporation has declared a rights offering to stockholders of record. The company has 5,000,000 shares outstanding and is selling an additional 1,000,000 shares via the rights offer. Which statements are TRUE regarding a customer who owns 500 shares of PDQ stock? I The customer will receive 100 rights II The customer will receive 500 rights III The customer may buy 100 shares IV The customer may buy 500 shares A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Each outstanding share gets 1 right, so there will be 5,000,000 rights issued / 1,000,000 new shares = 5 rights needed to buy 1 new share. The customer who owns 500 shares gets 500 rights. Since 5 rights are needed to buy 1 new share, the customer can buy 100 additional shares.
A corporation has issued 50,000,000 shares of common stock at $2 par. The corporation has 10,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A. $20,000,000 B. $40,000,000 C. $80,000,000 D. $100,000,000
The best answer is C. Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000) = 40,000,000 shares outstanding at $2 par = $80,000,000.
The Board of Directors of a company will set which of the following? I Declaration date II Record date III Ex date IV Payable date A. I and II B. III and IV C. I, II, IV D. I, II, III, IV
The best answer is C. The Board of Directors will set the declaration date (the day the dividend was declared), record date (the date on which customer's name must be on the record books to receive the dividend), and the payable date (the day on which the checks are mailed). The ex date is set by FINRA (the self regulatory organization or SRO that oversees the securities markets in the U.S.) based upon the report of the record date.
A company that has been growing rapidly announces that it is splitting its stock 3:2 and increasing its cash dividend by 20%. Prior to the announcement, the stock was trading at $60 and the dividend yield was 10%. What will be the next dividend paid per share? A. $.90 B. $1.00 C. $1.10 D. $1.20
The best answer is D. Another question that is more annoying than difficult. When the stock was trading at $60, it was paying an annual cash dividend of 10% of $60 = $6.00 per share. After the 3:2 split, for every 2 shares held, there will now be 3 shares. This is the same as 1.5:1. The new share price will be $60 / 1.5 = $40. The new annual dividend amount per share before the increase will be $6.00 / 1.5 = $4.00. If this dividend is increased by 20%, the new annual rate will be $4.80, and the new quarterly dividend payment per share will be $4.80 / 4 = $1.20
A customer owns 200 shares of ABC stock. ABC is having a rights offering where 20 rights are needed to subscribe to 1 new share. The customer will receive: A. 1 right B. 10 rights C. 100 rights D. 200 rights
The best answer is D. The customer receives a right for each common share held. Since he or she owns 200 shares, he or she gets 200 rights. 20 rights are needed to buy 1 new share, so 200 rights / 20 rights per share allows the purchase of 10 new shares
A customer owns 400 shares of ABC stock. ABC is having a rights offering where 20 rights are needed to subscribe to 1 new share. The customer will receive: A. 1 right B. 20 rights C. 100 rights D. 400 rights
The best answer is D. The customer receives a right for each common share held. Since he owns 400 shares, he gets 400 rights. 20 rights are needed to buy 1 new share, so 400 rights / 20 rights per share allows the purchase of 20 new shares.
Which of the following best describes the duties of a "Rights Agent"? The Rights Agent: A. ensures that all common shareholders have voting rights B. ensures that the correct number of shares are canceled and issued by the transfer agent whenever a transfer occurs C. repurchases company Treasury Stock when market conditions are favorable D. accepts shareholder subscriptions to a rights offering
The best answer is D. The rights agent handles the mechanics of a rights offering. In a rights offering, a company is attempting to sell additional shares directly to its existing shareholders. The company hires a "rights agent" to perform these duties.
A company declares a cash dividend that is 8% higher than the previous dividend rate. Prior to the announcement, the annual dividend yield was 6% and the stock was trading at $25 per share. What is the new dividend payment amount per share? A. $.375 B. $.380 C. $.400 D. $.405
The best answer is D. This question is more annoying than hard! The current annual dividend yield is 6% x $25 current share price = $1.50 per year. The dividend is now increasing by 8%, so the new annual dividend rate will be 1.08 x $1.50 = $1.62. Since common dividends are paid quarterly, the quarterly dividend will be $1.62 / 4 = $.405.
All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT: A. the number of outstanding shares is reduced B. the earnings per share is increased C. the market price of the stock will increase D. the number of authorized shares will be reduced
The best answer is D. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock's price in the market. The purchase of Treasury Stock has no effect on authorized shares.
