Equities Quiz
A customer buys 100 shares of preferred at $101 per share. The par value is $100. The dividend rate is 8%. Each dividend payment will be: A $80 B $400 C $800 D $808
The best answer is B. The annual rate is 8% x $100 par value = $8 per share x the number of shares = $800. Since preferred dividends are paid semi-annually, each payment would be $400
Common stockholders and preferred stockholders BOTH have: A voting rights B pre-emptive rights C dividend rights D subscription rights
The best answer is C. Both common and preferred shareholders have the right to receive dividends, if declared by the Board of Directors. Common shareholders have both voting rights and preemptive/subscription rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive/subscription rights
Preferred stock market valuation is based primarily upon: A future earnings expectations for the issuer B short term market interest rate levels C long term market interest rate levels D future dividend payment expectations for the issuer
The best answer is C. Preferred stock prices are based on market interest rates. Preferred stock is a fixed income security, and hence, when market interest rates move, the yield on the security adjusts to the market rate. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security.
All of the following statements are true regarding the trading of ADRs EXCEPT: A ADRs are traded on the New York Stock Exchange B ADRs are traded on the NASDAQ Stock Market C ADRs are traded on the American Stock Exchange D ADRs are traded on the Chicago Board Options Exchange
The best answer is D. An American Depositary Receipt is a foreign security that is held in a foreign branch of a U.S. bank. The bank issues receipts against these shares, and the receipts are registered in the United States as securities and are listed and traded on U.S. stock exchanges, including the NYSE, AMEX (now renamed the NYSE American) and NASDAQ stock markets. Note that only options trade on the Chicago Board Options Exchange (CBOE) - neither stocks nor ADRs trade in this market.
All of the following securities represent ownership of a corporation EXCEPT: A common stock B preferred stock C convertible preferred stock D warrants
The best answer is D. Warrants do not represent ownership of a corporation; only if they are exercised do they represent ownership, since exercise results in the purchase of the common stock of the issuer. Common stock and preferred stock are both securities that represent ownership
A corporation has issued 50,000,000 shares of common stock at $.50 par. The corporation has 10,000,000 shares of Treasury Stock on its books. The aggregate par 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 A. Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000 shares) = 40,000,000 shares outstanding at $.50 par = $20,000,000
A corporation has been in financial difficulty and its stock price has fallen to an extremely low level. To avoid delisting, it wishes to raise its stock and it wants to conserve its cash. To do this, it should declare a: A stock split B reverse stock split C stock buy-back program D cash dividend on outstanding shares
The best answer is B. When a corporation's stock price falls too low, the company might be delisted from its principal exchange, which would make the stock very difficult to trade. To keep the stock trading in the market, the corporation could raise the per share price by declaring a reverse stock split. Declaring stock split would reduce the price per share. Buying back shares uses cash, which the company wants to conserve. The same is true if the company pays a cash dividend
A customer holds 100 shares of ABC Corp $100 par non-convertible preferred stock. If ABC declares and pays a 10% common stock dividend, then as of the payable date, the customer will now have: A 90 shares of ABC preferred stock B 100 shares of ABC preferred stock C 100 shares of ABC preferred stock and 10 shares of ABC common stock D 110 shares of ABC preferred stock
The best answer is B. If ABC declares and pays a 10% "common" stock dividend, the customer who holds non-convertible or convertible preferred stock would not benefit in any way. Thus, due to the payment of a common stock dividend, the customer would still have 100 shares of the non-convertible preferred stock
The definition of Treasury stock is: A authorized shares minus issued shares B issued shares minus outstanding shares C authorized shares minus outstanding shares D capital in excess of par value minus par value
The best answer is B. If a company has the same number of issued shares as the number of shares outstanding, then no shares have been repurchased for the company's Treasury. However, if the company repurchases shares, the number of outstanding shares decreases. Thus, the definition of Treasury stock is issued shares minus outstanding shares.
Callable preferred stock is likely to be redeemed by the issuer if: A interest rates rise B interest rates fall C the common stock price rises D the common stock price falls
The best answer is B. If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen
To determine if a stock appears to be overpriced, what would be examined? A The company's Earnings Per Share B The company's Dividend Payout Ratio C The company's Price to Earnings Ratio D The company's Debt to Equity Ratio
The best answer is C. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued.
ABC Corporation has recently completed a $20,000,000 offering of 10% debentures due in 2035. Each bond was sold with a warrant attached that allows the holder to buy 10 shares of ABC common stock at $50 per share. The market price of ABC is currently $42. All of the following statements are true EXCEPT: A The warrants help to increase the issue's marketability B The warrants help to lower the interest cost on the issue C The warrants are "under water" D The company will raise an additional $5,000,000 if the warrants are exercised
The best answer is D. Warrants are "sweeteners" that are attached to bond and preferred stock offerings to make them more marketable. Because the warrants have potential value, the issue can typically be sold at a lower interest cost (higher price) than if the warrants were not attached. At issuance, the warrants are usually issued "out the money" - as in this example the warrants allow the stock to be purchased at $50 but the stock's current value is $42. Thus, these warrants are said to be "under water" and will not have real value until the stock price rises above $50. If the warrants are exercised, the 20,000 debentures issued ($20,000,000/ $1,000 par) can be converted into 10 shares of stock each for a total issuance of 200,000 shares. The company will receive $50 per share, for a total of $10,000,000
Which statement is TRUE regarding American Depositary Receipts? A Exchange listed ADRs must be sponsored B Non-sponsored ADRs trade exclusively offshore C All ADRs must provide quarterly and annual reports to shareholders in English D Non-sponsored ADRs are not required to provide quarterly and annual reports to shareholders
The best answer is A. All exchange listed ADRs are sponsored. Issuers that sponsor ADRs provide quarterly and annual financial reports to shareholders in English - basically the same financial disclosure required by the SEC for all publicly traded companies. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade in the U.S. over-the-counter market, not on exchanges.
Common dividends can be paid in all of the following forms EXCEPT: A Warrants B Product C Stock D Cash
The best answer is A. Common dividends can be paid in the form of cash, stock, or the products of a company (this last method is obsolete). The distribution of rights or warrants is not a method of dividend payment. In a rights offering, the corporation attempts to raise additional capital by allowing existing shareholders to subscribe to new shares at a discount to the current market price. Rights typically have a life of 30-90 days. Warrants are sweeteners attached to preferred stock or bond offerings by the issuer to make them more attractive to potential investors. Each warrant is a long-term option (up to 5 years) to buy a stated number of shares, at a premium to the market price at the time of issuance. The warrant has no value unless the price of the common stock rises above the exercise price.
Of the following choices, the only method that will raise new funds for a corporation is to: A sell additional common shares through a rights offering B force conversion of outstanding convertible preferred C split its common shares 2 for 1 D call its outstanding preferred
The best answer is A. The only method listed that will raise new funds for the corporation is to sell additional common shares through a rights offering. Forcing conversion of outstanding convertible preferred does not raise new capital. It simply converts preferred stock into common stock. Splitting shares does not raise new capital. After the split, the company has more shares outstanding, worth half the original amount. Calling outstanding preferred uses cash and reduces capital.
An investor has 300 shares and is voting for 3 open board seats. Which statement is correct if the election employs the cumulative voting method? A Cumulative voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 900 votes for a favored director. B Cumulative voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 300 votes for a favored director. C Cumulative voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 900 votes for a favored director. D Cumulative voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 300 votes for a favored director.
The best answer is A. Cumulative voting gives the shareholder a disproportionate voting weight as compared to statutory voting and is considered to be an advantage to the small investor. Under the statutory method, the number of shares held is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships and apply them to favored individuals. In this case the investor has 900 total votes (1 vote per share per board seat) so they may cast a maximum of 900 votes for a favored director.
Which statement is TRUE regarding preferred stock payments? A Preferred dividends are usually higher than those paid to common B Preferred dividends tend to grow over time C Preferred dividends are paid quarterly D Preferred interest is paid semi-annually
The best answer is A. Preferred dividends are typically fixed and are generally higher than those paid to common stockholders. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly
ABC Corporation has declared a rights offering to stockholders of record on Tuesday, June 22nd. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. A customer owning 240 shares wishes to subscribe. The market price of the stock is currently $73. The customer can buy: A 12 shares for $720 B 12 shares for $876 C 240 shares for $14,400 D 240 shares for $17,520
The best answer is A. Since 20 rights are needed to buy 1 new share, the customer holding 240 shares, and therefore receiving 240 rights can buy 240 / 20 = 12 shares at $60 each = $720 total for 12 shares.
Dawn owns 100 shares of ACME Company common stock, currently trading at $60 per share. She receives a notice that ACME has declared a 20% stock dividend. What does this mean to Dawn? A Dawn's stock will increase in value by 20% per share B Dawn will receive 20 additional shares of stock C Dawn will receive $20 in cash from ACME Corporation D Dawn's stock will decrease in value by 20% per share
The best answer is B. A stock dividend means that the company will issue additional shares to current shareholders instead of paying a cash dividend. Companies often "pay" stock dividends, as opposed to cash dividends, when they are young and growing and want to conserve cash to fund their growth. The percentage indicates how many additional shares each stockholder receives. In this case, 20% of 100 shares = 20 additional shares to be issued. Assume that each share was worth $60 before the 20% stock dividend was declared. The aggregate holding was worth $60 x 100 = $6,000. After the stock dividend is paid, Dawn will own 100 + 20 = 120 shares (same as 100 x 1.2). However, each share will now be worth $60/1.2 = $50. The aggregate holding is worth $50 x 120 shares = $6,000. The stock declines in value from $60 to $50, which is a $10 decrease from the original $60 value, for a $10/$60 = 16.66% decline in price
During periods of stable interest rates, which type of preferred stock will have the greatest price volatility? A Cumulative B Participating C Callable D Adjustable Rate
The best answer is B. Participating preferred gives the preferred shareholder the right to participate with common in any "extra" dividends declared by the Board of Directors. If these extra dividend payments are made, this can cause the preferred stock price to rise even though interest rates have not fallen. Virtually all preferred stock is cumulative - if the company misses preferred dividend payments, then before it can pay a common dividend, it must make up all unpaid preferred dividend payments. Callable preferred gives the issuer the right to call in the preferred at a pre-established price, which the issuer would do if market interest rates fell. This would tend to suppress the upward movement of the stock price to no more than the call price as market interest rates fell. In a period of stable interest rates, the issuer has no reason to call the preferred stock. Adjustable rate preferred adjusts the dividend rate, tied to the movements of a market interest rate index, so as market rates move up, the dividend rate moves up and vice versa. Therefore, in a period of stable interest rates, the dividend rate will not change, nor will the price (unless the credit quality of the issuer deteriorates).
During a period of stable interest rates, which type of preferred stock would show the greatest price volatility? A Cumulative B Adjustable rate C Participating D Callable
The best answer is C. Preferred stock is interest rate sensitive, since it is a fixed income security. As market interest rates rise, preferred stock prices fall. As market interest rates fall, preferred stock prices rise. If market interest rates are stable, preferred stock prices should be stable as well. However, participating preferred stock gives the preferred participation in any "extra" dividends declared by the company to its common shareholders. Thus, the declaration of such an extra dividend would make the preferred stock more valuable and its price would go up in the market - and this did not happen because market interest rates fell. Almost all preferred stock is cumulative - any unpaid dividends accumulate and must be paid before a common dividend can be paid. A call provision can suppress the price of preferred from rising as market interest rates drop, since it is likely that the issuer will call in the preferred and issue new stock at lower current rates. However, during a period of stable interest rates, the call provision has no impact of the preferred stock's price. Adjustable rate preferred moves the dividend rate up or down as market interest rates move up or down. With any variable rate security, the dividend or interest rate moves and the price stays right at par. Furthermore, when interest rates are stable, the dividend rate will not adjust and the price will be stable as well
ABC Company has outstanding 6% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 4% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive: A 0% B 2% C 6% D 8%
The best answer is D. On cumulative preferred stock, all back unpaid dividends PLUS this year's preferred dividend must be paid before a common dividend is paid. Thus, 2 years ago the full 6% preferred dividend was paid, so there is no arrearage; last year only 4% was paid, so 2% was missed. Before a common dividend can be paid this year, the missing 2% plus this year's 6% preferred dividend, or a total of 8% must be paid.
Which statement is TRUE regarding ADRs? A Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in U.S. dollars B Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in the foreign currency C Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in the foreign currency D Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in U.S. dollars
The best answer is D. The foreign corporation whose shares are "packaged" into an ADR declares any dividend in its home currency. The bank that assembled the ADR converts the dividend to U.S. dollars and remits it to the ADR holders
Dividends on preferred stock may be paid in: A Cash B Common shares of the same issuer C Common shares of another issuer D Preferred stock of the same issuer
The best answer is A. Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company
Common dividends are usually paid: A monthly B quarterly C semi-annually D annually
The best answer is B. Common dividends are usually declared and paid quarterly
Which terms describe common stock? A Negotiable and callable B Negotiable and non-callable C Non-negotiable and callable D Non-negotiable and non-callable
The best answer is B. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.
Which of the following pay quarterly dividends? A ADRs B Bonds C Preferred stock D Rights
The best answer is A. American Depositary Receipt holders receive quarterly dividends, just like common stockholders. Preferred holders are typically paid semi-annually. Holders of warrants and rights do not receive dividends on these instruments. Only if these are exercised, resulting in the purchase of the common shares, would dividends be received. Bondholders receive interest - a legal obligation to pay on the part if the issuer. They do not received dividends, which are paid to stockholders only if the Board of Directors declares the dividend.
All of the following statements are true regarding warrants EXCEPT: A warrants allow the holder to buy the stock of that issuer at a fixed price B warrants give the holder a long term option to buy the stock C warrants are attractive to speculators because of the leverage that they offer D warrant holders have pre-emptive rights
The best answer is D. Warrants are an equity-related security that give the holder the right to buy the stock of that issuer at a fixed price, typically with a 5-year life from issuance. Warrant holders do not receive dividends, nor do they have other shareholder rights such as the right to vote or the pre-emptive right. Warrants are much cheaper than the actual stock, because they only have value if the underlying stock rises. Thus, they give the holder greater leverage if the common stock does appreciate in value.
PDQ Company $1 par common stock currently trading at $34. PDQ is currently paying a quarterly common dividend of $.75 per share. The current yield of PDQ stock is: A 2.2% B 4.4% C 8.0% D 8.8%
The best answer is D. Yields are based on annual return. The formula for current yield is: $3$34 = 8.8%
Securities that are the means by which foreign issues are traded in the United States are termed: A Rights B Options C Warrants D ADRs
The best answer is D. ADRs (American Depositary Receipts) are the means by which foreign securities are traded in the United States.
