QBANK QUIZ - 08.11.2016 - A - EQUITY SECURITIES

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A) Dilution of shareholders' equity. B) Reduction of the number of shares outstanding. C) Reduction of the debt securities' interest rate. D) Increase in earnings per share.

C) Reduction of the debt securities' interest rate. Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest. Reference: 1.7.2 in the License Exam Manual

In general, a corporation assumes the least risk when it obtains funds from: A) a commercial bank. B) sale of debentures. C) sale of preferred stock. D) sale of income bonds

C) sale of preferred stock. Unlike the other choices, the sale of preferred stock does not entail the assumption of debt and is therefore the least risky. It is always riskier to borrow than it is to raise equity because equity does not have to be paid back. Reference: 1.3.1.4 in the License Exam Manual

All of the following statements describe stock rights EXCEPT: A) they are issued by a corporation. B) they are traded in the secondary market. C) they are most commonly offered with debentures to make the offering more attractive. D) they are short-term instruments that become worthless after the expiration date.

C) they are most commonly offered with debentures to make the offering more attractive. A corporation issues rights to existing shareholders to allow them to purchase enough stock, within a short period and at less than current market price, to maintain their proportionate interest in the company. Rights need not be exercised but may be traded in the secondary market. Warrants, not rights, are often issued with debentures to sweeten the offering. Reference: 1.7.1 in the License Exam Manual

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend? A) Wednesday, May 16. B) Tuesday, May 15. C) Thursday, May 17. D) Monday, May 14.

D) Monday, May 14. In order to receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 3 business days, the customer must purchase the stock no later than Monday, May 14. Reference: 1.6.1.5 in the License Exam Manual

The regular way ex-dividend date for cash dividends is the: A) 2nd business day preceding the record date. B) 3rd business day preceding the record date. C) 2nd business day following the record date. D) 2nd business day preceding the settlement date .

A) 2nd business day preceding the record date. The regular way ex-dividend date is 2 business days before the record date. Reference: 1.6.3.2.2 in the License Exam Manual

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Callable. B) Straight. C) Convertible. D) Cumulative.

A) Callable. When the stock is called, dividend payments are no longer made. With callable preferred stock, to compensate for that possibility, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight. Reference: 1.3.2.5 in the License Exam Manual

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Convertible. B) Callable. C) Noncumulative. D) Cumulative.

A) Convertible. Fixed dollar investments such as bonds and preferred stock are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk. Reference: 1.3.2.3 in the License Exam Manual

Investors should always be aware of taxes applicable to investments they own. Which of the following taxes might be associated with income derived from ADRs but not income from other investments? A) Foreign income tax. B) State income tax. C) Excise tax. D) Federal income tax.

A) Foreign income tax. In most countries, a withholding tax on dividends is taken at the source. To the holder of an ADR, this would be a foreign income tax. The foreign income tax paid may be taken as a credit against U.S. income taxes owed. Reference: 1.8.1.2 in the License Exam Manual

Which of the following statements regarding ADRs are TRUE? 1. Dividends are payable in the underlying foreign currency. 2. Dividends are payable in U.S. dollars. 3. Holders have voting rights. 4. Holders do not have voting rights. A) II and IV. B) I and IV. C) I and III. D) II and III.

A) II and IV. The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well. Reference: 1.8.1 in the License Exam Manual

After a company splits its stock 2 for 1, an investor who owns 100 shares receives: A) another certificate for 100 shares. B) another certificate for 200 shares. C) notice that the investor's 100-share certificate now represents 200 shares. D) notice to send in the current certificate to be replaced by a new certificate for 200 shares.

A) another certificate for 100 shares After a 2 for 1 split, the transfer agent will send the investor another certificate for 100 shares. The investor is not required to return the existing stock certificate. Reference: 1.2.4.1 in the License Exam Manual

All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT: A) currency risk is virtually eliminated. B) transactions are done in U.S. currency. C) ADRs fall under the oversight of the SEC. D) dividends are received in U.S. currency.

A) currency risk is virtually eliminated. ADRs carry currency risk because distributions on ADRs must be converted from foreign currency to U.S. dollars on the date of distribution. In addition, the trading price of the ADR is affected by foreign currency fluctuation. Reference: 1.8.1.3 in the License Exam Manual

When compared to statutory voting, cumulative voting gives an advantage to: A) minority stockholders. B) majority stockholders. C) participating preferred stockholders. D) management rather than the board of directors.

A) minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board. Reference: 1.2.3.1.1 in the License Exam Manual

The ex-date for NYSE-listed issues is set by: A) the NYSE. B) the SEC. C) the issuer. D) FINRA.

A) the NYSE. The ex-date is set by the market where the security principally trades. Reference: 1.6.3.2.2 in the License Exam Manual

All of the following are true of REITs EXCEPT: A) they must pass along losses to shareholders. B) they must to qualify under Subchapter M, distribute at least 90% of their net investment income. C) shares are publicly traded. D) they must invest at least 75% of their assets in real estate-related activities.

A) they must pass along losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs. Reference: 1.9 in the License Exam Manual

If a common stock is currently selling for $75 per share with a quarterly dividend of $.75, the current yield for the stock is: A) 1%. B) 4%. C) 10%. D) 3%.

B) 4%. The current yield formula is annual dividend divided by current price. In this case, $3 ($.75 × 4) / $75 = 4%. Reference: 1.4.1.3 in the License Exam Manual

A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 15%. B) 5%. C) 10%. D) 1%

B) 5%. The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield). Reference: 1.4.1.3 in the License Exam Manual

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of: A) 150. B) 600. C) 60. D) 15.

B) 600. The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600. Reference: 1.6.1.5 in the License Exam Manual

A change in earnings would affect the price of which of the following securities the most? A) Treasury stock. B) Common stock. C) 6% preferred stock. D) 10% debentures maturing in 10 years.

B) Common stock. Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm. Reference: 1.2.3 in the License Exam Manual

Which of the following taxes does NOT impact the holder of an ADR? A) State income tax. B) Excise tax. C) Federal income tax. D) Foreign income tax.

B) Excise tax. Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return. Reference: 1.8 in the License Exam Manual

The ex-dividend date is the: 1. date on and after which the buyer is entitled to the dividend. 2. date on and after which the seller is entitled to the dividend. 3. second business day before the record date. 4. second business day after the record date. A) I and IV. B) II and III. C) II and IV. D) I and II.

B) II and III. Stock sold on the ex-dividend date entitles the seller to the dividend; ex-date is two business days before the record date. Reference: 1.6.1.5 in the License Exam Manual

Which of the following activities are NOT a registrar's function(s)? 1. Audit the transfer agent. 2. Accounting for the number of shares outstanding. 3. Canceling old shares. 4. Transferring shares into the new owners' names. A) I and II. B) III and IV. C) II and III. D) I and IV.

B) III and IV. The registrar accounts for the number of shares and audits the transfer agent. Reference: 1.5.2.2 in the License Exam Manual

ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split? A) The market price of the stock would double. B) The par value would decrease to $5 per share. C) The number of shares outstanding would decrease by 50%. D) The retained earnings would be decreased by $10 million.

B) The par value would decrease to $5 per share. A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split. Reference: 1.2.4.1 in the License Exam Manual

The rate on an adjustable preferred stock may be indexed to the: A) Consumer Price Index. B) Treasury bill rate. C) Producer Price Index. D) Dow Jones Industrial Average.

B) Treasury bill rate. The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark. Reference: 1.3.1.2 in the License Exam Manual

Which of the following statements regarding preferred stock is NOT true? A) Because there is no set maturity value or redemption date, the holder of preferred stock has to sell his shares in the open market to close out his position. B) Voting rights of preferred shareholders take precedence over those of common shareholders. C) The dividend is fixed except in the case of adjustable preferred. D) Unlike debt, preferred stock has no set maturity date.

B) Voting rights of preferred shareholders take precedence over those of common shareholders. Preferred shareholders do not generally have voting rights. Voting rights are characteristic of common stock, not preferred. Preferred stock is unlike debt securities in that it has no set maturity date. It is true that the dividend on a preferred stock is fixed, except in the case of an adjustable preferred where the dividend can be tied to a market interest rate and readjusted. The holder of a preferred has to sell the shares in the open market to close out his position. Reference: 1.3.1 in the License Exam Manual

The last day that stocks can be bought for cash and still receive the dividend is: A) the day after the record date. B) the record date. C) the business day prior to the regular way ex-date. D) on the ex-date.

B) the record date. A cash trade settles the same day. Stocks bought for cash on the record date will be entitled to the dividend under an exception to the 2-business day rule for regular way transactions. Reference: 1.6.1.5 in the License Exam Manual

If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to: A) 0.4. B) 0.48. C) 0.32. D) 0.3.

C) 0.32. Stock splits will change the par value of the stock. To calculate the new value multiply the original par by the inverse of the split: 4/5 × $.40 = $.32. Reference: 1.2.4.1 in the License Exam Manual

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 300 B) 400 C) 100 D) 500

C) 100 The investor will receive an additional 100 shares from a 3 for 2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares. Reference: 1.2.4.1 in the License Exam Manual

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year 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) 8. B) 16. C) 24. D) 0.

C) 24. If the company is going 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. Reference: 1.3.2.2 in the License Exam Manual

Minority stockholders are more likely to be able to elect directors through which form of voting? A) Statutory. B) Regular. C) Cumulative. D) Progressive.

C) Cumulative. Minority stockholders are more likely to be able to elect representatives to the board of directors through cumulative voting. Small stockholders may cast all of their votes on 1 position rather than spread them out and thus dilute them over 2 or 3 positions. Reference: 1.2.3.1.1 in the License Exam Manual

Which of the following represent ownership in a corporation? Debentures. Convertible bonds. Preferred stock. Common stock. A) I and II. B) II and IV. C) III and IV. D) I and III.

C) III and IV. Common and preferred stocks represent ownership in a company. Convertible debentures may be converted to equity securities, but until they are, they are considered debt. Reference: 1.2 in the License Exam Manual

A tombstone for a new bond issue announces that 5-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer? A) To increase the dilution of the current shareholders. B) To decrease the dilution of the current shareholders. C) To improve the marketability of the bond issue. D) To make the bonds convertible into the issuer's common stock.

C) To improve the marketability of the bond issue. Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock. Reference: 1.7.2.1 in the License Exam Manual

Which of the following securities is subject to the greatest risk? A) Series EE bond. B) A-rated municipal bond. C) XYZ Inc., common stock. D) BAA-rated ABC convertible bond.

C) XYZ Inc., common stock. Common stock is a junior security. It is considered less safe than bonds because it has the lowest claim to assets in the event of the issuing firm's liquidation, and is paid dividends after bonds are paid interest. Reference: 1.2.3.6 in the License Exam Manual

ADR owners have all the following rights EXCEPT: A) the right to sell in the secondary market. B) the right to receive dividends in U.S. dollars. C) the right to sell the ADR in the foreign market. D) the right to receive the underlying foreign security

C) the right to sell the ADR in the foreign market. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas. Reference: 1.8.1.2 in the License Exam Manual

Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into ½ share of common. The preferred stock is selling at $17.50 and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 2 million. B) 500000. C) 3 million. D) 2.5 million.

D) 2.5 million. One million shares of preferred, each converted to ½ share of common, is 500,000 common shares. Five hundred thousand shares after conversion added to 2 million shares of common previously outstanding equals 2.5 million common shares. Reference: 1.3.2.3 in the License Exam Manual

If ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares? A) 30. B) 60. C) 100. D) 75.

D) 75. A 5-4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares × 25% = 75 shares. Reference: 1.2.4.1 in the License Exam Manual

Which of the following securities typically carries the highest dividend rate? A) Convertible preferred. B) Straight preferred. C) Participating preferred. D) Callable preferred.

D) Callable preferred. Straight preferred is the benchmark rate. As the name suggests, there are no conversion or participating features. Compared to straight preferred, both convertible and participating preferred tend to carry lower dividend rates, as the investor has been given something extra-the right to convert into common shares at a fixed price or the right to earn more than the stated rate if the issuer has a good year and the board of directors elects to make an additional dividend payment. Callable preferred allows the issuer to call the securities away from the investor. From an investor's point of view, this is not an incentive. Therefore, callable preferred tends to pay higher rates. Reference: 1.3.2.3 in the License Exam Manual

Which of the following is TRUE concerning a 5:4 stock split? A) Retained earnings will be increased. B) The par value will be unchanged. C) The net worth of the company will be reduced. D) Each shareholder's proportionate equity will be unchanged.

D) Each shareholder's proportionate equity will be unchanged. Since each shareholder will receive additional stock, the proportional equity will remain the same. Reference: 1.2.4.1 in the License Exam Manual

If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A) Privately placed investment. B) Interest in a real estate limited partnership. C) Direct investment in a shopping center renting retail space to a broad variety of stores. D) Real estate investment trust.

D) Real estate investment trust. Real estate investment trusts (REITs) are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate. Reference: 1.9 in the License Exam Manual

Which of the following terms or phrases does NOT apply to REITs? A) Dividends taxed at full ordinary income rates. B) Managed. C) Secondary market. D) Redeemable.

D) Redeemable. REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends and are, therefore, taxed as ordinary income. Reference: 1.9 in the License Exam Manual

Which of the following statements regarding the effects of a stock dividend is TRUE? A) Capital surplus is reduced. B) Net current assets are decreased. C) New capital is channeled to the company. D) The market value of the stock is decreased.

D) The market value of the stock is decreased. A stock dividend results in an increased number of outstanding shares, each with a lower value per share. The total value of stock outstanding is unchanged. There is no new capital generated from a stock dividend. Current assets are unchanged because there is no increase or decrease to the company's cash as a result of the stock dividend. Reference: 1.4.1.2 in the License Exam Manual