Series 6 Progress Exam 2A and B

A customer is considering the purchase of a bond fund in hopes of profiting from appreciation in the bond market. The customer is LEAST likely to receive a capital gain distribution if: I. The bonds in the portfolio have short maturities II. The bonds in the portfolio have long maturities III. Interest rates are rising IV. Interest rates are falling a. I and III only b. I and IV only c. II and III only d. II and IV only

A A bond fund investor is MOST likely to receive a capital gain distribution when bonds are appreciating substantially in value. This would occur if interest rates were falling. When rates fall, long-term bonds appreciate more than short-term bonds. Therefore, the investor is LEAST likely to receive a capital gain distribution if rates are rising and the portfolio contains short-term bonds.

All of the following securities may be found in the portfolio of a money-market mutual fund, EXCEPT: a. ADRs b. BAs c. T-bills d. Commercial paper

A American Depositary Receipts (ADRs) are a convenient method for investing in the common stock of foreign companies. Since they are an equity investment, they would not be held in the portfolio of a money-market mutual fund.

As a customer's tax bracket increases, an RR is more likely to recommend increased investment in: a. Tax-exempt funds b. Bond funds c. Stock funds d. International funds

A An investment that produces a taxable return will be taxed at the same rate as the investor's ordinary income. However, since the question is focused on an investor whose tax burden is increasing, dividend income from a tax-exempt fund will not incur this burden. (Note: capital gains that are distributed by tax-exempt funds are taxable.)

Which of the following statements is TRUE regarding the characteristics of options and warrants? a. Warrants are created by the corporation whose stock underlies the instrument; options are created by contract between an option buyer and an option writer. b. Options, but not warrants, can expire worthless if they are not exercised. c. If options are exercised, a set price must be paid for the underlying security; if warrants are exercised, the securities are received at no additional cost. d. Only options, not warrants, can be bought and sold in the secondary market.

A Both options and warrants have a strike price—if exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or preferred stock that investors can convert the security into the underlying stock with no additional payment of money. Warrants can expire worthless, if they are not exercised by the expiration date. Warrants as well as options are traded in the secondary market. Choice (a) is the only true statement.

Which TWO of the following are considered bullish? I. A call buyer II. A call seller III. A put seller IV. A put buyer a. I and III b. II and III c. I and IV d. II and IV

A Buying calls and selling puts are considered bullish strategies. Buying calls allows you to take advantage in the appreciation of the underlying security. Buying puts allows you to take advantage of the depreciation of the underlying security. If you sell options your strategy would be reversed. If you sell a call and the underlying security falls, the call will not be exercised and you will keep the premium received from the sale of the call option. If you sell a put and the underlying security rises, the put will not be exercised and you will keep the premium received from the sale of the put option.

Which of the following investors are considered creditors of a company? a. Convertible bondholders b. Preferred stockholders c. Call option holders d. All of the above

A Common and preferred stockholders are both considered owners of the company. Options, rights, and other derivative holders are potential owners but are not considered such until they exercise their contracts and actually purchase the stock. Anyone who has purchased a bond is considered to be a creditor of a company.

Corporations with highly leveraged capitalizations have raised most of their money by: a. Incurring debt in the form of long-term bank loans and long-term bonds b. Issuing equity securities in the form of common stock c. Issuing convertible preferred stock d. Doing any or all of the above

A Corporations with highly leveraged capitalizations have raised most of their money by incurring debt in the form of long-term bank loans and long-term bonds.

A portfolio manager owns a collection of blue-chip equity securities and would like to increase her overall rate of return through the use of options. She would most likely engage in which of the following strategies? a. Covered call writing b. Naked call writing c. CPI indexing d. Selling puts

A Covered call writing is a means of generating income by selling call options on stock held in the portfolio. It is considered a conservative option strategy. Naked or uncovered call writing is considered one of the most risky positions. Selling puts could result in an obligation to purchase worthless stock. CPI indexing would involve trying to match the return released by changes in the Consumer Price Index.

A company in which your client owns stock is about to make a rights offering. The client informs you that he does not plan on subscribing to the offer. You would tell the client that his proportionate ownership interest in the company would: a. Decrease b. Increase c. Remain unchanged d. Depend on the market value of the stock

A If an individual does not subscribe to additional stock in a rights offering, his proportionate ownership interest in the company will decrease.

A bond's nominal yield: I. Does not change II. Indicates the amount per thousand that bondholders will receive as income III. Needs to be approved by the board of directors IV. Will go up if interest rates go down a. I and II only b. I and III only c. II and III only d. III and IV only

A The nominal yield is set at the time of issuance and does not change. It indicates the dollar amount of income the bondholder will earn on each $1,000 of principal invested. For example, a 6% nominal yield indicates a return of $60 per year. Prices of bonds go up if interest rates go down. However, the nominal yield will remain the same.

XYZ Corporation has just announced that its quarterly earnings will be above market expectations. Which of the following securities issued by XYZ will be most affected by this news? I. Common stock II. Preferred stock III. Convertible debentures IV. Commercial paper a. I and III only b. I and IV only c. I, III, and IV only d. I, II, III, and IV

A The value of a company's common stock is generally most affected by news connected to the performance of the company's business. Any type of convertible security would also be affected, as convertibles will trade in line with stock prices.

Preemptive rights give a stockholder the right to: a. Maintain his or her proportionate interest in the corporation b. Purchase warrants c. Serve as a director d. All of the above

A A stockholder's preemptive rights gives the stockholder the right to maintain his or her proportionate interest in the corporation. For example, if a shareholder owns 1% of the corporation's common stock, and the corporation intends to issue additional shares, preemptive rights would give that shareholder the option of purchasing 1% of the new shares.

An issuer's capitalization refers to the amount of: a. Stocks and bonds it has sold b. Stocks and bonds it owns c. Long-term (capital) profits it generated in a given year d. Gross revenue it generated in a given year

A Capitalization refers to how a given company has raised money to start or expand its business. This is generally accomplished through the sale of stocks and/or bonds. Capitalization has nothing to do with stocks or bonds the company owns. These holdings are referred to as the company's portfolio holdings.

The stock price of XYZ Corporation has remained stable despite the fact that the company has increased the amount of its dividend. Under these conditions, what would happen to the stock's current yield? a. It would increase b. It would decrease c. It would remain the same d. The effect on current yield cannot be determined without knowing the investor's tax bracket

A The current yield of a stock is found by dividing the stock's annual dividend by its market price. If the dividend increases while the market price remains the same, the stock's current yield will increase.

When an investor is examining the bid and ask quotations of two over-the-counter stocks that he follows, he notices that the spreads between their bid and ask prices are dramatically different. From this, he could probably assume that: a. The stock with the narrower spread is more actively traded than the stock with the wider spread b. The stock with the wider spread is more actively traded than the stock with the narrower spread c. The stock with the wider spread will always be less expensive in the long run d. No conclusion is able to be drawn from this information

A Typically, the more active the trading is in a particular stock, the more narrow the spread between its bid and ask prices.

XYZ Corporation has 2,000,000 shares of common stock authorized. The company has issued 1,000,000 common shares of which 200,000 shares are treasury stock. The company has earnings of $2.00 per share. The XYZ Corporation has repurchased: a. 200,000 shares b. 500,000 shares c, 800,000 shares d. 1,000,000 shares

A XYZ corporation has repurchased 200,000 shares. This is known as treasury stock. Treasury stock is previously outstanding stock that has been repurchased by a corporation.

An individual who owns preferred stock receives a larger dividend than stated on its face. The preferred stock could be: I. Cumulative preferred II. Participating preferred III. Preemptive preferred IV. Collateralized preferred a. III only b. I and II only c. I, II, and III only d. I, II, III, and IV

B An owner of cumulative preferred stock must receive all omitted past dividends before common stockholders can receive any dividends. A participating preferred stockholder has the right to participate in any extra dividends paid to the common stockholders. Therefore, owners of either of these types of preferred stock might receive more money on a given dividend payment than the amount stated on its face.

All of the following are TRUE of a bond selling above par, EXCEPT: a. The current yield is lower than the nominal yield b. The nominal yield is less than the current yield c. The yield to maturity is lower than the nominal yield d. The nominal yield always remains fixed

B Bond prices and yields have an inverse (opposite) relationship; as a bond's price increases, its yield decreases. Conversely, as prices decrease, yields increase. When a bond is selling above its par value, both the current yield and yield to maturity are below the nominal yield. The nominal yield is printed on the face of the bond and always remains fixed.

An individual would purchase a put option for which of the following reasons? a. To take advantage of an increase in the value of the underlying security b. To protect the investment if the security should fall in value c. To generate income d. To purchase the underlying security at a set price in the future

B By purchasing a put an investor can lock in the price at which the security can be sold, protecting the investment if it should fall in value. Choice (a) and choice (d) describe the benefits of purchasing call options. Only the sale of options would generate income.

Cash dividends declared by a corporation: a. Must be approved for payment by the shareholders b. Must be approved for payment by the board of directors c. Are taxed as capital gains d. Are not taxed

B Cash dividends declared by a corporation must be approved by the corporation's board of directors. Shareholder approval is not needed to declare a cash dividend, although a company must obtain shareholder approval for a stock split. Any cash dividends paid to shareholders are taxed as ordinary income in the year received, not capital gains.

During a deflationary period when interest rates are falling, the market value of existing bonds would: a. Remain stable b. Increase c. Decrease d. Fluctuate

B Interest rates and bond prices have an inverse (opposite) relationship. As interest rates rise, bond prices decrease. Therefore, when interest rates are falling, the market value of existing bonds will increase.

A client in the 28% tax bracket wishes to buy a corporate bond yielding 7%. What must a municipal bond yield to be equivalent to the corporate bond on an after-tax basis? a. 1.96% b. 5.04% c. 7.00% d. 72.00%

B Municipal bonds pay interest that is exempt from federal income taxes. Interest on corporate bonds is subject to all taxes. The investor in this question would have to pay a 28% tax on the 7% yield received on the bond. This would reduce the yield by 1.96% (7% x 28%) making the after-tax yield 5.04% (7% - 1.96%). If the investor bought a municipal bond yielding 5.04% tax-free, this would be the same as buying a 7% fully taxable corporate bond.

Which of the following statements is TRUE when comparing rights and warrants for XYZ Corporation common stock? a. If they were issued at about the same time, the warrants will expire before the rights. b. XYZ issued the rights to enable stockholders to maintain their proportionate interest in the company, while the warrants were probably issued with another security to make that security more attractive to investors. c. When they were issued, the exercise price on both the rights and the warrants was probably above the market value of XYZ stock. d. Warrants may be traded in the secondary market, while rights are nonnegotiable

B Only choice (b) is true. Choice (a) is false because rights are short-term (usually less than 90 days), while warrants often last several years before expiring. Choice (c) is false because the exercise price on rights is usually less than the current market value of the stock at the time the rights are issued. Choice (d) is false because both rights and warrants can be traded in the secondary market.

Which TWO of the following securities would be subject to credit risk? 1 Mortgage bonds 2 Preferred stock 3 Debentures 4 Warrants a. I and II b. I and III c. II and III d. III and IV

B Only debt securities are subject to credit risk. Different types of bonds may be exposed to greater or lesser amounts of credit risk. Preferred stock is an equity security and a warrant is a derivative security whose price is linked to common shares.

In evaluating common stock, which of the following is the MOST important? a. Par value b. Market value c. Stated value d. Discounted value

B Par value is an accounting term and bears no relation to the market value of a company. For traders and investors, the market value is the current price as determined by the forces of supply and demand.

Two similar companies issue bonds at the same time. One company issues convertible bonds and the other issues nonconvertible bonds. Which of the following statements is TRUE? a. The convertible bonds will probably offer a higher coupon rate b. The nonconvertible bonds will probably offer a higher coupon rate c. The convertible bonds will probably have a higher current yield d. The nonconvertible bonds will probably have a lower yield to maturity

B Convertible bonds normally have a lower coupon rate than nonconvertible securities. The convertible bonds pay less interest and offer lower yields because the convertible feature gives individuals the ability to become stockholders at their discretion. Since the issuer is giving bondholders this advantage, it can offer a lower coupon rate.

A client in the 36% tax bracket wishes to buy a corporate bond yielding 8%. What must a municipal bond yield to be equivalent to the corporate bond on an after-tax basis? a. 2.88% b. 5.12% c. 8.00% d. 4.40%

B Municipal bonds pay interest that is exempt from federal income taxes. Interest on corporate bonds is subject to all taxes. The investor in this question would have to pay a 36% tax on the 8% yield received on the bond. This would reduce the yield by 2.88% (8% x 36%) making the after-tax yield 5.12% (8% - 2.88%). If the investor bought a municipal bond yielding 5.12% tax-free, this would be the same as buying an 8% fully taxable corporate bond.

When comparing municipal bonds to Treasury bonds, the municipals generally have: I. Lower coupons II. Higher coupons III. Lower risk IV. Higher risk a. I and III only b. I and IV only c. II and III only d. II and IV only

B While municipal bonds are considered more risky than Treasury bonds they provide tax-free income and as a result have lower yields.

An open-end investment company has a practice of buying bonds and holding them until maturity. At that time, the fund uses the proceeds from the matured bonds and purchases new bonds. If this process occurs during a period of declining interest rates, the income being generated from the fund's interest will: a. Increase b. Decrease c. Remain the same d. Be tax-deferred

B Within a bond fund, if the proceeds of matured bonds are reinvested into new bonds during a period of declining interest rates, the income generated by the fund will most likely decrease. Since interest rates declined, the new bonds will pay a lower rate of interest than that which was received from the old bonds. Ultimately, this will reduce the income that is generated by the fund.

An investor who wants a tax-free return but does not want a high risk of principal should invest in which TWO of the following? 1. Treasury bills 2. A tax-exempt money-market mutual fund 3. Short-term revenue anticipation notes 4. Long-term revenue bonds with a high rating a. I and II b. I and IV c. II and III d. II and IV

C A tax-exempt money-market mutual fund would invest in short-term tax-exempt obligations such as tax anticipation notes and revenue anticipation notes. There is an expectation of stable principal as these notes have short-term maturities (less than one year). A long-term revenue bond is federally tax-free but subject to market risk, interest-rate risk, and some credit risk.

Which of the following are examples of municipal bonds? 1 GOs 2. CMOs 3. IDRs 4. REITs a. I only b. I and II only c. I and III only d. I, II, III, and IV

C GOs are general obligation bonds and IDRs are industrial development revenue bonds, both types of municipal securities. CMOs are collateralized mortgage bonds which generally offer returns based on a pool of government agency bonds. REITs are real estate investment trusts, a type of security providing returns based on real estate properties or mortgages.

An equity security was trading at $100 per share and subsequently fell by 7%. The annual dividend, formerly $4 per share, is decreased to $3.80. The yield on the stock is: a. 3.8% b. 3.9% c. 4.1% d. 7%

C The current yield on a stock is found by dividing the annual dividend by the current market price. In this example, the annual dividend is $3.80. This must be divided by the current market price. The question states that the price of $100 fell 7% or $7, making the current market price $93. The current yield for this stock is therefore 4.1% ($3.80 divided by $93). Before the price fell and the dividend was reduced, the current yield was 4% ($4 divided by $100).

The Taurus High-Yield Fund has an NAV of $12.34 and an annualized yield of 7.88%. If interest rates rise, which TWO of the following would occur? I. The NAV would rise II. The NAV would fall III. The yield would increase IV. The yield would decrease a. I and III b. I and IV c. II and III d. III and IV

C The inverse relationship between interest rates and bond prices would cause the NAV to fall, enabling any new investor to purchase the fund at a higher yield. This, of course, assumes that the dividend remains the same. As new bonds with higher coupons are purchased, all holders will derive a higher yield.

A municipal bond backed by the full faith and credit of a state or city is called a(n): a. Debenture bond b. Revenue bond c. General obligation bond d. Income bond

C A general obligation bond is a municipal bond backed by the full faith and credit of a state or city. This means the municipality has promised to use its taxing power to raise revenue to pay principal and interest on the bonds.

If a bond is currently selling for less than par value, then: a. The current yield is lower than the nominal yield b. The current yield is equal to the nominal yield c. The current yield is higher than the nominal yield d. Interest rates are currently lower than when the bond was originally issued

C Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $850. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 9.41% ($80 / $850 = 9.41%).

An investor has purchased a Bristol County Public Power System revenue bond. Which of the following statements is TRUE concerning this investment? a. Earnings from the bond are exempt from federal, state, and local taxes b. Payment of principal and interest is ultimately the responsibility of Bristol County c. If the power system declares bankruptcy, the bonds will go into default d. The assets of the power system secure the bond

C Interest from a revenue bond (a type of municipal bond) is exempt from federal income tax. However, it is generally exempt from state and local taxes only if purchased by a resident of the state of issuance. In addition, a revenue bond is backed by a stream of income from a specific project or facility. Unlike a general obligation bond, it is notbacked by a general promise by the issuer to repay the debt. In this example, only the revenue (not the assets) of the power system back the bonds. If the power system cannot produce enough revenue to pay the bond's interest and/or principal, there will be a default. Bristol County is not obligated to use any other funds to make payments on the bonds.

An investor is considering whether to buy the common or preferred stock of XYZ Corporation. When comparing these two types of securities, which of the following statements are TRUE? 1, Preferred stock is more likely to receive a dividend than common stock 2. Common stock has more potential for capital appreciation than preferred stock 3. Preferred stockholders have greater control over the corporation compared to common stockholders 4. Common stock is generally more liquid than preferred stock a. I and II only b.I, II, and III only c. I, II, and IV only d. I, II, III, and IV

C Preferred stock, unlike common stock, generally does NOT have voting rights. Common stockholders, therefore, control the corporation through the board of directors. Common stock generally provides an opportunity for an investment to appreciate, whereas preferred shares are more likely to receive income in the form of a dividend.

An individual purchasing a U.S. Treasury bond would be most concerned with which TWO of the following risks? I. Liquidity risk II. Interest-rate risk III. Timing risk IV. Credit risk a. I and II b. I and III c. II and III d. II and IV

C Treasury bonds are back by the U.S. government and as such essentially lack credit risk, providing a risk-free rate of return. Treasury bonds are also very liquid, since the market for them is very large and active. Bonds are subject to interest-rate risk since they are long-term. All securities, including bonds are subject to timing risk since you may be forced to sell at an inappropriate period of time.

Which of the following statements is TRUE for a bond trading at par? a. The bond will trade at a yield basis equal to the prevailing prime funds rate b. Due to the effect of compounding, the bond will trade at a basis above its coupon rate c. Due to the time value effect of discounting, the bond will trade at a basis less than its coupon rate d. The basis and coupon will be identical

D Basis is a different method of saying yield to maturity. In the case of a bond trading at par, all three yields (nominal, current, and YTM) will be equal to the coupon rate.

Interest on U.S. government bonds is: a. Subject to federal and state income tax b. Exempt from federal and state income tax c. Subject to state income tax but exempt from federal income tax d. Subject to federal income tax but exempt from state income tax

D Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds, where the interest is exempt from federal tax but subject to state tax. This is due to the doctrine of the separation of powers between the federal government and state governments. Each government can tax the interest on its own obligations, but cannot tax the other's. In addition, states usually do not tax the interest received from their obligations owned by residents of that particular state and, in effect, interest is completely tax-free.

The major risk of investing in long-term, high-grade bonds is: a. Not being able to pay interest when due b. Not being able to pay principal upon maturity c. Limited marketability d. Purchasing-power risk

D Long-term, high-grade bonds are relatively safe investments since interest payments and repayment of principal are relatively secure. However, long-term bonds, even T-bonds, have a significant amount of purchasing-power risk. This is because the amount of interest is fixed. The purchasing-power of the interest income may decline over the long term because of inflation, which would reduce the amount that could be purchased with the fixed amount of dollars.

The investment adviser of ABC fund usually invests a high percentage of the fund's assets in growth stocks. The adviser now expects growth stocks to perform poorly in the market because of a recession. Which TWO of the following strategies could the manager employ to react to this situation? I. Sell growth stocks short II. Buy more growth stocks on margin III. Buy defensive stocks IV. Sell some growth stocks and invest in money-market instruments a. I and IV b. II and III c. II and IV d. III and IV

D Mutual funds are not generally permitted to sell short or buy on margin. If the fund manager bought more equities, the manager would probably select stocks in the defensive category such as tobacco, beverage, candy, and supermarket issues. Some proceeds could also be placed in money-market instruments until a buying opportunity arose in growth stocks.

A corporation may choose to pay its shareholders with cash dividends or stock dividends. Which of the following statements concerning the tax status of these events is the most accurate? a. The cash and stock dividends are taxable in the year received b. The cash dividends are taxable in the year received and the stock dividends are tax free c. The cash and stock dividends are received tax free d. The cash dividends are taxable in the year received and the stock dividends are subject to taxation when the stock is sold

D Only cash dividends are taxable at the time of distribution. The payment of a stock dividend simply increases the number of shares held by each shareholder. Shareholders must, however, adjust their cost basis. For example, if a client owned 100 shares that she bought at $80 ($8,000 total) and the issuer pays a 10% stock dividend, she now owns 110 shares with a cost basis of $72.73 per share. Her $8,000 investment has now been spread over her 110 shares. (110 x $72.73 = $8,000.) The sale of the stock becomes a taxable event.

Which of the following is NOT a characteristic of preferred stock? a. It has a fixed dividend b. The board of directors must declare the dividends c. It has a dividend that is not guaranteed d. It carries voting rights

D The board of directors must declare dividends for both common and preferred stock. Neither common nor preferred stockholders are guaranteed a dividend. Preferred stock normally has a fixed dividend. Preferred stock does not have voting rights, only common shares may vote.

A bond's yield to maturity: 1 Does not change 2 Represents the investor's total overall yield 3 Needs to be approved by the board of directors 4 Will go down if interest rates go down a. I and II only b. I and III only c. II and III only d. II and IV only

D The yield to maturity or basis, represents everything an investor receives from the bond from the time they purchase it until the bond matures. The bond's basis will change in the same direction as market interest rates. Prices of bonds go up if interest rates go down; however, the basis will go down.

A mutual fund portfolio consists of bonds with maturities of between 20 and 30 years. If interest rates decline, the fund's: a. Frequency of redemptions will increase b. Dividend distributions will increase c. Current yield will increase d. NAV will increase

D When interest rates decline, the value of existing bonds will rise. This will increase the value of the fund's portfolio and, therefore, its NAV. Choice (b) is not correct since the coupon payments received from the portfolio will not be affected by a change in interest rates. In addition, if the fund is collecting the same amount of interest from the bonds and distributing the same dividend, an increase in NAV will cause a decline in the fund's current yield (dividend/NAV). Regarding choice (a), it is difficult to predict just how an interest rate increase will affect the number of redemptions by fund shareholders.

A certificate giving someone other than the stockholder the right to vote is called a(n): a. Endorsement b. Stock power c. Warrant d. Proxy

D A certificate giving someone other than the stockholder the right to vote is called a proxy. While stockholders have the right to attend shareholder meetings in person, most do not. Instead, they sign a proxy directing a designated person on how to vote their shares.

A French company would like to have its stock traded in the U.S. securities markets. This would most likely be accomplished through the issuance of: a. Euro call options b. Global Depository Receipts c. Eurodollar bonds d. American Depositary Receipts

D American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. The foreign securities are deposited in a branch of a U.S. bank located in that country. A receipt for those securities is then issued and traded in the U.S. as if it were the foreign security itself. A Global Depository Receipt (GDR) is incorrect because it trades in foreign markets, not in the U.S.

An investor who believes that overseas stock markets will appreciate more rapidly than U.S. markets over the next several years might choose to invest in all of the following, EXCEPT: a. Stocks traded on foreign exchanges b. ADRs c. International mutual funds registered in the U.S. d. BAs

D Bankers' acceptances (BAs), are money-market instruments that facilitate foreign trade. The return on a BA is determined by current short-term interest rates, not appreciation in foreign stock markets. American Depositary Receipts (ADRs) represent investments in foreign equities. ADRs would appreciate if foreign stock markets rose.

The method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is: a. Statutory voting b. Cumulative voting c. Voting by proxy d. Special majority voting

b The method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is referred to as statutory voting. With statutory voting, each stockholder receives one vote, per share, per voting issue. For example, if a corporation is electing three directors (i.e., three voting issues) and a shareholder owns 100 shares, that shareholder is able to cast a maximum of 100 votes for each director. Cumulative voting provides shareholders with the ability to concentrate their votes for one favored candidate. For example, if a corporation is electing three directors and a shareholder owns 100 shares, that shareholder is able to cast 300 votes for one director. This method potentially gives a shareholder larger influence in getting one director elected.