Special Securities
Which statement is FALSE about the time value and intrinsic value of rights and warrants when issued? A. Warrants have time value at issuance B. Warrants have intrinsic value at issuance C. Rights have virtually no time value at issuance D. Rights have intrinsic value at issuance
The best answer is B. Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value." Rights are very short term options (30-60 days) granted to existing shareholders that allow then to buy the stock at a discount to the current market price. The discount is the "intrinsic value" of the right. However, because they are so short term, they have virtually no "time value."
All of the following statements are true regarding warrants EXCEPT: A. Warrants are considered to be an equity-related security B. Warrant holders have pre-emptive rights C. Warrants allow the holder to buy the stock of that issuer at a fixed price D. Warrants are attractive to speculators because of the leverage that they offer
The best answer is B. Warrants are an equity-related security that give the holder the right to buy the stock of that issuer at a fixed price. The exercise price is much higher than the market price of the common at the time of issuance, so the stock must rise in price for the warrant to have real value. They are typically attached by issuers to debt and preferred stock offerings (securities that are "senior" to the common stock of the issuer) to make the securities more attractive to purchasers. 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 price rises. Thus, they give the holder greater leverage (gain potential as a percentage of capital contributed) if the common stock does appreciate than actually purchasing that stock.
An ADR is a: A. U.S. security held in U.S. branches of foreign banks B. foreign security held in foreign branches of U.S. banks C. negotiable certificate denominated in a foreign currency D. negotiable certificate denominated in U.S. currency
The best answer is B. 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. In this manner, the foreign corporation does not have to register its shares with the SEC in order to have trading take place in the U.S.
Which statement is TRUE regarding sponsored American Depositary Receipts? A. Sponsored ADRs trade exclusively over-the-counter B. Sponsored ADRs are created to facilitate the trading of U.S stocks overseas C. Sponsored ADRs are not required to provide quarterly reports to shareholders D. Sponsored ADRs provide annual reports to shareholders
The best answer is D. All exchange-listed ADRs are sponsored. Issuers that sponsor ADRs provide both quarterly and annual financial reports to shareholders in English. 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 over-the-counter.
American Depositary Receipts pay dividends in: A. U.S. dollars only B. Eurodollars C. European Currency Units D. Foreign Currency or U.S. dollars based on the investor's preference
The best answer is A. American Depositary Receipts pay dividends in U.S. dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend that was received in the foreign currency into U.S. Dollars and pays this to the U.S. ADR holders.
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.
Which of the following are equity security holders of a company? A. Common shareholders only B. Both Common and Preferred shareholders C. Convertible Bondholders only D. All convertible security owners
The best answer is B. "Owners" have an equity position - and the only owners of a company are shareholders - both common and preferred. Convertible bondholders are creditors of a company. Their position only becomes equity if they convert to common shares. On the other hand, convertible preferred stockholders are equity owners, and if they convert, they are still equity owners.
When the market price of ACME Common stock is at $45, which of the following actions, when completed by ACME Corporation, would raise additional capital? A. Declaration of a 2 for 1 stock split B. Announcement of a rights distribution, allowing existing shareholders to buy the stock at $35 per share C. Announcement of a call of ACME $100 par convertible preferred at par, convertible at a 2.5:1 ratio D. Announcement of a 10% stock dividend
The best answer is B. The declaration of a stock split or stock dividend will not raise additional capital. Stock splits are typically declared when a company's stock price has risen too high for investors to easily trade 100 share units. By splitting the stock, the price is halved in the marketplace, making 100 share lots more affordable. A rights distribution will raise additional capital, since the existing shareholders are asked to "subscribe" and therefore, pay, for more shares. The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock. In this case, the issuer is doing a "forced conversion," because it makes sense for the preferred stockholders to convert to stock worth $45 per share in the market, rather than to tender their preferred shares at par, receiving $100 per preferred share/2.5 common shares per preferred shares = $40 equivalent price per share. Finally, the issuance of new preferred stock would raise new capital for the issuer.
Which of the following would be considered owners of a corporation? A. Only Common Shareholders B. Both Common and Preferred Shareholders C. Right Holders D. Warrant Holders
The best answer is B. "Owners" have an equity position - and the only owners of a company are shareholders - both common and preferred. Right holders have a short term option to buy the stock; warrant holders have a long term option to buy the stock. Both rights and warrants are considered to be "equity-related" securities. They have neither an equity nor creditor stake in the corporation.
All of the following statements about ADRs are correct EXCEPT: A. ADR holders receive dividends B. ADR holders can vote for the Board of Directors C. ADR holders receive the cash value of pre-emptive rights D. Many ADRs are listed on national stock exchanges
The best answer is B. ADR holders receive dividends that are remitted by the depositary bank, which converts them from the foreign currrency into U.S. dollars. The ADR holder cannot subscribe to a rights offering since the actual underlying stock is not registered in the United States, hence the shares cannot be issued directly to U.S. holders. Instead, the depositary bank sells off any rights and remits the money to the receipt holders. ADRs trade on national stock exchanges, and trade over-the-counter as well. The holder of an ADR cannot vote, since he or she owns a "receipt," not the underlying shares. The bank that actually owns the underlying shares votes.
Which statement is TRUE about the intrinsic value of rights and warrants when issued? A. Warrants have no time value but significant intrinsic value B. Warrants have no intrinsic value but significant time value C. Rights have limited time value but no intrinsic value D. Rights have intrinsic value and substantial time value
The best answer is B. Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value." Rights are very short term options (30-60 days) granted to existing shareholders that allow them to buy the stock at a discount to the current market price. The discount is the "intrinsic value" of the right. However, because rights are so short term, they have virtually no "time value."
Which statement is TRUE regarding warrants? A. Warrants are typically issued with an exercise price that is higher than the stock's current market price and would be exercised when the stock's market price is below the warrant strike price B. Warrants are typically issued with an exercise price that is higher than the stock's current market price and would be exercised when the stock's market price is above the warrant strike price C. Warrants are typically issued with an exercise price that is lower than the stock's current market price and would be exercised when the stock's market price is below the warrant strike price D. Warrants are typically issued with an exercise price that is lower than the stock's current market price and would be exercised when the stock's market price is above the warrant strike price
The best answer is B. Warrants are typically attached to bond and stock offerings to make them more marketable. At issuance, the warrants are usually issued "out of the money" - meaning that the exercise price is higher than the stock's current market price. In order for the warrants to have real value, the stock's market price must rise above the warrant strike price. As the market value of the stock goes above the warrant strike price, the holder of the warrant can exercise, purchasing the stock below the current market value, for an immediate profit.
A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one half additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have outstanding: A. 100,000 preferred shares and 100,000 common shares B. 200,000 preferred shares and 100,000 common shares C. 200,000 preferred shares and 50,000 common shares D. 50,000 preferred shares and 100,000 common shares
The best answer is C. Each unit consists of 2 preferred shares x 100,000 units equals 200,000 preferred shares issued and a warrant for 1/2 common share. If the warrants are exercised, 100,000 units x 1/2 common share = 50,000 common shares issued.
All of the following pay dividends EXCEPT: A. Preferred Stock B. ADRs C. Rights D. Real Estate Investment Trust Shares
The best answer is C. Preferred stock pays a fixed dividend rate; American Depositary Receipt holders receive dividends; and Real Estate Investment Trusts make dividend distributions to shareholders. Holders of warrants and rights do not receive dividends on these instruments.
All of the following terms describe rights EXCEPT? A. Exercisable B. Negotiable C. Redeemable D. Giftable
The best answer is C. Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.
Which statement is TRUE regarding rights? A. Rights give the holder the long term option to buy stock B. Rights typically give the holder a 6-9 month option to buy stock C. The exercise price of a right is set at a premium to the stock's current market price D. The exercise price of a right is set at a discount to the stock's current market price
The best answer is D. Rights are very short term options (about 1 or 2 months) that give existing shareholders the right to subscribe to new shares at a discount to the stock's current market price. Warrants give the holder the long term option to buy stock - they usually have a life of 5 years or so.They are attached by the issuer to preferred stock or bond offerings to make the deal more attractive to investors. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. Thus, for a warrant to have real value, the price of the common stock must subsequently rise in the market.
Which statement is TRUE regarding warrants? A. Warrants give the holder the long term option to buy or sell stock B. Warrants give the holder a maximum 9 month option to buy stock C. The exercise price of a warrant floats with the stock's current market price D. The exercise price of a warrant is set at a premium to the stock's current market price
The best answer is D. Warrants give the holder the long term option to buy (not sell) stock at a fixed price - so the exercise price does not float. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price, so that for the warrant to have value, the common stock price must rise. Warrants usually have a fixed life of 5 years or so. Do not confuse warrants with rights. Rights have a very short life (e.g., 1 or 2 months) and the exercise price for rights is set at a discount to the stock's current market price, allowing existing shareholders to subscribe at a favorable price.
An ADR has been issued where each ADR equals .1111 ordinary shares of the foreign issuer. If a client wished to buy enough ADRs to cover 100 ordinary shares, how many ADRs must be purchased? A. 1 B. 90 C. 100 D. 900
The best answer is D. Since each ADR equals .1111 ordinary shares, then 9 ADRs equal 1 ordinary share. To buy enough ADRs to cover 100 ordinary shares, 900 ADRs must be purchased. Note that when the foreign shares are inexpensive, it is typical for the ADR to cover a "multiple" of shares; and when the foreign shares are expensive, it is typical for the ADR to cover a "fraction" of shares, as in this example.
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.
