Common Stock
A client owns 100 shares of COSMO Company common stock. The client receives a notice that COSMO has declared a 10% stock dividend. What does this mean? A The client will receive 10 additional shares of COSMO stock B The client's aggregate stock holding will increase in value by 10% C The client must return 10 shares of stock to COSMO D The client's aggregate stock holding will decrease in value because of the additional shares
A. 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 dividend percentage indicates how many additional shares each stockholder receives. In this case, 10% of 100 shares = 10 additional shares to be issued. Assume that each share was worth $11 before the 10% stock dividend was declared. The aggregate holding was worth $11 x 100 = $1,100. After the stock dividend is paid, the client will own 100 + 10 = 110 shares. However, each share will now be worth $11/1.1 = $10. The aggregate holding is worth $10 x 110 shares = $1,100. Thus, as a result of the stock dividend, the stock price declines and the number of shares increase, but the aggregate holding does not change in value.
Which term describes common stock? A negotiable B redeemable C non-negotiable D callable
A. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.
A proxy given to a caretaker to vote a stockholder's shares is a: A power of attorney B trading authorization C discretionary authority D voting trust
A. When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.
A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. Which statement is TRUE? A This is known as aproxyand once given, it cannot be revoked B This is known as aproxywhich may be revoked prior to the annual meeting C This is known as avoting trustand once given, it cannot be revoked D This is known as a voting trust which may be revoked prior to the annual meeting
B. When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. A power of attorney is revocable at any time as long as it is revoked in writing. The customer can revoke the power of attorney if he decides to change his vote or decides to go to the annual meeting himself. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.
PDQ Company $10 par common stock is currently trading at $40. PDQ is currently paying a common dividend of $.20 per share quarterly. The current yield of PDQ stock is: A 0.5% B 2.0% C 5.0% D 8.0%
B. Yields are based on annual return. The formula for current yield is: annual income/ market price $.80/$40 = 2.00%
Common dividends are paid: A quarterly onissued shares B quarterly onoutstanding shares C semi-annually onissued shares D semi-annually onoutstanding shares
B. Common dividends are usually declared and paid quarterly. Dividends are only paid on outstanding shares - defined as issued shares minus Treasury stock.
What term would apply to Authorized Stock? A Issued B Outstanding C Voting D Par Value
D. Authorized stock is the total number of shares that the company is "authorized" to sell. Issued stock is the number of shares that have actually been sold to the public out of the authorized total. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). The only stock that votes and that receives dividends is Outstanding shares. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.
What term would apply to Issued Stock? A Retired B Outstanding C Non-voting D Par Value
D. Issued stock consists of shares that have been issued to the public out of the company's total number of "authorized" shares that it could sell as detailed in its corporate charter. These shares receive dividends and vote. However, if the corporation repurchases shares for its Treasury, this is deducted from the Issued number of shares to arrive at Outstanding shares. It is the Outstanding shares that vote and receive dividends. Note that Outstanding shares will not equal the Issued shares if there have been Treasury repurchases. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.
What term would apply to Treasury Stock? A Negotiable B Outstanding C Voting D Par Value
D. The only stock that votes and receives dividends is Outstanding shares. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). Treasury stock consists of shares that have been repurchased and "retired," so Treasury stock does not receive dividends and has no voting rights. Par value is the term that applies to all stock, whether it is Authorized, Issued, Treasury, or Outstanding.
Which term applies to common stock? A convertible B redeemable C non-negotiable D non-callable
D. Common stock is a negotiable (transferable) security that cannot be called by the issuer. It is not redeemable with the issuer nor is it convertible. Only preferred stock and bonds can be convertible
In a corporate liquidation, common stockholders are paid: A first B after creditors but beforepreferred stockholders C afterbondholdersbut before preferred stockholders D last
D. In a liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.
Common dividends can be paid in all of the following forms EXCEPT: A Warrants B Product C Stock D Cash
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.
All of the following actions will dilute shareholders' equity EXCEPT: A payment of a stock dividend B conversion of convertible preferred stock C exerciseof stock options granted to officers D issuance of additional common shares
A. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. However, in total, the shareholder has the same percentage interest in the corporation. If the holders of convertible securities convert, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. Similarly, if the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their "pre-emptive" rights. Finally, if officers are granted stock options, their exercise of those options results in the issuance of additional common shares, diluting existing shareholders' equity.
If a company repurchases its own common shares, the number of: A outstanding shareswill decrease B outstanding shares will increase C issuedshares will decrease D unissued shares will increase
A. If a company repurchases shares, the number of outstanding shares decreases.
The market price of common stock will be influenced by which of the following? A Expectations for future dividend payouts by the company B Number of Board of Directors C Book valueper share D Par valueper share
A. The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the number of Board of Director seats have no direct bearing on the market price of the common
Common shareholders have all of the following rights EXCEPT the right to: A attend the annual meeting of the company and physically cast their votes B vote for the general managers of the company C give their voting ability to a proxy by signing a power of attorney D vote for each individual proposed for election to the Board of Directors
B. Common stockholders have the right to vote. They get to vote on who is on the company's Board of Directors - they do not vote on the general managers of the company. If the shareholder cannot physically show up at the annual meeting to vote, then he or she can appoint a proxy by signing a power of attorney to cast his or her vote(s) at the meeting. The proxy given the power of attorney is usually the management of the company. Also note that shareholder vote is required if the company wishes to merge with another company; divest itself of a subsidiary; or if the company wants to take any action that would dilute the ownership interest of the common shareholders, such as issuing convertible securities.
A customer owns 1,000 common shares of ABC Corporation. Which of the following actions will dilute the shareholders' equity? A ABC declares a 10%stock dividend B ABC declares that it will call itsconvertible preferredstock, which is currently trading at apremium C ABC declares a 2:1stock split D ABC declares a 1 for 4 reverse split
B. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or any type stock split. In a forward split, the shareholder receives more shares worth proportionately less. In a reverse split, the shareholder receives fewer shares worth proportionately more. However, in total, the shareholder has the same percentage interest in the corporation. If the issuer forces conversion of convertible securities, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity.
ABC Corp. has a market price of $15 and a Price/Earnings multiple of 10. What was the corporation's Earnings Per Common Share? A $.67 B $1.50 C $10 D This cannot be determined
B. The Earnings per Share can be found by taking the: market price/ multiple 15/10= $1.50
When a corporation declares a reverse stock split, the: A number of outstanding shares increases and the market price per share increases B number of outstanding shares decreases and the market price per share increases C number of outstanding shares increases and the market price per share decreases D number of outstanding shares decreases and the market price per share decreases
B. When a company reverse splits its stock (say 1:5), the number of outstanding shares decreases to 1/5th the previous number, with each share now valued at 5 times the previous amount. The aggregate value of the stock holding does not change. For example, assume that a customer originally owned 500 shares at $10, for an aggregate holding of $5,000. After the 1:5 split, the customer will now have 100 shares (1/5th of 500), with each share now worth $50 (5 x $10), for an aggregate value of $5,000 - the same as before.
Which terms describe common stock? A Negotiableand callable B Negotiable and non-callable C Non-negotiable andcallable D Non-negotiableand non-callable
B. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.
The definition of Treasury stock is: A authorized sharesminusissued shares B issued shares minusoutstanding shares C authorized shares minus outstanding shares D capital in excess of par value minus par value
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.
Stockholder approval is needed if a corporation wishes to: A pay a cash dividend B split its stock 2 for 1 C repurchase shares for itsTreasury D pay a stock dividend
B. Stockholder approval is needed for a stock split, because it changes the par value of the stock. The state in which the company is incorporated typically requires shareholder approval of a par value change. In contrast, dividend decisions, either in cash or stock, do not require shareholder approval because they are "paid" out of retained earnings and do not affect par value per share. They are made solely by the Board of Directors of the company. The repurchase of shares for Treasury will boost earnings per share, because there will be fewer shares outstanding. This boosts the value of the existing common shares, so no shareholder approval is required. This is another decision that is made solely by the Board of Directors.
Which of the following influences the market price of common stock? A Thepar valueof the shares B Investor expectations about the future of the company C Stated valueof the shares D Book valueof the shares
B. The market price of common stock is determined by investor expectations about the future of the company. Par value (which is the same as stated value) and book value have no bearing on the market price of the common shares.
The market price of common stock will be influenced by which of the following? A The par value of the shares B Expectations for future earnings growth C Date of incorporation for the issuer D Book valueof the company
B. The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the issuer's date of incorporation have no direct bearing on the market price of the common.
Which statement is FALSE regarding Treasury Stock? A Treasury Stock is not entitled to dividends B Treasury Stock has voting rights C Treasury Stock buybacks decreases the number of sharesoutstanding D Treasury Stock purchases are used to increase reportedEarnings Per Share
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.
If a company declares and pays a 10% stock dividend, an existing shareholder with 100 shares will have: A more than 100 shares at an increased price per share B less than 100 shares at an increased price per share C more than 100 shares at a reduced price per share D less than 100 shares at a reduced price per share
C. 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, 10% of 100 shares = 10 additional shares to be issued to the stockholder. Assume that each share was worth $11 before the 10% stock dividend was declared. The aggregate holding was worth $11 x 100 = $1,100. After the stock dividend is paid, the stockholder will own 100 + 10 = 110 shares (same as 100 x 1.1). However, each share will now be worth $11/1.1 = $10. The aggregate holding is worth $10 x 110 shares = $1,100.
X Corporation stock has been trading at $1,200 per share recently and trading volume has fallen to record lows. To increase trading volume, the X Corporation may: A perform areverse splitto reduce the number of shares outstanding B suspend trading for a month period to create a market for its stock C splitthe stock three-for-one to make its price more attractive D reverse split the stock one-for-three to increase its price
C. Splitting the stock three for one will reduce its price from $1,200 per share to $400 per share. Current shareholders will have three times the stock shares they had before the split, but the total value will not change. New purchasers will be able to purchase X Corporation stock at a much more attractive $400 per share. This should bring more investors into the market for X Corporation stock and this may even contribute to future price increases because more investors can afford to buy the typical 100 share round lot of the stock. If the issuer were to reverse split its stock 1:3, then it would give the shareholders 1 new share in exchange for every 3 shares outstanding. The effect would be to increase the market price from $1,200 per share to 3 times this amount, or $3,600 per share, with the number of outstanding shares reduced to 1/3rd the previous amount. This would make the stock even less accessible to small investors.
Cumulative voting is considered to be an advantage to the: A large investor. B institutional investor C small investor D novice investor
C. Cumulative voting allows a disproportionate voting weight to be placed on selected directors and is considered to be an advantage for the small investor who wishes to have specific directors elected.
A corporation has issued 100,000,000 shares of common stock at $1 par. The corporation has 25,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A $12,500,000 B $25,000,000 C $75,000,000 D $100,000,000
C. Outstanding stock is: Issued stock (100,000,000 shares) minus Treasury stock (25,000,000 shares) = 75,000,000 shares outstanding at $1 par = $75,000,000.
An individual would examine a company's Price to Earnings Ratio in order to: A determine whether the company has a reasonable level of liquidity B assign a credit rating to the company C determine if the stock is fairly valued D assess the quality of the company's management
C. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios are being valued very highly by the market; while those with low P/E ratios are being valued at a low level. Rapidly growing companies tend to have high P/E ratios, while mature companies tend to have low P/E ratios.
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
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.