Equities: Special Securities and Financial Listings
If a corporation wishes to sell additional shares, which of the following persons can subscribe using pre-emptive rights? A - Common stockholders B - Preferred stockholders C - Convertible preferred stockholders D - Bondholders
A - Common stockholders The best answer is A. Only common stockholders have pre-emptive rights. Holders of senior securities (preferred stock and bonds) do not have pre-emptive rights; nor do warrant holders since they do not own the common stock unless the warrants are exercised.
At issuance, warrants have: A - time value B - intrinsic value C - both time value and intrinsic value D - neither time value nor intrinsic value
A - time value The best answer is A. Warrants are a "sweetener" attached by an issuer to a preferred stock or bond offering to make it more marketable. It gives the purchaser the long-term option to buy the common stock at a premium to the current market price. The life is typically 5 years. Assume that the stock price is currently $20 and the warrant allows the holder to buy the stock at $50 per share. The stock price must rise over 5 years to more than $50 for the holder to exercise. At issuance, the warrant is "out the money" by $30 - it has no intrinsic value (it only has intrinsic value if the market price of the stock rises above $50). The warrant trades in the market for its life, and its initial trading price is based on the "time value" of the warrant -essentially the value of the "bet" that the price will rise to more than $50 within 5 years.
The exercise price of a warrant is set at issuance at: A - a discount to the market price of the common stock B - a premium to the market price of the common stock C - the market price of the common stock D - any price designated by the issuer
B - a premium to the market price of the common stock The best answer is B. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price.
A corporation wishes to raise funds to build a new manufacturing facility. Which method is suitable for the issuer to obtain financing? A - Force conversion of outstanding convertible preferred B - Split the outstanding shares of common stock 2 for 1 C - Issue rights to outstanding shares of common stock D - Call outstanding convertible preferred
C - Issue rights to outstanding shares of common stock The best answer is C. 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.
All of the following terms describe rights EXCEPT? A - Exercisable B - Negotiable C - Redeemable D - Giftable
C - Redeemable 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.
XYZ Corporation wants to raise additional capital without using an underwriter by issuing rights to its existing shareholders. The company needs to raise $40,000,000 to build a new manufacturing plant. Its common stock is currently trading at $43 and the subscription price for a rights holder is set at $40. The company has 2,000,000 shares outstanding. Which statement is TRUE for the owner of 100,000 XYZ common shares? A- 50,000 rights are received allowing the holder to buy 50,000 shares B - 100,000 rights are received allowing the holder to buy 100,000 shares C - 50,000 rights are received allowing the holder to buy 100,000 shares D - 100,000 rights are received allowing the holder to buy 50,000 shares
D - 100,000 rights are received allowing the holder to buy 50,000 shares The best answer is D. Because the company has 2,000,000 shares outstanding, it will issue 2,000,000 rights. The company wants to raise $40,000,000 / $40 received per share = 1,000,000 new shares to be issued. Because there are 2,000,000 rights issued covering 1,000,000 additional shares, the terms of the offering will be that 2 rights are needed to buy 1 new share. The holder of 100,000 shares will receive 100,000 rights. Because 2 rights are needed to subscribe to 1 new share, the holder will be able to subscribe to 50,000 new shares.
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
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.
A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights-holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A - The shareholder can buy a maximum of 15 shares by paying $360 B - The shareholder can buy a maximum of 16 shares by paying $384 C - The shareholder can buy a maximum of 17 shares by paying $408 D - The shareholder can buy a maximum of 18 shares by paying $432
D - The shareholder can buy a maximum of 18 shares by paying $432 The best answer is D. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.
Which statement is TRUE regarding American Depositary Receipts? A - Exchange listed ADRs are 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.
Which of the following statements are TRUE regarding warrants? I The exercise price of a warrant is set at a premium to the stock's current market price II The exercise price of a warrant is set at a discount to the stock's current market price III Warrants are exercised when the exercise price is below the market price IV Warrants are exercised when the exercise price is above the market price A - I and III B - I and IV C - II and III D - II and IV
The best answer is A. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. The warrants will only be exercised when the market price rises above the strike price (why would you want to buy the stock at a price HIGHER than the current market?)
The essential difference between a sponsored and an unsponsored ADR is: A - SEC registration B - Issuer sponsorship C - Bank sponsorship D - Broker-dealer market making
The best answer is B. Sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. The NYSE, AMEX (NYSE American) and NASDAQ will only list sponsored ADRs. Unsponsored ADRs are assembled without the participation of the issuer. For example, a bank may assemble an ADR issue consisting of shares of a Japanese computer manufacturer. Since the Japanese firm is not "sponsoring" the ADR, any financial information received about the company will be in Japanese (unless the company also happens to prepare English language reports).
The Price / Earnings Ratio is a measure of: A profitability B valuation C volatility D velocity
The best answer is B. 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. Review question # 1-3-21-1 Equities : Special Securities and Financial Listings : Stock Exchange Listings : Price / Earnings Ratio Copyright 1989-2021 Pass Perfect, LLC All Rights Reserved
PDQ Company $1 par common stock currently trading at $55. PDQ is currently paying a quarterly common dividend of $1.10 per share. The current yield of PDQ stock is: A - 2.0% B - 4.4% C - 8.0% D - 44.0%
The best answer is C. Yields are based on annual return. The formula for current yield is: $4.40/$55 = 8%
All of the following statements are true about ADRs EXCEPT: A - ADRs trade on national stock exchanges B - ADR holders receive dividends C - ADR holders can vote for the Board of Directors D - ADR holders receive the cash value of pre-emptive rights
The best answer is C. ADRs do not vote. The bank that actually owns the shares votes. The bank passes through dividends to receipt holders and sells off pre-emptive rights, sending the cash to the receipt holders. ADRs are listed on stock exchanges and trade like any other stock.
Which statement is TRUE about American Depositary Receipts? A - ADR holders have voting and pre-emptive rights B - ADRs facilitate domestic trading of U.S. securities in foreign markets C - holders are entitled to dividends if declared D - ADRs are issued by foreign banks
The best answer is C. ADRs facilitate domestic trading of foreign securities. They are issued by domestic banks. ADR holders receive dividends but have neither voting nor pre-emptive rights.
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.
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
The best answer is 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
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.
Which statement is TRUE regarding 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
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, the
Which of the following statements about warrants are TRUE? I At issuance, warrants are "out of the money" II Warrant valuation is influenced by the life of the instrument III Warrant valuation is directly influenced by the valuation of the company's common stock IV Warrant valuation reflects market expectations for future earnings of the company A - I and IV only B - II and III only C - I, II, IV D - I, II, III, IV
The best answer is D. At issuance, warrants typically have exercise prices well above the current market price of the common stock, and therefore are "out of the money". The other statements are true. Warrant valuation is directly influenced by its life - the longer the warrant, the greater its value. It is also influenced by the valuation of the company's common stock price - the higher the market value of the common, the higher the warrant's value. Finally, it is influenced by market expectations for future corporate earnings, and hence the future price of the common stock.
