Equity Securities Practice Q's
All of the following statements describe stock rights EXCEPT: A) they are most commonly offered with debentures to make the offering more attractive. B) they are short-term instruments that become worthless after the expiration date. C) they are issued by a corporation. D) they are traded in the secondary market.
Answer: A 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.
Every corporation must issue what kind of stock? A) Common. B) Cumulative. C) Preferred. D) Callable.
Answer: A A corporation, according to its charter, must issue voting common stock. Thereafter, the corporation is free to issue other securities.
If a corporation wanted to offer the opportunity to purchase common stock at a given price for the next five years, it would issue: A) warrants. B) rights. C) callable preferred stock. D) put options.
Answer: A A warrant is a purchase option for stock for a long period (i.e., longer than one year). The warrant allows the holder to purchase common stock for a set price that is above what the market price was when the warrant was first issued.
Which of the following provides the right to buy a corporation's stock for the longest period of time? A) Warrant. B) Long put. C) Long call. D) Preemptive right.
Answer: A A warrant provides an investor a long-term right to buy an issuer's stock at a fixed price. The expiration period of a warrant is generally two to ten years. Calls have a nine-month maturity at issue, and rights have a 4 to 6 week lifetime.
All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT: A) currency risk is virtually eliminated. B) ADRs fall under the oversight of the SEC. C) dividends are received in U.S. currency. D) transactions are done in U.S. currency.
Answer: A 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.
Which of the stock valuations listed below is most important to an investor? A) Market value. B) Book value. C) Par value. D) Authorized value.
Answer: A Although market value, book value, and par value are all valuations of common stock, the value most relevant to investors is the market value, which is determined by supply and demand for the stock. Book value refers to the liquidation value of the stock, and par value is assigned for accounting purposes.
ABC stock is quoted at 67.75 bid 67.85 ask. If an investor wishes to purchase one round lot from the broker/dealer, excluding commissions, the investor would pay: A) $6,785. B) $6,775. C) $677.50. D) $678.50.
Answer: A An investor purchases stock at the ask price, or in this case, at $67.85. Because the investor is purchasing a round lot, or 100 shares, the amount payable is $6,785 (100 × $67.85).
If an investor buys a put option with a strike price of 40, which of the following is TRUE? A) The investor has a right to sell the underlying stock at the strike price and is bearish. B) The investor has a right to buy the underlying stock at the strike price and is bullish. C) The investor has an obligation to sell the underlying stock at the strike price and is bearish. D) The investor has an obligation to buy the underlying stock at the strike price and is bullish.
Answer: A Buyers of contracts have rights, sellers of contracts have obligations. Buying a put contract gives the right to sell the underlying stock at the strike price. With a strike price of 40, the investor wants the price of the stock to fall (bearish). They can then exercise the right; selling the stock at 40 and then buying at a price less than 40.
The voting method for board of directors elections that offers a greater benefit to shareholders representing a minority interest is: A) cumulative. B) participating. C) regular. D) statutory.
Answer: A 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. This tends to benefit the smaller stockholder because larger stockholders are often interested in more than one candidate and are therefore less likely to aggregate their votes.
If the current dividend of a stock remains constant while the offering price increases, the current yield of the stock: A) decreased. B) increased. C) remained the same. D) cannot be determined from the information given.
Answer: A Current yield is determined by dividing the annual dividend by the current offering price of the stock. If the offering price (the denominator of the fraction) has increased and the annual dividend (the numerator) stays the same, the value of the fraction is lower. (1/10 = 10%, 1/20 = 5%)
Which of the following stock features would cause a preferred stockholder to receive a greater amount of dividend income than the fixed rate stated on the stock certificate? I. Convertible II.Callable III. Participating IV. Cumulative A) III and IV. B) I and II. C) I and IV. D) II and III.
Answer: A Holders of participating preferred may receive a portion of the common dividend in addition to their fixed dividend, at the discretion of the board of directors. Holders of cumulative preferred receive dividends in arrears to make up for preferred dividends that the corporation has missed paying in past years.
Which of the following option investors are bearish? I. Buyer of a call. II.Writer of a call. III. Buyer of a put. IV. Writer of a put. A) II and III. B) I and II. C) I and IV. D) III and IV.
Answer: A If an investor anticipates a decline in a stock's price, he is considered to be bearish on the stock. To profit from the anticipated downward movement in the stock, he could either sell (write) calls or buy puts. Both are bearish option strategies.
Which of the following statements regarding a two-for-one stock split are TRUE? I.The share price is reduced by half. II.The total market value of the outstanding stock decreases. III.The total market value of the outstanding stock may increase or decrease as a result of the split. IV.The number of shares doubles. A) I and IV. B) I and III. C) II and III. D) II and IV.
Answer: A In a two-for-one stock split, the number of outstanding shares is doubled and the price is halved. The total market value of the issuer's stock therefore remains the same.
Which of the following securities is considered the most junior in a corporate bankruptcy? A) Common stock B) Mortgage bond C) Debenture D) Prior lien preferred stock
Answer: A In the event of a company's bankruptcy, common stock owners have the lowest priority in claims against corporate earnings and assets. This identifies common stock as the most junior security.
Stockholders have the preemptive right to: A) maintain their proportionate interest in the company. B) serve on the board of directors. C) purchase lettered stock. D) purchase bonds.
Answer: A Most corporations have a preemptive rights clause in their bylaws. This is the privilege granted to stockholders to maintain their proportionate share of ownership in the corporation by having the right of first refusal to purchase shares of any new common stock to be issued by the corporation.
Why might an investor choose to purchase an American depositary receipt for a foreign stock, rather than the foreign stock itself? A) He need only deal in U.S. currency. B) His voting rights are more easily implemented. C) He can exercise his preemptive rights with less expense. D) He can avoid currency risk.
Answer: A Owners of ADRs cannot vote the foreign equity shares represented by the ADR, nor do they have preemptive rights. Although ADRs pay dividends in dollars and trade at market prices in dollars, they do not offer protection from currency risk.
The holders of which of the following securities are considered owners of the issuing corporation? I. Collateral trust bonds. II.Convertible debentures. III. Cumulative preferred stock. IV. Common stock. A) III and IV. B) I and II. C) I and III. D) II and IV.
Answer: A Persons who own stock in a company are considered owners; thus, both common and preferred shareholders have ownership (equity) in a corporation. Bondholders are creditors of the corporation. Although convertible bonds convert into shares of common stock, convertible bonds remain a debt of a corporation until they are actually converted.
Which of the following statements regarding preemptive rights is TRUE? A) Bondholders do not have the right to subscribe to a rights offering. B) Common stockholders do not have the right to subscribe to a rights offering. C) Both common stockholders and bondholders have the right to subscribe to a rights offering. D) Neither common stockholders nor bondholders have the right to subscribe to a rights offering.
Answer: A Preemptive rights allow existing common stockholders, not bondholders, to maintain their proportionate ownership in a company when additional shares are being issued.
Which of the following are types of preferred stock? I. Participating. II. Adjustable price. III. Callable. IV. Fixed interest. A) I and III. B) I and IV. C) II and III. D) II and IV.
Answer: A Preferred stock can be issued as straight, callable, cumulative, convertible, participating, or adjustable rate. There is no fixed interest or adjustable price preferred.
Which of the following types of stock are most interest-rate sensitive? I.Common stocks. II.Preferred stocks. III.Growth stocks. IV.Treasury stocks. A) II only. B) I and II. C) I and IV. D) II and III.
Answer: A Preferred stock is sensitive to interest rates because of its fixed-dividend payment. As with debt securities, the price of preferred stock reacts inversely to changes in interest rates.
An investor owns 200 shares of common stock in ABC Corporation, and the corporate charter provides for statutory voting in elections for the board of directors. If there are eight candidates running for five vacancies on the board, the investor has: A) a total of 1,000 votes, of which 200 may be cast for each of the vacancies. B) a total of 1,000 votes that may be cast for each of the vacancies. C) a total of 1,000 votes that may be cast in any manner. D) a total of 1,600 votes that may be cast in any manner.
Answer: A Statutory voting allows investors one vote per stock share they own for each director position to be filled. This investor has 200 votes for each of the five vacancies on the board, for a total of 1,000 votes, which statutory voting requires that he allocate at 200 votes per seat.
ABC's stock has paid a regular dividend every quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's: A) current yield per share has increased. B) current yield per share has decreased. C) current yield per share has been unaffected. D) yield to maturity has gone up.
Answer: A The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield.
Which of the following statements regarding rights and warrants is NOT true? A) The exercise price of a right is generally above the market value at issue; the exercise price of a warrant is generally below the market value at issue. B) If not exercised, rights usually expire in 30 to 45 days; warrants usually expire in two to ten years. C) Warrants are frequently issued in bond offerings to improve the marketability of the bond; preemptive rights are offered to existing stockholders to maintain proportionate ownership. D) Rights and warrants can be traded in the secondary market before they expire.
Answer: A The exercise price of a right is typically below the market value of the stock at the time of issuance, to provide a benefit for the rights holder. The exercise price of a warrant is above the market value at the time of issuance; otherwise, the warrant would simply be instantly exercised.
Which of the following are TRUE of treasury stock? I. Treasury stock is authorized but not yet issued. II.Treasury stock may pay a reduced dividend. III. Treasury stock is issued but has no voting or dividend rights. IV. Treasury stock is previously issued stock that has been repurchased by the issuing company. A) III and IV. B) I and II. C) I and III. D) II and IV.
Answer: A Treasury stock is a company's stock that has been issued, sold through an offering, and then bought back by the company. When a company repurchases its own stock, that stock has no voting rights or dividend rights and is held in the issuer's treasury.
Which of the following is TRUE of treasury stock? I. It has voting rights and is entitled to a dividend when declared. II.It has no voting rights and no dividend entitlement. III. It has been issued and reacquired by the company. IV. It is authorized, but unissued, stock. A) II and III. B) I and III. C) I and IV. D) II and IV.
Answer: A Treasury stock is stock that has been issued by a corporation and subsequently reacquired in the secondary market. It does not carry the rights of other common shares, such as voting rights, rights to dividends, or preemptive rights.
A new bond issue may include warrants to: A) increase the issue's attractiveness to the public. B) increase the spread to the underwriter. C) compensate the underwriter for handling the issue. D) increase the issue's price to the public.
Answer: A Warrants are used as sweeteners to increase a new bond issue's attractiveness to the public. With warrants, the bonds can generally be offered with a lower coupon rate than would otherwise be acceptable to investors.
A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which six candidates are running for three seats on the board, the stockholder could cast the votes in which of the following ways? A) One hundred votes for each of six directors. B) Two hundred votes for each of three directors. C) Six hundred votes for any one director. D) Three hundred votes for each of two directors.
Answer: B A stockholder has one vote per seat for each share of stock he owns. Thus, in this case, the stockholder has a total of 600 votes. Under the statutory voting method, he must allocate an equal number to each seat, or 200 for each of three seats.
A company is offering investors the opportunity to purchase shares for the next five years at a fixed price slightly above today's market price. The company is issuing: A) call options. B) warrants. C) futures. D) a letter of intent.
Answer: B A warrant is a security that allows the holder to purchase shares of the underlying issue at a fixed price (above the current market price when issued) for an extended period (typically two to ten years). Call options are similar, except they are short-term securities (nine months at issue).
If the common stockholders of a company receive a dividend distribution, which of the following will also receive a dividend distribution? I. Warrant holders. II. Cumulative preferred stockholders. III. Rights holders. IV. Participating preferred stockholders. A) II and III. B) II and IV. C) I and III. D) I and IV.
Answer: B All preferred stockholders must receive dividends before common stockholders do. Rights and warrants do not pay dividends
An investor interested in purchasing the stock of an electronics manufacturer based in Japan might prefer buying the American Depositary Receipt (ADR) to the actual stock because: I. any dividends are received in U.S. dollars rather than yen. II.payment for the purchase is made in U.S. dollars rather than yen. III. purchasing the ADR minimizes currency risk. IV. ADRs are issued by banks, thereby offering an additional level of protection against market risk. A) III and IV. B) I and II. C) I and III. D) II and IV.
Answer: B American Depositary Receipts are issued by U.S. banks against the deposit of the actual foreign stock, but this does not affect the market risk. All transactions are in English and use the U.S. dollar. The investor is, however, still subject to currency risk, because all dividend payments are made in the currency specific to the stock covered by the ADR.
An investor may expect to receive dividends from a(n): A) warrant. B) ADR. C) put option. D) call option.
Answer: B An American Depositary Receipt (ADR) represents ownership in a foreign corporation, and dividends declared by the corporation are paid to the ADR owner. The currency conversion is performed by the issuing domestic bank. Options and warrants do not grant the holder the right to receive dividends on the underlying stock.
Holders of XYZ company preferred stock are paid a stated dividend of $5 per share, and then a further dividend of up to $1 per share, if declared by the board of directors. In these circumstances, the preferred stock is known as A) convertible B) participating C) cumulative D) adjustable
Answer: B At the discretion of the board of directors, the participating dividend may be paid as long as a common dividend has been declared.
Which of the following statements regarding holders of common stock are TRUE? I. They must approve the payment of dividends. II.They are entitled to declared dividend distributions in proportion to their ownership. III. They have residual rights to corporate assets on dissolution. IV. They have unlimited liability. A) II and IV. B) II and III. C) I and II. D) I and IV.
Answer: B Common stockholders are entitled to dividend distributions in proportion to their ownership and to residual rights to corporate assets on dissolution. They do not vote on the payment of dividends, and they have only limited liability.
Common stockholders may take advantage of which of the following features of their security? I.The right to vote. II.The potential appreciation of stock value. III.Tax-free income. IV.Guaranteed payment of dividends A) III and IV. B) I and II. C) I and III. D) II and IV.
Answer: B Common stockholders are the owners of the corporation, and, as owners, they may vote their shares and potentially enjoy appreciation of the value of their stock. They are not entitled to tax-free income or guaranteed payment of dividends.
Common stockholders of a publicly traded corporation have which of the following rights and privileges? I. Residual claim to assets at dissolution. II.Right to a vote for stock dividends to be paid. III. Right to receive an audited financial report on an annual basis. IV. Claim against dividends in default. A) II and IV. B) I and III. C) I and IV. D) II and III.
Answer: B Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends.
GHI stock is at $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield would be computed by: A) dividing 1 by 10. B) dividing 4 by 60. C) dividing 4 by 10. D) dividing 1 by 60.
Answer: B Current yield is determined by dividing the annual dividend of $4 ($1 per quarter × 4 = $4) by the current stock price of $60.
Stock that allows shareholders to receive not only their fixed preferred dividend but also additional dividends as provided by the board is: A) callable preferred. B) participating preferred. C) convertible preferred. D) straight preferred.
Answer: B Participating preferred stock allows shareholders to participate in the common dividend in addition to receiving their fixed dividend.
Stockholders can use what type of rights to maintain a proportionate ownership of a corporation? A) Primary. B) Preemptive. C) Voting. D) Secured.
Answer: B Preemptive rights give stockholders the right to maintain their proportionate ownership in a corporation.
All of the following statements about put sellers are true EXCEPT: A) they hope the underlying stock holds steady or goes up in value. B) they are bearish on the underlying stock. C) they have taken on an obligation. D) they receive money from the option transaction.
Answer: B Put sellers are paid the premium, in exchange for which they take on the obligation to buy stock at a fixed price, called the strike price. Whenever buying something (obligation to buy), the investor is bullish, not bearish.
Which of the following would be obligated to purchase stock should the option be exercised? A) Call buyer. B) Put writer. C) Call writer. D) Put buyer.
Answer: B Remember that buyers have rights and sellers have obligations. Writing is selling, therefore the answer is either put or call writer. If the buyer of a put has the right to sell the stock (put down), then if the contract is exercised the seller (writer) of the put is obligated to buy the stock
All of the following pay dividends EXCEPT: I. common stock. II. preferred stock. III. rights. IV. warrants. A) II and III. B) III and IV. C) I and III. D) I and IV.
Answer: B Rights and warrants do not pay dividends.
Under which of the following circumstances is an investor in a position to acquire stock? I. Buy a call. II.Buy a put. III. Sell a call. IV. Sell a put. A) II and IV. B) I and IV. C) I and III. D) II and III.
Answer: B The holder of a call has the right to buy stock at the strike price if exercised. The seller of a put is obligated to buy stock at the strike price if exercised.
Which of the following statements regarding warrants is TRUE? A) Warrants are safer than corporate bonds. B) Warrants are often issued with other securities to make the offering more attractive. C) Warrants give the holder a perpetual interest in the issuer's stock. D) Warrants' terms are generally shorter than rights' terms.
Answer: B Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.
A corporate offering of 200,000 additional shares to existing stockholders is what type of offering? A) Best efforts. B) Rights. C) Tender. D) Secondary.
Answer: B When a company issues additional new shares, it usually offers current shareholders the right to purchase their proportion of the issue before it is offered to the public. This is a rights, or preemptive rights, offering.
A customer believes that ABC's price will go up but does not have the money to buy 100 shares right now. How could the customer use options to profit from an increase in the stock's price? I. Buy calls. II.Write calls. III. Buy puts. IV. Write puts. A) II or IV. B) I or IV. C) I or III. D) II or III.
Answer: B When an investor anticipates an increase in a stock's price, he is considered to be bullish on the stock. To profit from the anticipated upward movement in the stock price, he could either buy calls or sell (write) puts. Both are bullish option strategies.
If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Convertible. B) Callable. C) Straight. D) Cumulative.
Answer: B 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.
When an option is trading, all of the following are fixed EXCEPT A) the underlying security. B) the premium C) the strike price D) the expiration date
Answer: B While the option is trading, the premium is variable - determined by supply and demand in the market. The other choices are characteristics of the option when issued.
Treasury stock is: A) preferred stock. B) issued by the U.S. Treasury Department. C) stock repurchased by the issuer. D) authorized but unissued stock owned by the company.
Answer: C A company may go into the market and buy some of its own outstanding stock, which is then placed in the treasury and called treasury stock
A similarity between common and preferred stock is: A) they have an equal vote. B) both are evidence of corporate indebtedness. C) the dividend must be declared by the board of directors. D) the dividend is fixed.
Answer: C All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.
Securities issued by a bank that represent ownership in foreign equities, but that trade and pay dividends in dollars, are called: A) international equity certificates. B) global equity shares. C) American depositary receipts. D) foreign stock credits.
Answer: C American depositary receipts (ADRs) are issued by banks, represent a specific number of shares of a foreign company, and trade and pay dividends in dollars.
An ADR is used to: A) finance foreign trade in which U.S. citizens are engaged. B) sweeten a bond offering. C) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. D) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad.
Answer: C American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors.
ADRs are used to facilitate the: A) foreign trading of U.S. government securities. B) domestic trading of U.S. government securities. C) domestic trading of foreign securities. D) foreign trading of domestic securities.
Answer: C An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.
ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders, each preferred share must be paid a dividend of: A) $15. B) $25. C) $10. D) $5.
Answer: C Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shares.
If an investor buys a call option with a strike price of 40, which of the following is TRUE? I.The investor is bearish. II.The investor is bullish. III.The investor has a right to sell the underlying stock. IV.The investor has a right to buy the underlying stock. A) II and III B) I and IV C) II and IV D) I and III
Answer: C Buying a call gives the investor a right to buy the underlying stock at the strike price. With a strike price of 40, the investor wants the price of the stock to rise (bullish). They can then exercise the right; buying the stock at 40 and then selling at a price greater than 40.
Cumulative preferred stockholders have the right to: A) receive a share of the common dividend. B) purchase three shares for every one share they own. C) receive previously unpaid dividends. D) exchange their stocks for another security issued by the corporation.
Answer: C Cumulative preferred stock has the characteristic of receiving previously unpaid preferred dividends.
A company that has issued cumulative preferred stock: A) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. B) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. C) pays past and current preferred dividends before paying dividends on common stock. D) pays the preferred dividend before paying the coupons due on its outstanding bonds.
Answer: C Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid. Bond interest is always paid before dividends.
There are a number of risks inherent in investing in equity securities. Which of the following stocks would be most affected by changes in interest rates? A) Long term warrants. B) Treasury stock. C) Noncumulative preferred stock. D) Common stock.
Answer: C For most investors, the primary feature of investing in preferred stock is its fixed dividend. Consequently, it is purchased for income and is more sensitive to changes in interest rates than common stock is. Warrants are not affected by interest rate movement as they only provide a right to purchase underlying common stock.
Minority stockholders are more likely to be able to elect directors through which form of voting? A) Statutory. B) Progressive. C) Cumulative. D) Regular.
Answer: C 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 one position rather than spread them out and thus dilute them over two or three positions.
All of the following are features of preferred stock EXCEPT: A) priority claim to assets at the dissolution of a corporation. B) typically no voting rights. C) fixed maturity. D) fixed rate of return.
Answer: C Preferred stock has no stated maturity. However, it does have a stated rate of return due to its fixed dividend and has priority over common stock in the liquidation of a corporation. Generally, preferred stock does not have voting rights.
As interest rates fall, prices of straight preferred stock will: A) remain unaffected. B) become volatile. C) rise. D) fall.
Answer: C Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.
Which of the following securities has a dividend expressed either as a fixed percentage of par or as a fixed dollar amount? A) Corporate bonds. B) Common stock. C) Preferred stock. D) Municipal bonds.
Answer: C Preferred stock pays dividends that are stated either as a percentage of par or as a fixed dollar amount. Municipal bonds and corporate bonds pay interest, not dividends. Common stock does not guarantee dividends and its par value is an arbitrary figure.
If interest rates are increasing and the market prices of bonds are decreasing, what happens to the value of straight preferred stock during this period? A) Its value remains the same. B) Interest rates and the price of bonds have no impact on the value of preferred stock. C) Its value decreases. D) Its value increases.
Answer: C Preferred stocks are interest-rate sensitive, as are other fixed- income investment securities, such as bonds. Thus, if interest rates increase, the fixed return may be surpassed by the return provided by other investments. The value of preferred stock will thus decrease when interest rates rise.
If a company's dividend increases by 5% but its market price remains the same, the current yield of the stock will: A) remain at 5%. B) be more volatile. C) increase. D) decrease.
Answer: C The current yield of a stock is the annual dividend divided by the market price. If a company's dividend increases and its market price remains the same, its current yield will increase.
An investor thinks ABC stock is going up and would like to use leverage to profit from his belief. You recommend the following A) Buy puts on ABC stock B) Sell puts on ABC stock C) Buy calls on ABC stock D) Sell calls on ABC stock
Answer: C The investor is bullish on ABC stock, believing it is going to rise in value. Buying calls (call up!) allows him or her to control a lot of ABC stock by paying a small premium, therefore leveraging the position.
Which of the following terms apply to options? I.Annual income. II.Strike price. III.Premium. IV.Interest rate risk. A) I and IV. B) II and IV. C) II and III. D) I and III.
Answer: C The premium is the cost of an option contract, expressed in dollars per share of the underlying stock. The strike price is the price at which the stock will be bought or sold if the contract is exercised, also expressed in dollars per share.
Which of the following statements regarding common stock is NOT true? A) Issued stock is authorized common stock that has been sold to shareholders. B) Outstanding stock has been issued but not repurchased. C) Treasury stock is unissued stock that a corporation maintains in the treasury. D) The authorized stock level is specified in the company's original charter.
Answer: C Treasury stock is issued stock that a company has repurchased and placed in the treasury.
All of the following may pay dividends EXCEPT: A) preferred stock. B) convertible preferred stock. C) warrants. D) common stock.
Answer: C Warrants do not pay dividends. The other instruments listed pay dividends when declared by the board of directors.
A company's dividend on its common stock is: A) voted on by shareholders. B) mandatory if the company is profitable. C) specified in the company charter. D) determined by its board of directors.
Answer: D A common stock's dividend payment and amount are determined by the company's board of directors.
Which of the following are reasons for a company to issue common stock? I. Acquire capital for corporate operations. II.Borrow money for an acquisition. III. Take on debt to fund a new business venture. IV. Become a publicly held corporation. A) I and III. B) II and III. C) II and IV. D) I and IV.
Answer: D A company issues stock to acquire funds for business purposes and in so doing becomes a publicly held corporation. Issuing stock does not entail any debt obligations.
A company may pay dividends in which of the following forms? I. Preemptive rights. II. Cash. III. Its own stock. IV. Its own bonds. A) I and III. B) I and IV. C) II and IV. D) II and III.
Answer: D A company may pay a dividend in stock of another company, cash, its own stock, or its own product. Preemptive rights are used in subsequent primary offerings, and bonds trade separately.
If a corporation wanted to raise capital and offer stock at a given price for the next 30 days, it would issue: A) warrants. B) convertible preferred stock. C) uncovered calls. D) rights.
Answer: D A right is a purchase option for stock, at a set price, for a short period, typically four to six weeks. Warrants have long lives.
Last year, an investor purchased stock in XYZ Corporation because of its relatively high dividend compared with those of other companies in the same industry. This year, the price of the stock has dropped, but the dividend paid has remained constant. Compared with last year, the current yield of XYZ stock: A) has decreased. B) has remained the same. C) cannot be determined from the information given. D) has increased.
Answer: D A stock's current yield is determined by dividing the annual dividend amount by its current market price. If the dividend amount stays the same while the price of the stock falls, the current yield will increase.
Owners of American depositary receipts enjoy all of the following benefits EXCEPT: I.avoidance of currency risk. II.trading and collection of dividends in U.S. currency. III.the right to vote their shares. IV.registration of the security with the SEC. A) I and IV. B) II and III. C) II and IV. D) I and III.
Answer: D Although ADR owners do receive their dividends in dollars and can purchase and sell the security in dollars, they do not avoid currency risk. ADRs generally do not carry voting rights.
Each of the following securities are issued with a fixed rate of return EXCEPT: A) bonds. B) preferred stock. C) convertible preferred stock. D) common stock.
Answer: D Bonds and preferred stock are issued with a stated payment in interest or dividends, respectively. Common stockholders are entitled to receive a variable distribution of profits if a dividend is declared.
Which of the following represent ownership in a corporation? I. Debentures. II.Convertible bonds. III. Preferred stock. IV. Common stock. A) I and II. B) I and III. C) II and IV. D) III and IV.
Answer: D 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.
When trading common stock, either at an exchange or over-the-counter, the typical size of the trading unit is: A) 10 shares. B) 50 shares. C) There is no standard unit. D) 100 shares.
Answer: D Common stock trades in round lots of 100 shares each.
Which of the following securities carries the greatest amount of risk for an investor? A) Debentures B) Preferred stock C) Corporate bonds D) Common stock
Answer: D Common stockholders are always the last to receive payment in the event of a corporate liquidation and, therefore, have the most risk. However, common stockholders have the greatest potential reward of ownership if the corporation is successful.
A common stockholder's voting rights apply to which of the following? I.Election of the board of directors II.Declaration of dividends III.Authorization or issue of more common shares IV.Changing suppliers of raw material A) I and IV B) II and III C) II and IV D) I and III
Answer: D Common stockholders never vote directly on dividend payment or size. They may elect the board of directors (indirectly influencing the policy on payment of dividends) and may vote on issues concerning the company's capitalization, such as the issuance of more common stock. Changing suppliers is a decision for the vice president of manufacturing.
Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Cumulative. B) Noncumulative. C) Callable. D) Convertible.
Answer: D 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.
Holders of a common stock traded on Nasdaq have all of the following rights EXCEPT: A) to vote on a merger or acquisition. B) to stock dividends, if declared by the board of directors. C) to receive an annual audited report describing the corporation's operations over the previous year. D) to receive dividends before preferred stockholders do
Answer: D Holders of common stock have the right to vote on mergers and acquisitions, receive annual audited reports, and receive dividends when declared by the board of directors. However, when the board of directors declares dividends, owners of preferred stock must receive their dividends before common stockholders can be paid.
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 two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $0. B) $8. C) $16. D) $24.
Answer: D If the company is going to pay a common stock dividend, it must pay any 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.
A registered representative has been following the performance of KPL Manufacturing, a new company that has had several successful products. A year ago, the price of KPL was $20 per share. Recently, the company paid its first QUARTERLY dividend, $0.75 per share, and the current price of the stock is $27 per share. In discussing this stock with one of his customers, which of the following statements could the registered representative make? A) If you take into account the price increase and the last dividend, you get a yield on this stock of 37%. B) The yield on this stock will continue to rise now that dividends are being paid. C) The current yield on this stock is about 2.8%. D) The current yield on this stock is a little over 11%.
Answer: D In calculating current yield, divide the annual dividend by the current market price. That would be 4 times the quarterly dividend of $.75, or $3, divided by $27, which gives a yield of 11.1%. Capital gains may never be included in a yield calculation.
A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into five shares of common stock. The conversion price of the common stock is A) $25 B) $100 C) $1,200 D) $20
Answer: D Par value divided by conversion price equals the number of shares into which the security is convertible. Never use the current market value! If par is $100 and it can be converted into 5 shares, the conversion price must be $20 ($100÷5 = $20).
In which of the following equity securities do stockholders have preemptive rights? A) Preferred stock. B) Convertible bonds. C) Debentures. D) Common stock.
Answer: D Preferred stockholders do not have preemptive rights, and neither convertible bonds nor debentures are equity securities. Preemptive rights allow common stockholders to subscribe to additional issues of shares before they are offered to the public, to maintain their percentage ownership.
When does a customer have to receive the Options Disclosure Document? A) With the confirmation of his first options transaction B) Within 15 days of account approval C) Within 5 business days of the first options trade D) Prior to account approval
Answer: D Prior to opening an account to trade options, the owner must be told about the risks involved with trading options. By providing the owner with an Options Disclosure Document entitled "Understanding the Risks and Uses of Options", the broker/dealer satisfies the risk disclosure requirements.
A corporation's offer to current stockholders of the ability to purchase a proportionate number of new shares at a specific price for a limited time is called a: A) warrant. B) option. C) preference. D) right.
Answer: D Rights give stockholders the privilege to purchase a proportionate number of additional shares at a specific price for a limited time. Rights usually expire in 30-45 days.
A corporation needs shareholder approval for which of the following? A) Cash dividend. B) 10% stock dividend. C) Repurchase of 100,000 of the company's own shares. D) Four-for-one split.
Answer: D Shareholders have a right to vote on such items as mergers, reorganizations, recapitalizations, and stock splits. Shareholders never vote on payment or size of dividends. Repurchase of shares for the treasury is a decision for the board of directors.
If GHI currently has earnings of $3 and pays an annual dividend of $1.00 and GHI's market price is $20, the current yield is: A) 3%. B) 15%. C) 17%. D) 5%.
Answer: D The current yield is calculated by dividing the annual dividend by the current market value ($1.00/$20.00 = 5%).
A stock's market value is directly determined by which of the following? A) Board of directors. B) Vote of the stockholders. C) Company's financial condition. D) Supply and demand.
Answer: D The market value of stock is directly determined by supply and demand and only indirectly by the company's financial condition.
Which of the following statements about warrants is NOT true? A) Warrants have longer lifetimes than rights. B) Warrants may be attached to another of the issuer's securities. C) Warrants have an exercise price above the current market price of the common stock when issued. D) Warrants may not be traded in the secondary market.
Answer: D Warrants usually have lifetimes of two-ten years; rights expire in 30-45 days. A corporation may attach warrants to other securities, such as bonds, to make the bonds more marketable. Warrants have no intrinsic value when issued and may expire without ever having intrinsic value. Before expiration, they may be, and often are, traded in the secondary market.
If ABC common stock closed at 20 yesterday and ABC is currently paying a quarterly dividend of $.40, what is the stock's current yield? A) Less than 1%. B) Between 1% and 5%. C) More than 10%. D) Between 5% and 10%.
Answer: D The annual dividend is $1.60 (4 × $0.40). The current yield is the dividend of $1.60, divided by the current price ($20). Thus, the yield of 8% is more than 5% (1/20) and less than 10% (2/20).
LMN's trading volume for yesterday was reported as 178. The number of shares traded was: A) 1,780 shares. B) 178,000 shares. C) 17,800 shares. D) 178 shares.
Click for Answer and Explanation Answer: C Shares are reported in round lots, which are 100 shares each 178 × 100 shares = 17,800.