Series 66 Chapter 12

The primary defining characteristic of an equity security is A) it represents ownership in a corporation. B) voting rights. C) the ability to keep pace with inflation. D) it pays dividends, usually quarterly.

A

A technical analyst is least likely to consider which of the following when selecting securities? A) Short interest ratio B) Trend lines C) Advance/decline line D) Corporate earnings

D

Which of the following is not included in fundamental analysis of a company? A) The study of a company's historical stock prices and trading volume. B) The study of the direction of the economy. C) The study of a firm's financial statements. D) The study of a firm's position within its industry.

A

Which of the following statements is TRUE? A) A stock split increases the owner's proportionate share of the company. B) A growth company would be more likely to pay a cash dividend than a stock dividend. C) Dividends have a significant influence on the value of the corporation's stock. D) A corporation is required to pay a cash dividend to stockholders if the earnings are sufficient, especially if it is of preferred stock.

C

In the technical analysis of the value of securities, which of the following items is NOT important? A) The amount of a company's past earnings B) Resistance and support levels C) A prevailing market trend in response to shifts in supply and demand D) The breadth of market volume

A

Sortel Industries has preferred stock outstanding that pays annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should she be willing to pay for a share of Sortel preferred stock? A) $44.12 B) $42.10 C) $31.88 D) $33.89

A

One of the rights of being a stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to votes is A) the record date. B) the ex-dividend date. C) the election date. D) the last day of the company's fiscal year.

A

The type of analysis that attempts to value securities by examining general economic trends and the growth potential and productivity of individual companies is A) fundamental analysis B) holding period analysis C) credit analysis D) technical analysis

A

A technical analyst would be most interested in which of the following? A) Working capital B) Capitalization ratios C) Price-to-earnings ratios D) 200-day moving averages

D

One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote, A) ownership must be established by the record date B) the stock must be paid for in full before the annual meeting C) the company must be current on its dividends to preferred stockholders D) the stockholder must be a natural person

A

When reviewing potential securities to select for an investor's portfolio, a technical analyst would be most likely to evaluate A) the price-to-book ratio B) the management tenure C) the price-to-earnings ratio D) the daily trading volume

D

Reasons why a corporation might issue a convertible preferred stock would include A) giving those shareholders an opportunity to participate in the future success of the company B) a lower cost to the issuer than would be incurred by the issuance of convertible bonds C) tax savings to the issuer D) giving those shareholders the ability to convert into the issuer's bonds

A

An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors EXCEPT A) required rate of return B) growth of the dividend C) market capitalization D) current dividend

C The classic definition of the dividend growth model is "a stock valuation model that deals with dividends and their growth, discounted to today." The market capitalization is the number of outstanding shares multiplied by the current market price per share and has nothing to do with the company's dividend policies.

One of the features of convertible preferred stock is that A) the holder is able to select the conversion price B) the owner has the opportunity to convert the stock into the issuer's bonds C) the dividend is paid ahead of all other securities D) the owner has the opportunity to participate in the growth of the company

D

Kellie is a senior equity analyst for a large brokerage firm. She primarily uses fundamental analysis techniques to assist her in picking stocks for her firm's clients. Today, she is reviewing the XYZ Corporation. The company is a manufacturer of computer keyboards and is currently going through an expansion phase. Which of the following techniques would Kellie be least likely to use to determine whether to buy, sell, or hold this company's stock? A) She may review the company's stock 200-day moving average. B) She may calculate the intrinsic value of the stock using one or more of the stock valuation models. C) She may examine the overall state of the economy, the computer industry, and then XYZ Corporation. D) She may consider trends towards tablets and smart phones.

A

To a technical analyst, the resistance level signifies the price at which a stock's supply would be expected to A) remain constant. B) cause the stock price to "break out". C) increase substantially. D) decrease substantially.

C This is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates increased selling. This selling represents an oversupply of the stock which results in downward pressure on the stock.

In the field of securities analysis, there are many tools available. Which of the following would most likely be used by an analyst to approximate a reasonable price for a common stock? A) Yield to maturity B) The dividend discount model C) Par value D) Book value per share

B The simplest model for valuing equity is the dividend discount model—the value of a stock is the present value of expected dividends on it. Yield to maturity only applies to debt securities with a fixed maturity date. The par value of a common stock has nothing to do with its market price. Although fundamental analysts will examine a company's book value per share, it generally has little or no bearing on the current market price of the stock.

Which of the following have equity positions in a corporation? Common stockholders Preferred stockholders Convertible bondholders Mortgage bondholders

1, 2

Which of the following are regulated under the Securities Exchange Act of 1934? New issues Broker-dealers Transfer agents

2, 3

Discounted cash flow is commonly thought of as applying solely to fixed-income securities. However, forms of DCF used for the valuation of common stock also include the price-to-earnings ratio the dividend discount model the discounted book value model the dividend growth model

2, 4

A company's dividend on its common stock is A) voted on by shareholders B) determined by its board of directors C) specified in the company charter D) mandatory if the company is profitable

B

When using the dividend discount model, A) the discount rate is generally lower than the expected rate of return B) ​​​the degree of accuracy in forecasting the price of preferred stock is less​ than​ that ​obtained by using the dividend growth model C) future expected dividends are discounted to compute the present value of the stock D) best results are obtained from stocks that pay irregular dividends

C

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) 200-day moving average B) resistance level C) previous high D) support level

D

Which of the following has the least exposure to inflation risk? A) Common stock B) Cash C) Preferred stock D) Fixed annuity

A

A support level is the price range at which a technical analyst would expect A) the supply of a stock to decrease substantially. B) the demand for a stock to increase substantially. C) the supply of a stock to increase substantially. D) the demand for a stock to decrease substantially.

B

All of the following represent ownership in corporation except A) convertible preferred stock. B) mortgage bonds. C) common stock. D) preferred stock.

B

A common stockholder's rights include all of the following EXCEPT A) the receipt of dividends, if declared by the board of directors B) electing the board of directors C) the right to determine the par value of the stock D) preemptive rights

C

A fundamental analyst researching a stock is concerned with all of the following EXCEPT A) the stock's market price as a multiple of the company's earnings B) capitalization ratio C) volume of shares traded D) management efficiency

C

Which of the following statements regarding preemptive rights is TRUE? A) Neither common nor preferred stockholders 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 and preferred stockholders have the right to subscribe to a rights offering. D) Preferred stockholders do not have the right to subscribe to a rights offering.

D

A technical analyst would be least concerned with A) S&P 500 index B) book value per share C) short interest D) advance/decline

B

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A) Support and resistance B) Trend lines C) Moving averages D) Consolidation

C

A company that has issued cumulative preferred stock A) pays the preferred dividend before paying the coupons due on its outstanding bonds B) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common C) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends D) pays past and current preferred dividends before paying dividends on common stock

D

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has A) no effective change in the value of the position B) a proportionately decreased interest in the company C) greater exposure D) a proportionately increased interest in the company

A

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 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $16.00 B) $24.00 C) $8.00 D) $0.00

B

A fundamental analyst would be most interested in which of the following? A) A 200-day moving average B) A P/E analysis of the stocks included in the Dow Jones Industrial Average C) The outstanding short interest in the market D) Resistance and support levels

B

Which of the following statements about equity securities is NOT true? A) Preferred stock pays a fixed dividend. B) Preferred stock is an equity security while common stock is a hybrid. C) Preferred stock is usually nonvoting. D) Common stock is less sensitive to interest rate risk than preferred stock.

B

Which of the following would be of least interest to a chartist? A) The advance/decline line B) The volume of shares traded during the past month C) The relationship between the current market price of an issuer's common stock and most recently reported earnings per share D) The short interest

C

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 this year, each preferred share must be paid a dividend of A) $5.00 B) $15.00 C) $25.00 D) $10.00

D This stock has a par value of $100 and a dividend rate of 10%. That means the annual dividend will be 10% of the $100 par, or $10. 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 shareholders. Any dividends from previous years that were not paid are ignored. If this had been a cumulative preferred stock, all of the dividends in arrears (past unpaid) would have to be paid before the common shareholders could get a dividend. In that case, it would have been $10 for two years ago, $5 for the balance of last year's dividend, and $10 for this year's (a total of $25).

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A) Prices increase on heavy volume. B) Prices decrease on light volume. C) Prices decrease on heavy volume. D) Prices increase on light volume.

A

Which of the following statements about technical analysis are TRUE? Technical analysis tries to identify trends and predict market changes. Technical analysis is often accomplished by reviewing data in the form of charts. Technical analysis looks primarily at past performance to predict future trends.

1, 2, 3

Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? The company's financial condition, as revealed by its income statement and balance sheet General economic conditions, such as employment levels and changes in interest rates Charts showing past movements in stock prices and trading volumes

1, 2

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? Loss of principal Price volatility of preferred stock is closely related to interest rates Preferred stock cannot be traded as readily as bonds If the stock is callable, the client's income can be suddenly lowered

1, 2, 4

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? 125 shares 100 shares Cost basis of $25 Cost basis of $201, 4

1, 4

Which of the following are regulated under the Securities Exchange Act of 1934? Broker-dealers Investment advisers Pension plans Transfer agents

1, 4

Which of the following statements regarding a 100% stock dividend are TRUE? The share price is reduced by half. The total market value of the outstanding stock decreases. The total market value of the outstanding stock may increase or decrease as a result of the split. The number of shares doubles.

1, 4

Rank the following securities from the same issuer from most suitable to least suitable for a client whose primary objective is income. Cumulative preferred stock Convertible preferred stock Common stock Warrant

1,2,3,4

An investor in an equity security A) acquires an ownership interest in the company B) has a say in the day-to-day operations of the business. C) is assured of a minimum rate of return. D) becomes a creditor of the company.

A

Which of the following would NOT be of interest to a technical analyst? A) P/E ratio B) Volume C) Moving averages D) Advance/decline line

A

All of the following statements regarding technical analysis are correct except A) technical analysts rely on charts to predict the future prices of stocks. B) technical analysts rely heavily on financial ratios in their analysis of stocks. C) technical analysts attempt to predict the future movement of stock prices based on past trends. D) technical analysts use terms such as trendline, support, and resistance in analyzing stocks.

B

An analytical tool used to project the current value of a common stock using projected future dividends is A) the future value computation B) the dividend discount model C) the price-to-earnings ratio D) the dividend payout ratio

B

An investor believes that he can study the history of security trades and security markets in order to identify buying opportunities. Furthermore, he prepares and studies charts on the past prices of the securities he is most interested in purchasing for his portfolio. He uses these charts to try to predict the future activity of a particular stock. What type of strategy is this investor using to make his investment decisions? A) Fundamental analysis B) Technical analysis C) Tactical asset allocation D) Ratio analysis

B

During the analysis of XYZ stock, a technical analyst concludes that XYZ's support level has been broken. Being a technician, the most appropriate decision should be to A) rate the stock as a hold. B) rate the stock as a sell. C) purchase additional shares of the stock. D) rate the stock as a buy.

B

Investments in which of the following offer the best long-term protection against inflation? A) Government bonds B) Common stock C) Corporate bonds D) Fixed annuities

B

An investor holding which of the following equity securities would NOT expect to have preemptive rights? A) Common stock acquired in a private placement B) Common stock C) Preferred stock D) Control stock

C

Among the advantages of including preferred stock in an investor's portfolio are dividends must be paid before any distribution to common stockholders a rate of return that is likely to keep pace with inflation the opportunity for increased income if the issuer's profits increase a fixed rate of return that is likely higher than that for a debt security offered by the same issuer

1, 4 Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. However, unlike the interest on a debt security, there is no obligation to pay the dividend. Therefore, the yield on a company's preferred stock is invariably higher than that on its debt issues. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income.

A fundamental analyst would be interested in all of the following EXCEPT A) daily trading volumes on the NYSE B) innovations within the automotive industry C) corporate annual reports D) statistics of the U.S. Department of Commerce on disposable income

A

All the following factors support fundamental analysis while assessing a wide range of qualitative factors except A) the company's stock price trend. B) the company's competitive position. C) the company's management team's quality and experience. D) the company's business model.

A

Which of the following statements about dividends on common stock is NOT true? A) Corporations are contractually obligated to pay dividends to their shareholders each year B) Only those who are owners of the stock on the record date will receive dividends C) Dividends represent a pro rata distribution of corporate profits to shareholders D) Dividends may be paid in cash, property, or stock

A

Which of the following analyze corporate financial statements and trends in sales and income? A) Chartists B) Technicians C) Market timers D) Fundamentalists

D

Which of the following statements best describes cumulative preferred stock? A) Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend. B) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock. C) Owners are allowed to vote for directors using the cumulative voting procedures. D) Owners lose any claim to dividends that are not paid in any one year.

B

A stock has been in a downtrend for several days. When its price decreases to near $30, many investors enter orders to buy the stock and the price increases to $31. This is most likely an example of A) a resistance level. B) a change in polarity. C) a support level. D) a reversal.

C

Which of the following statements concerning equity securities is not correct? A) Preferred stock is an equity security with an intermediate claim (between the bondholders and the common stockholders) on a firm's assets and earnings. B) Equity securities provide a residual claim, after payment of all obligations to fixed-income claims, on the income and assets of a corporation. C) Common stock is an equity security representing an ownership interest in a corporation. D) Equity securities represent a lending interest in a corporation.

D