Series 7 Chapter 1 Q banks

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above:

$175 per share In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?

10 The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10

The regular way ex-dividend date for cash dividends is the

1st business day preceding the record date

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into 5 shares of common stock. The conversion price of the common stock is:

20 Par value divided by conversion price equals the number of shares into which the security is convertible. If this security is convertible into 5 shares, we need to know what number goes into $100 5 times. That number is $20. The current market value of the preferred stock is unnecessary information.

If a common stock is currently selling for $75 per share with a quarterly dividend of $.75, the current yield for the stock is:

4% The current yield formula is annual dividend divided by current price. In this case, $3 ($.75 × 4) / $75 = 4%.

If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is

5% The current yield is calculated by dividing the annual dividend by the current market value ($1.75 / $35 = 5%).

ABC, Inc. will issue new stock through a rights offering. Terms of the offering are 10 rights plus $10 to purchase one new share of stock, with any fractional shares to be considered whole shares. ABC is currently trading at $13. If your customer owns 85 shares of ABC and wishes to subscribe to the new offering, how many shares can she purchase at the subscription price and how much money will be required?

9 shares ; $90 Owning 85 shares, the customer would receive 85 rights allowing the purchase of 8.5 shares. Because fractional shares are rounded up, a total of 9 shares could be purchased. Each share requires an additional $10 to purchase, therefore if the customer wants to buy the 9 shares the customer must pay a total of $90.

A similarity between common and preferred stock is: A)the dividend must be declared by the board of directors. B)they have an equal vote. C)both are evidence of corporate indebtedness. D)the dividend is fixed.

A) the dividend must be declared by the board of directors 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.

Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue?

A) registrar The registrar is responsible for keeping careful account of the number of shares a company is authorized to issue and ensuring that the number outstanding does not exceed this number.

Cash dividends from REITs are: A)taxed as long-term capital gains B) taxed as ordinary income C) not taxed. D) taxed at a maximum rate for qualified dividends.

B) Taxed as ordinary income Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs.

Which of the following is an advantage of owning American depositary receipts? A)The investor has the right to vote at stockholders' meetings. B)The investor avoids the currency risk that characterizes many foreign investments. C)The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency. D)The investor receives preemptive rights should the issuer make an additional stock offering.

B) The investor avoids the currency risk that characterizes many foreign instruments ADRs permit an American investor to purchase, not stock, but a certificate of deposit for stock in a foreign company. The advantage is that the transactions are done in dollars, but the ADR itself does not carry a vote or stock rights, and subjects the owner to currency risk.

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Straight B) callable C) cumulative D) convertible

B) callable 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.

Which of the following securities typically carries the highest dividend rate? A) Convertible preferred B) Callable preferred C) Participating preferred D) Straight preferred

B) callable preferred Straight preferred is the benchmark rate. As the name suggests, there are no conversion or participating features. Compared to straight preferred, both convertible and participating preferred tend to carry lower dividend rates, as the investor has been given something extra-the right to convert into common shares at a fixed price or the right to earn more than the stated rate if the issuer has a good year and the board of directors elects to make an additional dividend payment. Callable preferred allows the issuer to call the securities away from the investor. From an investor's point of view, this is not an incentive. Therefore, callable preferred tends to pay higher rates.

Which of the following terms or phrases does NOT apply to REITs? A) secondary market B) redeemable C)Dividends taxed at full ordinary income rates D) managed

B) redeemable REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends and are, therefore, taxed as ordinary income.

ABC, a publicly held Corporation, decides to issue shares in an additional public offering. If the APO is for an additional 1 million shares and 60% of the shares are subscribed to in the preemptive rights offering, how many shares will the standby underwriter for this offering have available to sell to the public?

B)600,000. If 60% of the additional shares are subscribed to by existing shareholders, then 40% of the additional shares will be available to be sold to the public through a standby (firm commitment) underwriting (1,000,000 × 40% = 400,000).

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by A) 0.3 B) 0.25 C) 0.2 D) 0.1

C) 0.2 The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5:4 stock split, the new price should be about 4/5 the old price. A 1/5-change equals 20% (100% / 5 = 20%).

Which of the following securities carries the greatest amount of risk? A) corporate bonds B)debentures C)Preferred stock D) common stock

Common stock 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 stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats on the board, the stockholder could cast the votes in which of the following ways? A)300 votes for each of 2 directors. B)100 votes for each of 6 directors. C)200 votes for each of 3 directors. D)600 votes for any 1 director.

C) 200 votes for each of 3 directors A stockholder has 1 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 3 seats.

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) 8 B) 0 C) 24 D) 16

C) 24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There is $16 due in back dividends in addition to $8 this year, for a total of $24.

The record date: A) is set by the issuing corporation as a mailing date for distribution of cash dividends B) is fixed by the SEC to determine which investors own stock C) is set by the issuing corporation to determine which stockholders will receive a declared dividend D) indicates when the public offering of new issues can be made legally

C) is set by the issuing corporation to determine which stockholders will receive a declared dividend The record date is set by the corporation, at which time a list of stockholders who will receive a dividend is compiled.

All of the following statements describe stock rights EXCEPT: A) traded in secondary market B) short term instruments that become worthless after expiration date C) most commonly offered with debentures to make the offering more attractive D) they are issued by a corporation

C) they are most commonly offered with debentures to make the offering more attractive 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.

If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT: A)the certificates are publicly traded. B)a mortgage REIT represents pooled capital for real estate financing. C)the issuer must redeem certificates on shareholder request. D)investors receive dividends periodically.

C)the issuer must redeem certificates on shareholder request. REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.

All of the following are true of REITs EXCEPT: A)they must to qualify under Subchapter M, distribute at least 90% of their net investment income. B)they must invest at least 75% of their assets in real estate-related activities. C)they must pass along losses to shareholders. D)shares are publicly traded.

C)they must pass along losses to shareholders REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs.

A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that:

Current dividend yield has increased Current dividend yield is income dividend divided by price. If the price of a stock decreases and the dividend remains the same, dividend yield will increase.

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 25 odd lots B) 1 odd lot C) 1 round lot D) 25 rounds lots

D) 25 rounds lots For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.

Minority stockholders are more likely to be able to elect directors through which form of voting? A) Statutory. B) Regular. C) Progressive D) Cumulative.

D) Cumulative 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 1 position rather than spread them out and thus dilute them over 2 or 3 positions.

A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as "plusses" or advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is NOT an advantage of investing in REITs? A)Using real estate as a potential hedge against the movement of other equity securities the customer owns B)Being able to divest of the shares easily C)Having a professionally managed portfolio of commercial real estate assets D)Dividend treatment

D) Dividend treatment Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are, therefore, taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or OTC and considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.

Which of the following statements regarding warrants are TRUE? I.They pay dividends. II.They represent ownership in the issuing corporation. III.They allow for the purchase of common stock at a fixed price. IV.They do not give holders voting rights.

D) III and IV Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. They do not pay dividends which are only paid to stockholders, nor do they give holders voting rights. The owner of the warrant does not own the stock until the warrant is exercised.

Which of the following is an equity security? A)Mortgage-secured bond. B)Collateralized mortgage obligation. C)Government National Mortgage Association pass-through certificate. D)Real estate investment trust share.

D) Real estate investment trust share. A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities.

REITs can distribute all of the following to their shareholders EXCEPT: A)capital gains. B)cash dividends. C)stock dividends. D)capital losses

D) capital losses REITs can distribute their income to shareholders but not their losses. Under subchapter M of the Internal Revenue Code, they must distribute at least 90% of their income to shareholders in the form of cash dividends.

If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A)Interest in a real estate limited partnership. B)Direct investment in a shopping center renting retail space to a broad variety of stores. C)Privately placed investment. D)Real estate investment trust.

D) real estate investment trustReal estate investment trusts (REITs) are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate.

To qualify for favorable tax treatment, real estate investment trusts must do all of the following EXCEPT A)be organized as trusts B)invest at least 75% of their assets in real estate-related activities C)distribute at least 90% of their investment income to shareholders D)pass through losses to shareholders

D)pass through losses to shareholders Real estate investment trusts (REITs) engage in real estate activities and can qualify for favorable tax treatment if they invest at least 75% of their assets in real estate-related activities and pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they cannot pass through any losses.

If a stock is sold on November 30 when the record date for a dividend distribution is December 1, the seller is: I.entitled to the dividend if the trade is done regular way II.not entitled to the dividend if the trade is done regular way III.entitled to the dividend if the trade is done with cash settlement IV.not entitled to the dividend if the trade is done with cash settlement

I and IV Anyone who owns the stock on the record date will receive the dividend. In a regular way trade (T + 2 settlement), the seller will still be owner of record on the record date of December 1st, as the trade will settle after the record date. In a cash settlement transaction, the buyer will be owner of record on record date.

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make?I. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. II. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. III. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. IV. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

I, II, III and IV. All are true statements. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

The ex-dividend date is the I.date on and after which the buyer is entitled to the dividend II.date on and after which the seller is entitled to the dividend III.one business day before the record date IV.one business day after the record date

II and III Stock sold on the ex-dividend date entitles the seller to the dividend; ex-date is one business day before the record date.

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.

II and III 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.

A company may pay dividends in which of the following forms? I. Preemptive rights. II. Cash. III. Its own stock. IV. Its own bonds.

II and III. 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.

Which of the following must be paid before a corporation may pay its cumulative preferred stock arrearages? I. This year's preferred dividends. II. Bond interest. III. Corporate taxes. IV. Common stock dividends.

II and III. Before paying any dividends, the corporation must pay wages, taxes, and both interest and principal on debts that are due. Once the debt obligations have been satisfied, it may pay arrearages on cumulative preferred stock, then current fixed dividends on preferred stock, and finally common dividends.

Which of the following activities are NOT a registrar's function(s)? I. Audit the transfer agent. II. Accounting for the number of shares outstanding. III. Canceling old shares. IV. Transferring shares into the new owners' names.

III and IV The registrar accounts for the number of shares and audits the transfer agent

As interest rates fall, prices of straight preferred stock will:

RISE Preferred stock is interest rate sensitive. As rates fall, prices of preferred stocks tend to rise, and vice versa.

A tombstone for a new bond issue announces that 5-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer?

To improve the marketability of the bond issue Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock.

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend?

Tuesday may 15

Which of the following statements regarding warrants is TRUE? A)Warrants are often issued with other securities to make the offering more attractive. B)Warrants' terms are generally shorter than rights' terms. C)Warrants give the holder a perpetual interest in the issuer's stock. D)Warrants are safer than corporate bonds.

Warrants are often issued with other securities to make the offering more attractive 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.

Which of the following securities is subject to the greatest risk? A)Series EE bond. B)XYZ Inc., common stock. C)A-rated municipal bond. D)BAA-rated ABC convertible bond.

XYZ Common stock Common stock is a junior security. It is considered less safe than bonds because it has the lowest claim to assets in the event of the issuing firm's liquidation, and is paid dividends after bonds are paid interest.

A company set up to invest in real estate, mortgages, construction, and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called:

a real estate investment trust. A real estate investment trust, in order to avoid tax on its income, must distribute 90% of its net investment income to investors.

A change in earnings would affect the price of which of the following securities the most? a) common stock b) 10% debentures maturing in 10 years c) 6% preferred stock d) treasury stock

a) common stock Common stock is most sensitive to earning changes because,as owners, common shareholders have a claim on the earnings of the firm

A company has reverse-split its common stock. The effect on the earnings per share will be:

an increase. When a reverse split takes place, the number of outstanding shares is reduced. Since the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.

A company's dividend on its common stock is:

determined by its board of directors

ADRs are used to facilitate the:

domestic trading of foreign securities. 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.

An ADR is used to: A finance foreign trade in which U.S. citizens are engaged. B facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. C. sweeten a bond offering. D. facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad.

facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States

An informal network of market makers that offers to trade securities NOT listed on an exchange is called:

the over-the-counter market This best describes the over-the-counter market which is an interdealer market linked by computer terminals to Financial Industry Regulatory Authority (FINRA) member firms across the country.