Series 7 - Chapter 1 Questions

RST Corporation has both common stock and cumulative preferred stock out- standing. Its preferred stock has a stated dividend rate of 5% (par value $100). Because of financial difficulties, no dividend was paid on the preferred stock in 2002 and 2003. If RST wished to declare a common stock dividend in 2004, RST is required to first pay how much in dividends to the cumulative preferred shareholders?

$15 This amount includes the dividends in arrears for 2002 ($5) and 2003 ($5), plus the $5 dividend for 2004.

OTC equity securities that trade over $175/share, how much is the unit of trade, or round lot?

1 share.

In a stock split, what two things does the customer receive?

1. Additional shares from the transfer agent. 2. A sticker to put on existing certificate to change its par value.

Match each of the following terms with the appropriate description below. A. Outstanding stock B. Authorized stock C. Book value D. Par value __ 1. Number of shares that a corporation is permitted to Issue __ 2. Dollar amount assigned to a share of stock by its issuer __ 3. Liquidation value of each share of common stock __ 4. Issued stock - treasury stock

1. B. 2. D. 3. C. 4. A.

Match each of the following terms with the appropriate item below. A. CUSIP number B. Preemptive right C. Current yield D. Registrar E. Transfer agent __ 1. Party responsible for recording security owners' names and holding delivering new securities. __ 2. Assigned to each security for identification. __ 3. Stockholders may maintain proportionate ownership by purchasing newly issued shares before they are offered to the public __ 4. Party responsible for accounting for all of an issuer's outstanding stock __ 5. Annualized dividend divided by current market price

1. E 2. A 3. B 4. D 5. C

RST stock has a current market value of $50. Total dividends paid during the year were $5. What is the dividend yield?

10% The solution is found by dividing $5 by $50 (5 ÷ 50 = .10)

XYZ Corp. will be electing three directors at its annual meeting. Assume a shareholder owns 100 shares. Under STATUTORY voting, what is the maximum votes the shareholder may allocate to each director?

100 maximum votes for each seat on the board.

If a preferred stock is described as XYZ 6% preferred participating to 9%, how much does the company pay in additional dividends in profitable years if the BOD declares so?

3% in additional dividends

XYZ Corp. will be electing three directors at its annual meeting. Assume a shareholder owns 100 shares. Under CUMULATIVE voting, what is the maximum votes the shareholder may allocate to each director?

300 maximum votes for any one seat. This means the shareholder has no more votes for the other 2 seats.

RST has a current market value of $100. The most recent quarterly dividend paid was $1.25. What is the dividend yield?

5% The solution is found by annualizing the dividend (multiplying by 4) first. $1.25 × 4 = $5. $5 ÷ $100 = a 5% dividend yield. Remember to use annual dividends in calculating yield.

ABC has 1 million shares of common stock outstanding. Mr. X owns 100,000 shares of ABC common stock, or 10%. If ABC issues an additional 500,000 shares, Mr. X will have the opportunity to buy how many shares?

50,000 Percentage of shares owned x total # of additional shares 10% x 500,000 = 50,000

ABC company has authorized 1 million shares of common stock. It issued 800,000 shares one year ago. It then purchased 200,000 shares for its treasury. How many shares of ABC stock are outstanding?

600,000 Issued stock - treasury stock = outstanding stock 800,000 - 200,000 = 600,000

Which of the following are characteristics of a REIT? I. It is traded on an exchange or over the counter. II. It is professionally managed. III. It passes through both gains and losses to investors. IV. It is a type of limited partnership. A. I and II B. I, II and III C. III and IV D. I, II, III and IV

A

Which of the following have equity positions in a corporation? I. Common stockholders II. Preferred stockholders III. Convertible bondholders IV. Mortgage bondholders A. I and II B. I and III C. II and III D. III and IV

A Common and preferred stockholders have equity positions, or ownership positions. Bondholders (mortgage or otherwise) are creditors, not stockholders.

An investor owns 3,000 shares of a low-priced common stock. After a 1:6 reverse split, how many shares would he hold? A. 500 B. 3,000 C. 5,000 D. 18,000

A In a reverse split, we have fewer shares than before. Therefore, a 1:6 reverse split would give us 1⁄6 of the previous 3,000 shares, or 500 shares.

All of the following characteristics are advantages of a REIT investment EXCEPT A. liquidity B. tax deferral C. diversification D. professional management

B

To avoid taxation at the corporate level, REITs must derive at least 75% of their income from real property and must distribute to shareholders A. 75% of net income B. 90% of net income C. 95% of net income D. 98% of net income

B

An ADR represents A. a U.S. security in a foreign market B. a foreign security in a domestic market C. a U.S. security in both a domestic and a foreign market D. a foreign security in both a domestic and a foreign market

B ADR stands for American depositary receipt. ADRs are receipts issued by U.S. banks. They represent ownership of a foreign security and are traded in U.S. securities markets.

If a stock undergoes a 1:5 reverse split, which of the following are TRUE? I. Market price per share increases. II. The number of shares outstanding increases. III. Earnings per share typically increase. A. I and II B. I and III C. II and III D. I, II and III

B After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share should increase.

In a portfolio containing common stock, preferred stock, convertible preferred stock, and guaranteed common stock, changes in interest rates would be most likely to affect the market price of the A. common B. preferred C. convertible preferred D. guaranteed

B Preferred stock most closely resembles bonds; therefore, it would be the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is in uenced by the common stock because it is convertible into the underlying security. Guaranteed common stock is common stock whose dividends are guaranteed by another corporation.

REITs must I. invest all of their assets in real estate-related activities II. distribute at least 90% of their net investment income III. be organized as trusts IV. pass along losses to shareholders A. IandII B. II and III C. IIandIV D. IIIandIV

B 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 (not all of their assets) 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; they are not DPPs.

Stockholders must approve A. a declaration of a cash dividend B. a 3:1 stock split C. a repurchase of 100,000 shares for the treasury D. a declaration of a 15% stock dividend

B Shareholder approval is required to change the stated value of stock, which occurs with a stock split. Decisions regarding payment of dividends or repurchase of stock are made by the board of directors (management only) since these are considered operational decisions.

ABC Corp. has outstanding a 10% noncumulative preferred stock. Two years ago, ABC omitted its preferred dividend. Last year, it paid a dividend of $5 per share. In order to pay a dividend to common shareholders, each preferred share must be paid a dividend of A. $5 B. $10 C. $15 D. $25

B The company must pay the full stated dividend of $10 per preferred share in order to pay any dividends to the common shares. Note that this is straight, or noncumulative, preferred. Omitted does not mean missed. BOD can decide when they want to pay out dividends, but stockholders are guaranteed those non-missed dividends sooner or later.

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor could purchase the stock regular way and receive the dividend? A. Monday,May14 B. Tuesday, May 15 C. Wednesday,May16 D. Thursday,May17

B To receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 2 business days, the customer must purchase the stock no later than Tuesday, May 15. If the investor waits until Wednesday, May 16, to purchase the stock, the investor will not receive the dividend because the trade will settle on Friday, May 18. Wednesday, May 16, is the ex-date, which is the rst day the stock trades without the dividend. For regular way trades, the ex-date is 1 business day before the record date.

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit? A. Dilution of shareholders' equity B. Reduction of the debt securities' interest rate C. Reduction of the number of shares outstanding D. Increase in earnings per share

B Usually, a warrant is issued as a sweetener to make the debt instrument more marketable. This enhancement allows the issuer to pay a slightly lower rate of interest. A warrant may be issued together with an issue of bonds or preferred stock, entitling the owner to purchase a given number of common shares at a speci c price for a certain number of years.

Which of these matters do shareholders vote on: A. Declaring dividends B. Stock splits C. Board members D. Issuance of additional equity-related securities E. How much dividends to disburse

B C D

ABC's price per share is $28, the subscription per share is $17. 4 rights are needed to purchase one share of stock. What is the value of one right before the ex-date? What is the value of one right after the ex-date?

Before: $2.20 (market price - subscription price) / (# of rights to purchase 1 share + 1) (28 - 17) / (4 + 1) = 11/5 = $2.2 -------- After: $2.20 market price = original market price - price of one share (market price - subscription price) / (# of rights to purchase 1 share) (25.8 - 17) / 4 = 8.8/4 = 2.2

The following shows the capital transactions of ABC Corporation. Date: 10-19-96 Event: Initial offering Amount: 6 million shares Date: 4-1-00 Event: Treasury purchase Amount: 500,000 shares ABC wants to raise additional capital by sell- ing 2 million shares through a rights offering and engages an underwriter on a standby basis. By ex- piration date, ABC was able to sell only 1 million shares to existing shareholders. After expiration, how many shares does ABC have outstanding? A. 6.5 million B. 7.0 million C. 7.5 million D. 8.0 million

C Before the rights offering, the company had 5.5 million shares outstanding (6 million issued - 500,000 treasury shares). In connection with the offering, ABC engages a standby underwriter, which commits to purchasing any unsold shares. Therefore, regardless of the number of shares initially subscribed to, all 2 million shares will be sold.

1. Which of the following represent(s) ownership, or equity, in a company? I. Corporate bonds II. Common stock III. Preferred stock IV. Mortgage bonds A. I and IV B. II only C. II and III D. I, II, III and IV

C Owning either common or preferred stocks represents ownership, or equity, in a corporation. The other two choices represent debt instruments. Clients purchasing corporate or mortgage bonds are considered lenders, not owners.

Holders of both XYZ preferred stock and common shares are paid an annual dividend of $5 per share and then share equally in further dividends up to $1 per share in any one year. In these circumstances, the preferred stock is known as A. cumulative B. adjustable C. participating D. convertible

C Participating preferred stock allows for an increase in the stated dividend when the common dividend is increased. Cumulative preferred requires that dividends in arrears be paid before the current dividend can be paid. Adjustable refers to an adjustable dividend rate. Convertible preferred can be converted into the issuer's common shares.

Shareholder approval is required for all of the following corporate events EXCEPT A. stock splits B. the acceptance of a tender offer C. stock dividends D. the issuance of convertible bonds

C Shareholder approval is not required for the payment of dividends. Shareholder approval is normally required for actions that increase or potentially increase the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.

If your client wished to purchase a preferred stock that would offer him the highest likelihood of assured income plus the opportunity to take part in the growth of the company's common stock, which of these features might he consider? I. Callable II. Convertible III. Cumulative IV. Straight A. I and II B. I and III C. II and III D. II and IV

C The callable feature does nothing to ensure an investor income, whereas a cumulative preferred means that the common stockholder will never receive a dividend until the cumulative stockholder receives all current and prior dividends due the preferred. The only way to take part in the growth of the company's common stock would be to have an opportunity to obtain that common stock (the convertible feature).

The board of directors is responsible for setting all of the following EXCEPT A. declaration date B. payable date C. ex-dividend date D. record date

C The ex-date for a distribution is set by the appropriate self-regulatory organization. The issuer determines the other dates listed.

Treasury stock I. has voting rights and is entitled to a dividend when declared II. has no voting rights and no dividend entitlement III. has been issued and repurchased by the company IV. is authorized but unissued stock A. I and III B. I and IV C. II and III D. II and IV

C Treasury stock is stock a corporation has issued and subsequently repurchased from the public in the secondary market. It does not carry the rights of other common shares, such as voting rights, rights to dividends, or preemptive rights.

Treasury stock I. has voting rights and is entitled to a dividend when declared II. has no voting rights and no dividend entitlement III. has been issued and repurchased by the company IV. is authorized but unissued stock A. I and III B. I and IV C. II and III D. II and IV

C Treasury stock is stock a corporation has issued but subsequently repurchased from investors in the secondary market. The corporation can either reissue the stock at a later date or retire it. Stock that has been repurchased by the corporation has no voting rights and is not entitled to any declared dividends.

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

C Warrants are generally issued with bond offerings as a sweetener. Warrants are long- term options to buy stock and, because they are equity securities, warrants are junior in safety to bonds.

A corporation has a 2:1 stock split. Before the split, there were 1 million shares of $10 par common stock outstanding. Which of the following is(are) TRUE? I. The par value remains at $10 per share. II. The par value is now $5 per share. III. There are still 1 million shares outstanding. IV. There are now 2 million shares outstanding. A. I and III B. II and III C. II and IV D. III and IV

C When a stock splits, the par value is always reduced (unless it is a reverse split, in which case the par value is increased). We will have twice as many shares worth half as much each.

ADRs are used to facilitate A. the foreign trading of domestic securities B. the foreign trading of U.S. government securities C. the domestic trading of U.S. government securities D. the domestic trading of foreign securities

D

Which of the following statements regarding dividend payments on common stock is TRUE? A. They must be paid if the corporation has earnings. B. Dividend payments are always in direct proportion to corporate earnings. C. Dividends are sometimes paid before preferred stockholders receive theirs. D. Dividends on common stock are paid at the discretion of the board of directors and may be paid whether there are earnings or not.

D Dividends on common stock are variable and are never paid ahead of preferred stockholders. The board decides how much of the earnings to pay out as a dividend and may, in fact, decide to keep all of the earnings (or a very high percentage of the earnings) if the money is needed for future expansion, new equipment, and so on.

If ABC Corp. has a 6% participating preferred, the 6% represents the A. dividend payment B. maximum dividend payment C. maximum dividend, but not the minimum D. minimum dividend, but not the maximum

D If ABC Corp. has a 6% participating preferred, the 6% represents the minimum expected dividend payment. Although this dividend is not guaranteed, no dividends can be paid on common if any of the preferred is unpaid. The key to participating preferred is that it also shares in the common dividend to which, theoretically, there is no maximum.

All of the following accurately describe a warrant EXCEPT A. it is a sweetener to bond issues B. it is a long-term option to buy stock at a set price C. no voting rights are involved D. each warrant allows the owner to purchase a fractional share of the stock

D The usual terms of a warrant permit the investor to purchase 1 share of the common stock for each warrant held. One other point to remember about warrants is that warrant holders do not receive dividends.

T/F: In a forward stock split, the percentage increase in price will always be less than the percentage decrease in shares.

False. In a forward stock split, the percentage decrease in price will always be less than the percentage increase in shares.

Which dividends are guaranteed? -Preferred -Common

Neither

An investor has 100 shares at $60 per share. Assume a 2:1 split. Find the new number of shares and the new value of each share.

New number of shares: 200 (original # of shares x first number ) / second number (100 x 2) / 1 = 200 ______ New value per share: 30 (total value of shares / new number of shares) (100 x 60) / 200 = 30

Assume the original interest of 100 shares at $5. After a 1:4 reverse split, what is the new number and value of shares?

New number of shares: 25 (original # of shares x first number ) / second number (100 x 1 / 4 = 25 ______ New value per share: 20 (total value of shares / new number of shares) (100 x 5) / 25 = 20

Of straight and cumulative preferred, which would you expect to have the higher stated rate?

Straight preferred Cumulative preferred is safer, and there is always a risk/reward trade-off. Because straight preferred has no special features, it will pay a higher stated rate of dividend.

ABC has 10 million shares outstanding and will issue 1 million additional shares. How many rights will it issue and how many rights are required to buy one share?

The company will issue 10 million rights. It will require 10 rights to buy one share.

T/F: In a forward stock split, the percentage decrease in price will always be less than the percentage increase in shares.

True

Which type of voting benefits the smaller investor and the larger shareholder?

Cumulative - smaller investor. Statutory - larger shareholder.

T/F: In a forward stock split, the percentage increase in price will always be less than the percentage increase in shares.

False. In a forward stock split, the percentage decrease in price will always be less than the percentage increase in shares.

An investor has 100 shares at $60 per share. Assume a 5:4 split. Find the new number of shares and the new value of each share.

New number of shares: 125 (original # of shares x first number ) / second number (100 x 5 / 4 = 125 ______ New value per share: 48 (total value of shares / new number of shares) (100 x 60) / 125 = 48

At the annual meeting of ABC Corporation, 5 directors are to be elected. Under the cumulative voting system, an investor with 100 shares of ABC would have a total of A. 100 votes to be cast among 5 directors B. 500 votes to be cast in any way the investor chooses for 5 directors C. 500 votes to be cast for each of 5 directors D. 100 votes to be cast for only 1 director

B With cumulative voting rights, this investor may cast 500 votes for the 5 directors in any way the investor chooses.

Which type of preferred stock typically has the highest stated rate of dividend, all other factors being equal?

Callable preferred When the stock is called, dividend payments are no longer made. To compensate for that possibility, the issuer pays a higher dividend.

T/F: Shareholders vote on dividend-related matters

False. These are decided by the BOD.

T/F: When interest rates rise, the preferred price falls.

True

How much is a round-lot number of shares?

Any amount divisible by 100.

ABC common stock is currently selling for $150 per share with a quarterly dividend of $1.50. The current yield for ABC common stock is A. 1% B. 4% C. 12.5% D. 25%

B To calculate current yield, the quarterly dividend must be annualized ($1.50 × 4 = $6). The $6 annual dividend ÷ the $150 market price = 4%.

Cumulative voting rights A. benefit the large investor B. aid the corporation's best customers C. give preferred stockholders an advantage over common stockholders D. benefit the small investor

D The cumulative method of voting gives an investor 1 vote per share owned times the number of directorships to be elected. For example, if an investor owns 100 stock shares and there are 5 directorships to be elected, the investor will have a total of 500 votes. The stockholder may cast all of his votes for one candidate, thereby giving the small investor more voting power.