Series 7 - Equities Quiz #1 & #2

ABC Corp. has a convertible preferred issue with an "anti-dilutive" covenant. ABC declares a stock dividend. After the stock dividend is paid, which statements are TRUE? I The conversion price is decreased II The conversion price is unaffected III The conversion ratio is increased IV The conversion ratio is unaffected A I and III B I and IV C II and III D II and IV

The best answer is A. When a senior convertible security is issued with an "anti-dilutive" covenant, should the company issue additional common shares, the terms of conversion are adjusted. Additional common shares will be issued, and since there are more common shares now outstanding, each share will be worth proportionately less. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible (the conversion ratio) is increased.

Which statement is TRUE about shareholder rights? A Common shareholders have preemptive rights B Preferred shareholders have preemptive rights C Both common and preferred shareholders have voting rights D Only preferred shareholders have voting rights

The best answer is A. Common shareholders have both voting rights and preemptive rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive rights. This is the case because they are being given a fixed rate of return that is not affected by dilutive actions taken on the part of the company (as is the case with common shareholders).

A corporation has issued $100 par, 6 1/2% cumulative convertible preferred stock, callable at par. The preferred is convertible into 2 shares of common stock. Currently, the preferred stock is trading at $100 while the common stock is trading at $50. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions): A $0 B $1,000 loss C $5,000 gain D $10,400 gain

The best answer is A. If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $100 per share = $10,000. Since each share of preferred is convertible into 2 common shares, the 100 preferred shares will be converted into 2 x 100 = 200 common shares. The sale of 200 common shares at the current market price of $50 will yield $10,000. The net profit is: $10,000 - $10,000 = $0. Here, there is a wash, as both the common and preferred are trading at parity.

All of the following are the responsibilities of the registrar EXCEPT the registrar: A distributes dividends, corporate reports, and voting materials B acts as a watchdog over the transfer agent C accounts for the number of shares issued and canceled D maintains the integrity of the record of all shareholder names

The best answer is A. The transfer agent handles the mailings to shareholders - dividends, corporate reports, and voting materials. The registrar acts as a watchdog over the transfer agent and makes sure that any mistakes made by the transfer agent are corrected. The registrar also ensures that all shares are properly accounted for and verifies the integrity of the record of shareholders' names and addresses.

A customer buys 100 shares preferred at $110 per share. The par value is $100. The dividend rate is 5%. Each dividend payment will be: A $250 B $275 C $500 D $550

The best answer is A. The annual rate is 5% X $100 par value = $5 per share X 100 shares = $500. Since preferred dividends are paid semi-annually, each payment is $250.

The Board of Directors of a company will set which of the following? I Declaration date II Record date III Ex date IV Payable date A I and II B III and IV C I, II, IV D I, II, III, IV

The best answer is C. The Board of Directors will set the declaration date (the day the dividend was declared), record date (the date on which customer's name must be on the record books to receive the dividend), and the payable date (the day on which the checks are mailed). The ex date is set by FINRA (the self regulatory organization or SRO that oversees the securities markets in the U.S.) based upon the report of the record date.

Which of the following would be considered owners of a corporation? A Only Common Shareholders B Both Common and Preferred Shareholders C Right Holders D Warrant Holders

The best answer is B. "Owners" have an equity position - and the only owners of a company are shareholders - both common and preferred. Right holders have a short term option to buy the stock; warrant holders have a long term option to buy the stock. Both rights and warrants are considered to be "equity-related" securities. They have neither an equity nor creditor stake in the corporation.

A corporation issues $100 par convertible preferred stock, convertible at $20 per share, when the market price of the common is currently $10. Which statement is TRUE? A The conversion ratio is 10:1 B The conversion ratio is 5:1 C The conversion ratio is 2.5:1 D The conversion ratio is 2:1

The best answer is B. The conversion ratio is Par Value / Conversion Price. $100 Par / $20 Conversion Price = 5:1 Conversion Ratio.

The definition of Treasury Stock is: A issued shares which are outstanding B issued shares which are no longer outstanding C unissued shares which are outstanding D unissued shares which are no longer outstanding

The best answer is B. Treasury Stock consists of authorized shares which have been issued and subsequently repurchased, thus they are no longer outstanding.

Which statement is TRUE regarding the effect of a repurchase of Treasury Stock? A Outstanding shares are reduced and Earnings Per Share are reduced B Outstanding shares are reduced and Earnings Per Share are increased C Outstanding shares are increased and Earnings Per Share are reduced D Outstanding shares are increased and Earnings Per Share are increased

The best answer is B. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, Earnings Per Share increases.

As interest rates fall, preferred stock prices will: A remain unaffected B rise C fall D fluctuate

The best answer is B. Preferred stock is a fixed income security whose prices move inversely with interest rates. As interest rates fall, preferred stock prices rise, so that the preferred will give a yield that is competitive with the current market.

The definition of Treasury Stock is: A issued stock minus authorized stock B issued stock minus outstanding stock C authorized stock minus outstanding stock D outstanding stock minus authorized stock

The best answer is B. Treasury stock consists of issued shares that have been repurchased by the corporation. Repurchased shares are no longer "outstanding," so the definition of Treasury Stock is issued shares minus outstanding shares.

Preferred stocks are most often suitable investments for the: A individual B corporate investor C partnership investor D fiduciary investor

The best answer is B. Corporations that receive dividends from investments held generally are allowed to exclude 50% of the dividends received from taxation. This exclusion does not apply to individual investors (however, individual investors get the benefit of taxation of cash dividends received at a substantially lower rate - 15% (or 20% for those in the highest tax bracket) - than do corporate investors). Thus, a corporation that receives dividends from common stock holdings, preferred stock holdings, or mutual fund holdings where the fund's income is from common and/or preferred stock investments, is allowed to exclude 50% of that income from taxation.

A corporation has issued 20,000,000 shares of common stock at $2 par. The corporation has 5,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A $10,000,000 B $30,000,000 C $40,000,000 D $50,000,000

The best answer is B. Outstanding stock is: Issued stock (20,000,000 shares) - Treasury stock (5,000,000 shares) = 15,000,000 shares outstanding at $2 par = $30,000,000 value.

To receive a quarterly dividend, a purchaser must settle no later than the: A. Declaration date B. Record date C. Ex-dividend date D. Payable date

The best answer is B. Record date

A customer owns 210 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 20 rights tendered, a shareholder may purchase one additional share at $20 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 10 shares by paying $20 B The shareholder can buy a maximum of 11 shares by paying $220 C The shareholder can buy a maximum of 11 shares by paying $420 D The shareholder can buy a maximum of 110 shares by paying $2,200

The best answer is B. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 210 shares and thus, will receive 210 rights. 210 rights / 20 rights per share = 10.5 shares, which is rounded up to 11 shares @ $20 each = $220 necessary to subscribe.

A corporation is attempting to sell additional shares to its existing shareholders through a rights distribution. A shareholder who wishes to subscribe must send the purchase amount with the rights certificate to the: A transfer agent B stand-by underwriter C rights agent D corporate controller

The best answer is C. A rights agent is hired to handle the mechanics of a rights offering. To subscribe, the existing shareholders submit their rights with the subscription dollar amount to the rights agent.

DEFF ADR represents 20% of the value of a DEFF ordinary share. The ordinary shares trade on the London Stock Exchange, where the current price is 200 British Pounds (BP). The current exchange rate for the British Pound against the U.S. Dollar is $1.40. The ordinary share pays an annualized dividend of 12 BP, with payment made semi-annually. The DEFF ADR is listed on the NYSE. If a customer places an order to buy $560,000 of the ADR on the NYSE, how much will the customer receive in each dividend payment? A $8,400 B $10,000 C $16,800 D $33,600

The best answer is C. Because the DEFF ordinary share trades for 200 BP in London, and the BP is worth $1.40, each ordinary share is worth 200 x $1.40 = $280. The ADR created for the U.S. market is 1/5th of this amount, or $56 per U.S. ADR. A customer who invests $560,000 will buy $560,000 / $56 = 10,000 ADR shares. The annual dividend rate per ordinary share is 12 BP, so the semi-annual payment is 6 BP. Since the ADR is worth 1/5th of an ordinary share, this becomes 1.2 BP per ADR share x $1.40 exchange rate = $1.68 per ADR share x 10,000 shares = $16,800.

If interest rates fall, issuers most likely will call: A all preferred issues B preferred issues with below market interest rates C preferred issues with above market interest rates D only preferred issues with high call premiums

The best answer is C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. The "call premium" is any amount that the issuer will pay the preferred stockholder above par value as "extra" compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

The transfer agent will typically perform which of the following functions? I Canceling old stock certificates II Issuing new stock certificates III Acting as disbursement agent for the corporation IV Maintaining the integrity of the record of all shareholder names and addresses A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. It is the responsibility of the registrar to maintain the integrity of the shareholder list, and to ensure that the number of shares transferred from one shareholder to another always matches. The transfer agent will cancel old shares, issue new shares, and act as disbursement agent for the corporation.

All of the following terms describe rights EXCEPT? A Exercisable B Negotiable C Redeemable D Giftable

The best answer is C. Rights are: exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.

All of the following statements about warrants are true EXCEPT: A warrants have a longer term than rights B warrants are issued to make corporate senior securities offerings more attractive to investors C warrants give the holder a perpetual interest in the issuer's underlying common stock D warrants trade separately from the stock of the company

The best answer is C. Warrants are long term options to buy a company's shares at a fixed price. They are typically attached to debt and preferred stock offerings (securities that are "senior" to the common stock of the issuer) to make the securities more attractive to purchasers. This is accomplished because the warrant gives growth potential to these senior security holders if the common stock price should rise in the future. Warrants typically have a fixed life of 5 years or less and then expire. Companies can issue perpetual warrants, but rarely do so.

DEF Corporation wants to raise additional capital without using an underwriter by issuing rights to its existing shareholders. The company needs to raise $100,000,000 to build a new manufacturing plant. Its common stock is currently trading at $54 and the subscription price for a rights holder is set at $50. The company has 4,000,000 shares outstanding. Which statement is TRUE for the owner of 100,000 XYZ common shares? A 50,000 rights are received allowing the holder to buy 50,000 shares B 100,000 rights are received allowing the holder to buy 100,000 shares C 50,000 rights are received allowing the holder to buy 100,000 shares D 100,000 rights are received allowing the holder to buy 50,000 shares

The best answer is D. Because the company has 4,000,000 shares outstanding, it will issue 4,000,000 rights. The company wants to raise $100,000,000 / $50 received per share = 2,000,000 new shares to be issued. Because there are 4,000,000 rights issued covering 2,000,000 additional shares, the terms of the offering will be that 2 rights are needed to buy 1 new share. The holder of 100,000 shares will receive 100,000 rights. Because 2 rights are needed to subscribe to 1 new share, the holder will be able to subscribe to 50,000 new shares.

If Acme Motor Company earned $5.00 per common share in 2018, its dividend payout ratio was: A 2% B 20% C 25% D 50% 2018 div payout = $2.5

The best answer is D. $2.50 of Dividends paid in 2018 divided by $5.00 Earnings per Common Share = 50% Dividend Payout Ratio.

All of the following features are common to both preferred stock and bonds EXCEPT: A fixed rate B periodic payments C can be callable D fixed maturity date

The best answer is D. Preferred stock has no maturity - its life is indefinite. Bonds have a stated maturity date. Both preferred and bonds are fixed rate, can be callable, and typically make semi-annual payments to holders.

A company declares a cash dividend that is 8% higher than the previous dividend rate. Prior to the announcement, the annual dividend yield was 6% and the stock was trading at $25 per share. What is the new dividend payment amount per share? A $.375 B $.380 C $.400 D $.405

The best answer is D. This question is more annoying than hard! The current annual dividend yield is 6% x $25 current share price = $1.50 per year. The dividend is now increasing by 8%, so the new annual dividend rate will be 1.08 x $1.50 = $1.62. Since common dividends are paid quarterly, the quarterly dividend will be $1.62 / 4 = $.405.

Which statement is BEST regarding participating preferred stock? A The dividend rate is fixed B The dividend rate varies depending on the decision of the Board of Directors C The dividend rate is fixed as to maximum but not as to minimum D The dividend rate is fixed as to minimum but not as to maximum

The best answer is D. Participating preferred pays a fixed dividend rate but also participates with common in "extra" dividends declared by the Board of Directors. Therefore, the dividend rate is fixed as to minimum but not as to maximum.

Which statement is TRUE regarding ADRs? A Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in U.S. dollars B Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in the foreign currency C Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in the foreign currency D Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in U.S. dollars

The best answer is D. The foreign corporation whose shares are "packaged" into an ADR declares any dividend in its home currency. The bank that assembled the ADR converts the dividend to U.S. dollars and remits it to the ADR holders.

Which of the following best describes the duties of a "Rights Agent"? The Rights Agent: A ensures that all common shareholders have voting rights B ensures that the correct number of shares are canceled and issued by the transfer agent whenever a transfer occurs C repurchases company Treasury Stock when market conditions are favorable D accepts shareholder subscriptions to a rights offering

The best answer is D. The rights agent handles the mechanics of a rights offering. In a rights offering, a company is attempting to sell additional shares directly to its existing shareholders. The company hires a "rights agent" to perform these duties.