SIE ch 2 exam

Which of the following statements is true when comparing the cumulative voting method to statutory voting?

Minority shareholders have greater voting effectiveness with cumulative voting than under statutory In a cumulative voting structure, shareholders may cast their votes in any way they wish. Cumulative gives minority shareholders greater voting effectiveness and is considered an advantage to the small investor. The number of votes is the same regardless of the method, it's the way the votes may be allocated that is different.

The record date to receive a dividend is set for Tuesday, January 14th. If a current stockholder wishes to receive the dividend, but want to sell their shares, they must sell the stock in a regular way trade no earlier than:

Monday January 13th If an individual owns common stock and wishes to receive the dividend, that individual cannot sell their shares prior to the ex-date. The ex-date is 1 business day prior to the record date, in this example Monday January 13th. If the stock is sold on or after January 13th, the seller would still be entitled to receive the dividend. If the stock is sold before this date, the individual that purchases the shares would be entitled to receive the dividend.

An individual owns 400 shares of RVL, an exchange-traded stock. RVL paid a 20% stock dividend on August 5th. On the day before the ex-dividend date, the stock closed at $20/share. What are the tax consequences of this event?

No immediate tax liability, but the cost basis per share will be adjusted Stock dividends, like stock splits, do not increase an investor's holdings. They just redistribute holdings into more shares at a lower price per share. The individual owned 400 shares at $20/share before the ex-date, for a total value of $8,000. After the stock dividend, the individual owns 480 shares (20% more than 400), but the value of the shares was adjusted so that their total value remained at $8,000 (i.e., to $16.667/share). Therefore, stock dividends are not taxable. The individual will adjust their cost basis per share down to account for the new shares they have received.

The AZA Corporation declares a dividend payable on May 1 to all shareholders of record on April 15. If an investor purchases AZA common stock in a regular-way settlement on April 14, the investor is:

Not entitled to the dividend For regular-way settlement on a stock, the ex-dividend date is 1 business day before the record date. Since the stock was purchased on the ex-dividend date, the investor will not receive the dividend.

What determines the number of votes a stockholder has?

Number of shares owned Number of shares owned by the stockholder determines how many votes the stockholder has. They have the same total number of votes under the statutory and the cumulative methods.

Which of the following is false regarding options?

Options must be exercised

A call contract has an exercise price of $50. The current market value of the underlying stock is $45. The option contract is:

Out-of-the-money If an option could not currently be favorably exercised by the holder, the option is out-of-the-money. A put contract is out-of-the-money when the market price of the stock is above the strike price. A put contract is in-the-money when the market price of the stock is below the strike price. If the strike price of the option and the market price of the stock are exactly equal, the option is at-the-money.

An investor purchased 1 OPQ Aug 40 put @ 1.50. Currently OPQ common stock is trading at 44.50 per share. This put option is currently:

Out-of-the-money by $4.50 An option is out-of-the-money when it is not profitable to exercise it. It would not make financial sense for the investor to sell OPQ stock at the $40 exercise price when OPQ is currently selling for $44.50. The difference between the strike price and the current market price determines how far an option is either in- or out-of-the-money. The put option is current out of the money by $4.50 ($40 strike price ˗ $44.50 current price = ˗$4.50). The premium paid is not a factor in determining how far an option is in- or out-of-the-money.

Shares that are held by the investing public are specifically referred to what type of shares?

Outstanding Outstanding shares are those authorized shares that have been sold to investors and have not been bought back by the issuer. Those that are issued and then bought back by the issuer are treasury shares. Authorized shares are the shares approved in the articles of incorporation for the corporation to make available for sale. Unissued shares are shares that are not being offered for sale to the public at this time but may be offered in the future.

Shares that are held by the investing public are specifically referred to what type of shares?]

Outstanding Outstanding shares are those authorized shares that have been sold to investors and have not been bought back by the issuer. Those that are issued and then bought back by the issuer are treasury shares. Authorized shares are the shares approved in the articles of incorporation for the corporation to make available for sale. Unissued shares are shares that are not being offered for sale to the public at this time but may be offered in the future.

For preferred stock, dividends are stated as a percentage of the:

Par value of the shares Dividends for preferred shares are stated as a percentage of its par value. Par value can be assumed to be $100 for preferred shares unless it has been stated differently.

Cumulative preferred stock will:

Pay past and current preferred dividends before it can pay dividends on common shares

An investor owns 300 shares of ABC Inc. Recently, ABC issued 10 million shares of common stock and gave current stockholders the ability to purchase some of the new shares prior to the public offering. This offering is known as:

Preemptive rights Stockholders have the right to maintain their proportionate share of the companies in which they are part owners. This is accomplished through preemptive rights (often just called rights), which are the ability to purchase any newly issued shares before they are offered to the public. These shares are available at the subscription price. The subscription price is below the current market price of the stock to give the stockholders further incentive to exercise their rights. The percentage of the new shares that the stockholder has the right to buy is the same percentage of the company that they currently own.

Which of the following best describes preemptive rights for common shareholders?

Preemptive rights give common shareholders the opportunity to maintain a proportionate share of ownership in the corporation if more shares are issued Preemptive rights allow shareholders to maintain a proportionate share of ownership in the corporation when additional shares are issued. When a corporation wants to issue additional shares, the existing shareholders will have the right to purchase those shares in an amount that would keep their proportionate ownership in the corporation unchanged, before the shares are offered to new investors.

An investor has an option to sell 100 shares of ABC stock at $50 per share until the expiration of the contract. The investor has a:

Put option A put option gives the buyer/holder the right to sell stock at a stated price, the strike price, until the option contract expires. A call option gives the buyer/holder the right to buy stock at a stated price, the strike price, until the option contract expires. Rights are short-term options to buy, and warrants are long-term options to buy.

Which of the following is not required to be forwarded to customers by member firms carrying customer accounts being held with equities?

Red herring Brokerage accounts are opened by clients who wish to buy and sell securities. If a client has purchased equity securities, their BD should forward all proxy material and all annual reports, information statements, and other material sent to stockholders that are distributed to the BD by the issuer of the stock. If the client has purchased debt securities, the BD should make reasonable efforts to forward any material from the issuer that contains material information regarding the bond, like notices concerning defaults, financial reports, information statements, and material event notices. A red herring is only used during the cooling-off period.

Which of the following SEC rules allows new shares created as a result of a corporate merger or acquisition to reclassify the shares of the old company into a new company without having to complete the registration process over again?

Rule 145 Normally, newly created securities must be registered with the Securities Exchange Commission, unless an exemption applies. SEC rule 145 allows the reclassification of shares because of M&A. The newly created shares can reclassify and do not need to go through the registration process. Rule 144 allows for the public resale of restricted or control securities if several conditions are met. Rule 10b-5 prohibits fraud, misrepresentation, and deceit in the sale of securities. Rule 415 allows for shelf registration of securities, allowing an issuer of established, publicly traded companies to keep a blanket registration of securities and issue new securities up to 3 years from the effective date.

If an owner of a common stock no longer wants it, what is the investor's best option?

Sell it to another investor Common stock is considered a negotiable security that shareholders are generally free to give, transfer, assign, or sell without restrictions. This is called the right of free transfer. While it is possible to sell it back to the corporation in a stock buyback program or to an existing employee of the corporation, those are not always readily available options. The most convenient and efficient way to sell publicly traded securities is in the open market to another investor.

Which option positions are bearish?

Selling calls and buying puts

An investor holds shares of a publicly traded corporation that has been in the news lately for repeated scandals. This negative publicity has caused the stock price to fall by nearly half from its recent peak. The investor believes that it's time for new management and that shareholders should pressure the board of directors to remove the CEO. The investor wants to begin a letter-writing campaign to shareholders and requests a list of current shareholders from the transfer agent. Which of the following regarding this situation is TRUE?

Shareholders are entitled to receive the names and addresses of other shareholders upon request Shareholders have the right to inspect the books, records, and shareholder lists of the corporation in which they have invested. The financial reports can be downloaded from an online database, but not the shareholder list. No shareholder is restricted from receiving the list of all shareholders.

Which of the following is not an income strategy?

Short stock with a long call Income strategies are used to provide income when the market is flat. Options are sold to generate additional income. All income strategies involve a short option contract. A short stock with a long call is a hedge strategy.

ABC Corp. has sent proxy voting materials to its shareholders to decide upon the members of the board of directors. The voting instructions indicate that each shareholder is entitled to cast 1 vote for each share owned, and the votes must be divided evenly among each board member candidate. This voting structure is known as:

Statutory voting Shareholders are entitled to vote on the board of directors. In a statutory voting structure, each shareholder may give no more than 1 vote per share to any board member candidate. A shareholder's votes must be divided evenly among each issue being voted on. A shareholder who owns 100 shares when there are 4 board member seats up for election has a total of 400 votes. These votes must be distributed by exactly 100 votes per candidate. This voting structure is distinct from cumulative voting, where shareholders may choose to cast their votes in any manner. Proportional voting is another term for cumulative voting. While proxy materials are effectively absentee ballots, proxy voting can be either statutory or cumulative.

What type of voting is it when the total number of votes is the maximum that may be voted for each available seat on the board?

Statutory voting Shareholders are entitled to vote on the board of directors. In a statutory voting structure, each shareholder may give no more than 1 vote per share to any board member candidate. A shareholder's votes must be divided evenly among each issue being voted on. A shareholder who owns 100 shares when there are 4 board member seats up for election has a total of 400 votes. These votes must be distributed by exactly 100 votes per candidate. This voting structure is distinct from cumulative voting, where shareholders may choose to cast their votes in any manner. Proportional voting is another term for cumulative voting. While proxy materials are effectively absentee ballots, proxy voting can be either statutory or cumulative.

Which of the following statements is false regarding corporate voting rights?

Statutory voting benefits small stockholders The only false statement is that statutory voting benefits small stockholders. Under statutory voting, each stockholder must keep their votes separate and use them for each individual election. Statutory voting benefits the larger shareholder.

How do you calculate the breakeven for a put contract?

Strike price minus premium Breakeven is the point that the option buyer will not make any money or lose any money if the contract is exercised. This means that the market price is above or below the strike price by the exact amount of the premium paid. To calculate the breakeven for a put, strike price minus the premium. To calculate the breakeven for a call, strike price plus the premium.

An investor owns 3% of WHO Corporation stock. The investor has been provided with the right to purchase an additional 3% within the next 30 days. This is a description of a:

Subscription right A subscription right is also called a preemptive right. These allow a shareholder to buy additional shares to maintain the same percentage of ownership. Rights are usually have no more than 30-days until expiration. Warrants are long term. Standard options contracts expire in 9 months.

ABC Inc. was incorporated in 2014 and had its initial public offering in 2017. In its most recent filing, ABC provided the following information at the close of its fiscal year: Gross income: $15,500,000 Net income: $4,285,000 Number of shares outstanding: 10,000,000 Price per share: $8.50 Value of tangible assets: $3,380,000 Value of intangible assets: $485,000 Outstanding loan balance: $1,150,000 Accounts payable: $290,000 Based on this information, what is ABC Inc.'s book value?

$1,940,000 Book value indicates a company's worth if it were to cease operations, sell off all its tangible assets, and pay off all its outstanding debts. It is calculated by taking the value of all tangible assets (things that can be liquidated) and subtract the total of its liabilities. This represents the total value that shareholders would theoretically receive if the company were to sell everything it had and paid all its debts. Tangible assets include real estate, equipment, vehicles, office fixtures, etc. While intangible assets, such as patents, goodwill, and intellectual property are certainly valuable, they are not physical objects and can't simply be sold at an auction. Therefore, the value of intangible assets is not included in a company's book value. ABC's total tangible assets total $3,380,000. Subtract its outstanding debts, namely a loan for $1,150,000 and bills due for $290,000, and shareholders are left with a book value of $1,940,000.

ABCD Corporation has issued preferred convertible stock at par that is convertible at $25. When current market price of ABCD common stock is $26, what is the parity price of the preferred?

$104 This is a 2-step problem. First you must determine the conversion ratio using the formula: par value ÷ conversion price (100 ÷ 25 = 4). Remember the phrase "we commonly multiply and prefer to divide". The question gives the current market price of the common stock. Multiply the CMP of the common by the conversion ratio to get the parity of the preferred (26 x 4= $104). This investor would want to consider conversion if the preferred is trading at any price below $104.

WTM convertible preferred stock is issued at par with a conversion ratio of 6. The current market price (CMP) of the convertible preferred stock is $108. If a customer purchases the convertible preferred at the current market price, what is the parity price of the common stock?

$18 An investor will receive 6 shares of WTM common stock for each 1 share of convertible preferred if they convert. Remember the phrase "we commonly multiply and prefer to divide". The question gives the current market price of the preferred stock. Divide the CMP of the preferred by the conversion ratio to get the parity of the common stock ($108 ÷ 6 = $18). This investor would want to consider conversion if the common stock is trading at any price above $18.

MNM Corporation issued convertible preferred stock with a par of $100. The shares have a conversion ratio of 5:1. The current market price of the common stock is $10. What is the conversion price?

$20 The conversion price multiplied by the conversion ratio always equals par. 100 ÷ conversion ratio = conversion price (100 ÷ 5 = $20 conversion price).

KAM Corporation has issued preferred convertible stock with a par of $100. The conversion ratio is 5:1. If the current market price of the preferred stock is $125, what is the parity price of the common stock?

$25 An investor will receive 5 shares of KAM common stock for each 1 share of convertible preferred if they convert. Remember the phrase "we commonly multiply and prefer to divide". The question gives the current market price of the preferred stock. Divide the CMP of the preferred by the conversion ratio to get the parity of the common stock ($125 ÷ 5 = $25). This investor would want to consider conversion if the common stock is trading at any price above $25.

An individual invested $25,000 into FAM Corporation during their IPO. Now the value of the stock has almost doubled. What is the investor's financial liability in FAM Corporation?

$25,000 A stockholder's liability is limited to the amount of their investment. Stockholders cannot be sued for the corporation's activities, nor must they pay additional amounts if the corporation goes bankrupt.

The holder of 1 VWX Nov 35 put has paid a 4.25 premium. What is the maximum possible gain on this trade?

$3,075 The maximum gain for the buyer of a put option is the strike price minus the premium paid. The holder of a put option will profit when the underlying stock falls below the strike price. The holder can purchase the stock at the lower current market price, then exercise the put option and sell the stock at the higher strike price. If the stock is worthless, then the put holder can "buy" the stock at $0, then "sell" the stock at $35 for a gain of $3,500 ($35 per share × 100 shares per contract). The buyer paid $425 for the contract ($4.25 premium per share × 100 shares), for a net profit of $3,075 ($3,500 ˗ $425). The writer of this call option has a maximum gain of $425, and the holder of a call option has unlimited maximum gain.

An investor sells 1 JKL Dec 40 put @ 3 when the underlying stock is currently trading at $36. What is the breakeven point on this contract?

$37 The breakeven point is when the investor will not make or lose any money. For a put, the breakeven is the strike price minus the premium (40 - 3 = 37).

A call contract has a strike price of $50. The premium paid for the contract was $2. What is the breakeven price per share?

$52 The breakeven point is the point that the option buyer will not make any money or lose any money if the contract is exercised. This means that the market price is above or below the strike price by the exact amount of the premium paid. For a call contract the BE is the strike price plus the premium, $50 + $2 = $52.

A customer buys 100 shares of 6% preferred stock. What is the expected annual dividend payment this customer would receive, assuming the BOD declares a dividend to be payable this year?

$600 This stock pays 6% of its par value in dividends per year, or $100 x .06 = $6 per share. The customer owns 100 shares for a total of $600.

An individual owns 2 round lots of ABC Industries. The stock has moved up 3 points from yesterday's close. What is the increase in the individual's net worth based on this price change?

$600 A round lot of stock contains 100 shares, so the individual owns 200 shares of ABC Industries. A 1-point move in a stock equates to a $1.00 increase in value per share, giving a total increase in net worth of $600 ($3 x 200).

An investor bought 200 shares of XYZ Corp. common stock at $37.35 per share and paid $50 commission for the trade. The investor received $1 per share in dividends during the year. What is the investor's cost basis?

$7,520 Commissions are included in the cost of the trade. The cost basis is the amount paid for the shares (200 shares × $37.35 per share = $7,470) plus the commission ($50) for a total of $7,520. The $1 per share dividend is not included in the cost basis (unless reinvested), nor does it reduce the cost basis.

An investor owns 100 shares of stock of a company that has 1,000 shares that are issued and outstanding. How much of the company does the investor own?

10%

How many shares of stock are in a round lot?

100

Most common stocks are traded in units of:

100 shares One round lot of common stock is 100 shares. Trading of common stock is done by shares, not dollar amount or par value (which is simply an arbitrary accounting value). Par value of preferred stock is $100. Par value of corporate and municipal bonds is $1,000.

A company has sent out proxy ballots to its shareholders to vote for board member candidates. There are currently 4 board member seats up for election, and the company uses a cumulative voting structure. An investor owns 500 shares of this corporation. What is the maximum number of votes the investor could cast for a single candidate?

2,000 In a cumulative voting structure, shareholders may cast their votes in any way they wish. The investor owns 500 shares and receives 1 vote per share, per issue. Since there are 4 seats up for election, this investor has a total of 2,000 votes (500 shares × 4 board seats). The investor can, if they choose, cast all 2,000 votes for a single candidate, and no votes for the other 3 candidates.

A stockholder owns 200 shares of common stock in the ACM Corporation. 3 new members are to be elected to the board of directors. If ACM uses statutory voting, how many votes may the stockholder cast for each of the 3 candidates?

200 Stockholders may cast 1 vote per share that they own for each directorship position under the statutory method. Under the cumulative method, shareholders have the same number of total votes (1 vote per share owned times the number of directorship positions being voted on) but they may cast that total number of votes in any manner among the positions being voted on. For example, they could cast all their votes on 1 position, thereby forfeiting any vote on the remaining positions.

XYZ Corporation pays a quarterly dividend of $0.50 and has a current market price of $50. What is the dividend yield?

4% Dividend Yield = Annual Dividend ÷ Current Market Price. In this example XYZ is paying a quarterly dividend of $0.50, which is an annual dividend of $2. $2 ÷ $50 = .04 or 4%

FRK Corporation issued convertible preferred stock with a par of $100. The shares are convertible at $25, when the current market price of the common stock is $20. What is the conversion ratio?

4:1 The formula for conversion ratio is par value ÷ conversion price (100 ÷ 25 = 4). This is the number of common shares that the investor will receive when converting the convertible preferred stock.

ABC Corporation has just announced a 3-for-2 stock split. An investor owns 500 shares of ABC, currently trading at $88 a share. After the stock split, the investor will own:

750 shares at $58.67 per share In a stock split, shareholders will receive additional shares of stock, each valued proportionally lower. A 3-for-2 stock split means that shareholders will receive 3 shares for every 2 that they currently own, a 50% increase. A stock split is described as a ratio, giving the number of new shares compared to the relative number of old shares. You will always see two numbers, using a format of "x-for-y". Use the following steps to calculate the results of a stock split: To find the new number of shares, multiply the original number of shares by the first number in the ratio, then divide the result by the second number in the ratio. To find the new value per share, multiply the original value by the second number in the ratio, then divide the result by the first number in the ratio. In this example, the ratio is 3-for-2. Multiply the original number of shares by the first number in the ratio (500 × 3 = 1,500) and divide the result by the second number (1,500 ÷ 2 = 750 shares). For the new value, multiply the original value by the second number ($88 × 2 = $176), and divide the result by the first number ($176 ÷ 3 = $58.67).

Which of the following best characterizes shareholder liability in the event of a corporate bankruptcy?

A shareholder's liability is limited to the total amount invested when the shares were purchased In the event that a corporate bankruptcy occurs, the most a shareholder can lose is the total amount that has been invested. This is known as limited liability, not being able to lose more than one has invested.

Option contracts that can be exercised any time before expiration during the life of the contract are:

American Option contracts that can be exercised any time before expiration during the life of the contract are American style. All equity options trade as American options. Option contracts that can only be exercised on the expiration or maturity date are European style. Both American and European options can trade at any time.

All the following are true regarding options, except:

An option contract with a premium of $2 would cost a buyer $2,000 Call contracts give the holder/buyer the right to buy a specific stock, and the writer an obligation to sell the specific stock, at the agreed (strike) price. Put contracts give the holder/buyer the right to sell a specific stock, and the writer of the contract an obligation to buy a specific stock, at the agreed (strike) price. The expiration date is last date the option can be exercised. Most options have a 9-month life. Once this date passes, the option is worthless. The premium is the amount an investor will pay for an option. This number is based on 100 shares of the underlying security. An option with a premium of 2 would cost a buyer $200.

When an option writer does not own the underlying security and exposes themself to unlimited loss potential they have:

An uncovered position referred to as writing a naked call If a call option is sold and the writer is long the underlying security, this is known as covered call writing and is considered a relatively safe form of option writing. The writer owns the security. If the option is exercised, the greatest risk to the writer is the total loss of the value of the underlying security. This loss is also offset by the premium the option writer received when the contract was sold. With uncovered or naked call writing, the option writer does not own the underlying security. If the option is exercised, the writer's loss potential is unlimited. The stock price could be trading at very high prices and the writer is obligated to purchase the underlying security at the current market price to fulfill the obligation when the call is exercised.

A call contract has an exercise price of $50. The current market value of the underlying stock is $50. The option contract is:

At-the-money If the strike price of the option and the market price of the stock are exactly equal, the option is at the-money. An option is in-the-money when it has intrinsic value. In-the-money has to do with the strike price as it relates to the current market value of the underlying stock. Calls are in the money if the market price is higher than the exercise (strike) price. An investor can exercise their call and purchase the underlying stock at a lower price than the current market value. Intrinsic value or in-the- money is always looked at from the option holder's position. Out-of-the-money is the opposite of in-the-money. If an option could not currently be favorably exercised by the holder, the option is out-of-the-money.

If the writer of a put contract is assigned, the writer must:

Buy shares of the underlying security from the put holder, at the strike price, in 2 business days If the writer of a put is assigned, this means that the OCC has assigned an exercise notice to that put writer. The writer is obligated to buy the stock from the put holder in a regular way trade, with the transaction occurring at the strike price. Regular way settlement occurs 2 business days after the trade (exercise) date.

Ownership in a corporation is represented by:

Common stock and preferred stock All stockholders collectively own the firm regardless of the type of stock they own. Therefore, ownership in a corporation is represented by both common and preferred stock. Bondholders are creditors of the corporation, as are parties to whom the corporation owes short-term debt.

Company A and Company B complete a merger and form Company C. What shares will all the investors end up owning?

Company C shares With mergers, 2 or more companies combine into 1. Each of their shareholders are now shareholders of the merged company. Often, stock shares of the old companies are replaced by the new combined company's shares. Shareholders will receive an information statement, or proxy, with all the details, including any proceeds to be received from the merger. With acquisitions, 1 company completely takes over another company. In this case, the acquired company's shares disappear and are replaced by the buying company's shares in proportion to ownership. Those holding shares of the acquiring company may receive additional shares once the acquisition is complete. SEC Rule 145 allows the reclassification of shares because of M&A. This means that the newly created shares of the M&A can simply reclassify and do not need to go through the time and expense associated with registration.

An event initiated by a public company that will bring an actual change to the securities issued by the company is called:

Corporate action Corporate actions are actions that corporations take that have an effect on current shareholders. Most corporate actions are approved by the board of directors, and a few require a vote of the majority of shares to occur.

Regarding preferred stock, which of the following statements is not accurate?

Corporations must offer preferred shares if they intend to offer common shares Corporations are not required to issue shares of preferred stock in order to issue common stock. However, when they do, it should be recognized that the preferred shareholders will have no voting rights or preemptive rights, but in the case of a corporate dissolution (bankruptcy), they will be paid before common shareholders.

Which of the following types of risk may be associated with an American depositary receipt (ADR)?

Currency risk and political risk ADRs are subject to currency risk because they represent ownership of a security that is not dollar denominated. The value of the ADR will track with that of its underlying shares. Currency (exchange-rate) risk represents the inverse relationship between the U.S. dollar and foreign currency. Additionally, investments in foreign securities will be subject to political risk. The risk that an investment's returns could suffer because of political changes, social events or instability in a country is a social or political risk. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy markets, military control, and excessive debt.

As interest rates increase in the market, preferred stock prices will:

Decrease Preferred stock prices are interest-rate sensitive so there is an inverse relationship between interest rates and the price. When current interest rates rise, preferred stock prices decrease. When current interest rates fall, preferred stock prices increase.

When dividend payments to common stockholders decrease but the price of the common stock remains the same, the yield on the common stock will:

Decrease The dividend yield is equal to the annual dividend divided by the current price. If the dividend payment decreases and the market price remains the same, the dividend yield will decrease. For example, if the annual dividend was $2 per share and the current market price (CMP) was $20, the dividend yield would be 10% (2 ÷ 20 = 0.10). If the dividend payment fell to $1 and the CMP remains $20 per share, the dividend yield falls to 5% (1 ÷ 20 = 0.05).

For preferred stock, dividends are stated as a percentage of the:

Dividends for preferred shares are stated as a percentage of its par value. Par value can be assumed to be $100 for preferred shares unless it has been stated differently.

XYZ Ltd. is a British pharmaceutical company whose common shares trade on the London Stock Exchange. It has ADRs that are listed on the New York Stock Exchange. All the following statements regarding the ADRs are true, except:

Dividends from the ADRs will paid in British pounds Dividends from ADRs are paid in U.S. dollars. ADRs are created by major financial institutions that purchase large blocks of a foreign company's shares on its home stock exchange and hold those shares in their vaults. The firms then issue American depository receipts, which are then traded on domestic stock exchanges such as the NYSE or Nasdaq. This is an easy way for a U.S. investor to buy shares of a foreign company. An ADR can represent 1 share, or more than one share, of the foreign company. The dividends may be subject to tax withholding by the foreign government.

All the following about listed equity options are true, except:

FINRA regulates the Options Clearing Corporation (OCC) An option is a legal financial contract between 2 parties, the option writer, or seller, and the option holder, or buyer. Options exist on stock, bond yields, bond prices, stock market indexes, and foreign currency. An options contract gives the option holder the right to buy or sell 100 shares of a specific stock at a predetermined price, the strike price, for a specified time period. The option writer sells the contract to the option holder for a premium and is obligated to fulfill the terms of the contract (either buying or selling the specific stock) if exercised by the holder. Trading of listed equity options is handled by the Options Clearing Corporation or OCC. The SEC maintains jurisdiction over the OCC.

All the following are true regarding preferred stock, except that it:All the following are true regarding preferred stock, except that it:

Has voting rights Preferred stock represents ownership in a corporation. It has liquidation priority over common stock, pays a fixed annual dividend, and trades similarly to a bond. Unlike common stock, preferred stock does not have voting rights.

An investor has a long stock position and long put position. What type of strategy is this?

Hedge strategy Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. With a long stock position, the investor is hoping the stock price will go up- if the stock price does go up the investor will let the option expire and will enjoy the gains in the stock position. The concern is that the stock price could decline, a long put can be purchased as protection. If the stock price declines below the strike price, the investor can exercise the put and sell the shares to the writer of the contract.

An investor has a short stock position and a long call position. What type of strategy is this?

Hedge strategy Hedging is like buying insurance to protect a stock position. For hedging, an investor would buy (long) an option contract. With a short stock position, the investor is hoping the stock price will decline-if the stock price does fall the investor will purchase shares at the reduced market price and will enjoy the gains in the stock position. The concern is that the stock price could increase, a long call can be purchased as protection. If the stock price rises above the strike price, the investor can exercise the call and buy the shares from the writer of the contract.

In 1999 Exxon bought Mobil, becoming Exxon Mobil. This is an example of:

Horizontal merger A horizontal merger is when 2 companies offering similar products in the same industry combine to gain a larger share of the market. A vertical merger is when companies in 2 different industries merge, for some business benefit such as reduced costs. A tender offer is when a corporation offers to purchase some of the shares currently held by investors at a premium. When corporations want to invest in themselves, they create a buyback program.

Why would a corporation declare a reverse stock split?

If they perceive the share price to be too low A company will declare a reverse stock split when share prices are perceived to be too low. This action allows for fewer shares at a higher market price. With a reverse stock split an investor will have fewer shares than originally held, the price per share will be higher, and the total value of the shares will remain the same.

An option is said to have intrinsic value if it is:

In-the-money Intrinsic value is the in-the-money amount. In-the-money has to do with the strike price as it relates to the current market value of the underlying stock. Calls are in-the-money if the market price is higher than the exercise (strike) price. Puts are in-the-money when the market price is less than the strike price.

If a put option has a strike price of $50 and the current market value of the underlying stock is $40 the option is:

In-the-money Puts are in-the-money when the market price is less than the strike price. For the put to be "in-the-money", the market price of the stock would need to drop below the strike price of the option. Options that are in-the-money are said to have intrinsic value. Intrinsic value is the in-the-money amount. This contract has an intrinsic value of $10 per share, or $1,000 for each option contract (100 shares x $10).

A common stock is selling at $14.90 per share. The issuer's new product line has increased profits the last 3 quarters. As a result, the issuer's board of directors has increased dividends each of the last 3 quarters even though the stock price has stayed the same. The common stock's yield will:

Increase The yield on common stock is computed by dividing the market price of common stock into the annual dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).

The shares of ABC Incorporated's preferred stock are currently trading at $110, which is above its par value. The most likely reason for this increase in market price is:

Interest rates have declined since this preferred stock was issued and its dividend yield is now more valuable to investors The prices of fixed-income investments, such as preferred stocks and bonds, have an inverse relationship to interest rates. When interest rates go down, the price of previously issued preferred stock will go up as they are locked in at a dividend rate that is greater than newly issued preferred stock. This makes it a more attractive investment, and its market price will be bid up accordingly. Holders of preferred stocks will only receive the stated dividend payment, and they do not participate in the growth of the company; only common stock has growth potential. The dividend payment of a preferred stock is fixed when it is issued and will not change. While it is true that a declining inflation rate does reduce purchasing power risk, the price of a preferred stock has an inverse relationship to interest rates, not to inflation rates.

Which of the following regarding the ex-dividend date for a stock is true?

Investors who sell shares they own on the ex-dividend date or later are entitled to receive the next dividend payment While buyers must purchase prior to the ex-dividend date, any investor who sells on the ex-dividend date or later will receive the next dividend payment. This is because the settlement date of a stock trade takes place 2 business days following the trade date, or T+2. The settlement date is the day that money and securities change hands. Therefore, the seller will be entitled to receive the next dividend payment. The board of directors establish the declaration, record, and payable dates, but not the ex-dividend date. The ex-dividend date is set by FINRA. The ex-dividend date for mutual funds, not stocks, is generally 1 business day after the record date. For stocks, the ex-dividend date is R-1.

Which of the following is the correct formula for calculating a corporation's number of outstanding common shares?

Issued shares - treasury shares

An investor owns 100 shares of stock of a company that has 1,000 shares that are issued and outstanding. If the company decides to issue another 1,000 shares and the investor does not buy any, what happens to their ownership interest in the company?

It goes down Corporations issue shares of stock to equity investors, each representing a proportionate interest in the company. If additional shares are offered and not purchased by existing shareholders, their proportionate interest in the company is reduced. This investor initially had a 10% ownership in the company (100/ ÷ 1,000 = 10%). If the investor does not buy any of the offering, the ownership percentage falls to (100/ ÷ 2,000 = 5%).

If the purchase price for a stock has risen by 8% and the dividend payout on that stock has increased by 6%, what can be said about the current yield for that stock?

It has decreased The percent increase of the dividend has not kept pace with the percent increase in stock price; therefore, the current yield has declined. For example, if the annual dividend was $1.50 per share and the current market price (CMP) was $20, the dividend yield would be 7.5% (1.50 ÷ 20 = 0.075). The CMP of the stock has risen by 8% to $21.60 ($20 x .08 = 1.60). The dividend payment has risen to $1.59 ($1.50 x .06 = .09). The dividend yield is now 1.59 ÷21.60 =7.36%.

All the following are true regarding treasury stock, except:

It has voting rights Stock that is bought back by the corporation is known as treasury stock. Treasury stock is not eligible to receive dividends, and it does not have voting rights. Treasury stock has nothing to do with the U.S. government.

Which of the following positions indicates a bearish investor?

Long put and short call A person who is bearish on the stock market believes that stocks, in general, will decline in value. An investor could profit in a bear market by buying (long) puts or selling (short) calls.

Which of the following is known as a writing a covered call?

Long stock short call If a call option is sold (short stock) and the writer is long the underlying security, this is known as covered call writing and is considered a relatively safe form of option writing. The writer owns the security. If the option is exercised, the greatest risk to the writer is the total loss of the value of the underlying security. This loss is also offset by the premium the option writer received when the contract was sold. With uncovered or naked call writing, the option writer does not own the underlying security. If the option is exercised, the writer's loss potential is unlimited. The stock price could be trading at very high prices and the writer is obligated to purchase the underlying security at the current market price to fulfill the obligation when the call is exercised.

Which of the following statements is false regarding option contracts?

The buyer of an option has a short position The terms holder, buyer and long indicate the investor has bought the option contract, giving them the right to buy or sell the underlying security at the strike price. The terms seller, writer, and short indicate the investor has sold the option contract, having an obligation to buy or sell the underlying security if the contract is exercised. The strike price is an agreed price stated in the contract. If the contract is exercised, this is the price the stock will be bought/sold for. The expiration date is the last date the option can be exercised.

Which of the following is not considered a tender offer?

The corporation purchases their own securities on the secondary market When corporations want to invest in themselves, they create a buyback program. With a buyback program the corporation purchases their own securities on the secondary market, or they present existing shareholders with a tender offer. With a tender offer, the corporation offers to purchase some of the shares currently held by investors at a premium. The investor has the option of tendering all, some, or none of their shares. There are several different reasons that a corporation might create a buyback program. With an exchange offer, which is considered a type of tender offer, the corporation offers shareholders the option of trading in their common stock shares for a bond or a preferred stock. Tender offers and exchange offers will change the number of shares that are held by the investing public and could affect the earnings and value of those holdings.

The market price of common stock will be influenced by which of the following?

The expectation for future earnings of the company The market price of common stock is determined by investor expectations about the future of the company. Par value and book value have no bearing on the market price of the common stock. The number of authorized shares is the maximum number of shares the issuer is permitted to sell.

An investor purchased 100 shares of ABC Industries at $50 per share. The company has declared a 20% stock dividend to holders of record as of June 15th. Which of the following statements is correct?

The investor will receive a new certificate for 20 additional shares, the investor's cost basis per share will be $41.67 After ABC pays its stock dividend, the investor will own 20 more shares that what is currently held (100 shares x 20% = 20 shares). The company will send a certificate for 20 additional shares. After the dividend is paid, the investor will own 120 shares that cost $5,000 (original cost basis). The cost per share (basis) will now be $5,000 divided by 120 shares, which is $41.67 per share.

An investor is short 1 STU Mar 35 call option and received $5 per share premium. On the expiration date, STU stock is trading at $105 a share and the investor is assigned an exercise notice. Which of the following regarding the assignment is TRUE?

The investor with the short call position must accept the assignment, and must deliver 100 shares of STU by the settlement date of the trade

In July of this year, the board of directors of XYZ Corporation decided that, due to cash flow considerations, the company will not pay a dividend this quarter on its 6% preferred stock. Which of the following remedies are available to the holders of XYZ's preferred stock?

The investors in the preferred stock must abide by the decision of the board and will face a loss of income this quarter Dividend payments are a distribution of the company's profits to its investors, and the board of directors has sole discretion as to the amount of the payment. Dividend payments are not guaranteed, even for preferred stocks. Bonds, however, are debt instruments and corporations are legally obligated to pay interest and principal. If the corporation defaults on its debts, then bondholders may be able to liquidate the corporation's collateral to recover their investment. Only a cumulative preferred stock is required to make up any back dividends before paying dividends to common stocks, and this question did not describe these preferred stocks as being cumulative. Preferred stockholders have no voting rights, and even if they did, only the BOD has the authority to declare a dividend payment.

A registered representative for a boutique broker-dealer wants to recommend a non-NMS stock to one of their best clients. This stock is currently bid at $2.50 and offered at $3.00. This investor has been a customer for several years, and the registered representative remembers that on multiple occasions this client purchased similarly priced OTC stocks. The representative calls the client and recommends the purchase at the current offer price. Which of the following regarding this solicited order is true?

The large spread between the bid and the ask prices indicates this security is likely has a low trading volume and is relatively illiquid The SEC defines a "penny stock" as an unlisted security that is priced below $5 a share. Unlisted securities are those that do not qualify for listing on a stock exchange and are traded over-the-counter with their prices quoted on the OTC Markets Group. These securities typically have low trading volume and little competition for orders by market makers in these securities. Low competition for orders tends to cause the spread between the bid and ask prices to widen, in this case to 17%. Because of the additional risks associated with penny stocks, any recommendation must certainly be suitable to an investor both willing and able to accept such risks. However, the registered representative is not required to conduct a suitability requirement with the customer who is an establish customer. An established customer is one who has been a client with the firm for at least 1 year and has done at least 3 unsolicited trades from separate issuers on 3 separate occasions. There is no regulation that limits the spread on OTC-traded stocks to 8.5%; only the maximum sales charge on mutual funds is limited to 8.5%.

XYZ Corporation announces a stock split of 4:1 on December 16, 2020. All the following will occur as a result of this decision, except:

The market price of XYZ will increase When a corporation splits its stock, the number of shares is increased and the price per share is decreased proportionately. The earnings per share are now spread over more shares, so that figure will be decreased.

XYZ Corporation declares a 1:5 stock split. As a result of this action which of the following statements is true?

The number of common shares of XYZ outstanding will decrease This is an example of a reverse stock split. In this scenario, the number of XYZ common shares outstanding is decreased and the market price per share is increased proportionately. Because the corporation's earnings will be spread over fewer shares, earnings per share will increase.

Which of the following does not represent a right associated with corporate stock ownership?

The right to participate directly in the daily management of the company While stockholders have the right to vote for those who serve on the board of directors, thus having a voice in how the company is run, they do not have the right to participate in the day-to-day management and operations. In addition to voting rights, they have the right to examine the minutes of board meetings and receive annual audited financial statements.

If the call holder exercises their option, what happens?

The writer must sell the underlying security at the strike price When an option contract is exercised, the writer of the contract is notified that this occurred. It lets the writer know that they will have to fulfill the contract. Prior to being exercised, the writer had an obligation. Once exercised, that obligation becomes an assignment. If a call is exercised, the writer needs to sell the underlying security at the strike price. If a put is exercised, the writer needs to purchase the underlying security at the strike price.

At the end of the year, ABC common stock had a market price of $10 and a dividend of $1.00. Recently, the stock's market value has risen by 10% while its dividend has been increased by 5%. How do these changes affect the stock's dividend yield?

The yield has fallen A stock's dividend yield is calculated as follows: annual dividends divided by current market price. If the market value rises by more than the dividend on a percentage basis, then the dividend yield falls. At the end of the year, the dividend yield was $1.00 ÷ $10.00 = .10 or 10%. The market price has risen 10% ($10 x 0.1= $1), therefore ABC now has a current market price of $11. The dividend has increased by 5% ($1 x 0.05 = 0.05), therefore the dividend is $1.05. The new dividend yield is $1.05 ÷ $11.00 = .09 or 9%.

What is never an ownership right of common stockholders?

To receive a fixed portion of the corporation's earnings in the form of dividends Dividends on common stock are never guaranteed. They are paid only when and if declared by the board of directors. Preemptive rights are rights to subscribe to any new shares to protect percentage of ownership. Common stockholders vote on big issues, including capitalization issues and the board of directors. Common stock is called the junior security because it has the lowest (residual) claim to assets at bankruptcy.

Shares that a corporation repurchases from existing shareholders are referred to as what type of stock?

Treasury Shares that have been previously issued and repurchased by the company are referred to as treasury stock.

When a corporation buys shares back from existing shareholders these shares are called:

Treasury The corporation may offer to buy back outstanding shares from the existing shareholders. These shares that were previously issued and then repurchased by the company are referred to as treasury stock. Once repurchased by the corporation, treasury stock has no voting rights and is not entitled to receive dividends. Treasury shares can be retired permanently or can be used to fund employee stock plans or be paid to stockholders in the form of a dividend. A company may buy its own stock if they feel it is undervalued or to boost the price of the common stock in the market. If the company earns the same amount of profits, but there are fewer shares outstanding, the reported earnings per share will increase. Shares of stock that are in possession of investors are referred to as outstanding shares.

Option contracts can be written on all the following, except:

U.S. currency Options exist on stocks, bond yields, bond prices, stock market indices, and foreign currencies.

An investor writes a call option. If they do not own the same amount, or more, of the underlying security they are:

Uncovered (naked) An option writer that does not own the underlying security of the option is said to be uncovered, or naked. If exercised against they do not have the security in which to deliver to the exercising party. They must buy it on the secondary market for whatever price it is going for.

ABC Homes builds custom modular homes. XYZ Lumber has been their supplier for the past 10 years. ABC Homes buys XYZ Lumber, this is a:

Vertical merger A vertical merger is when companies in 2 different industries merge, for some business benefit. In this example, the home builder believes that by purchasing the lumber supplier, the cost of building homes will be reduced. In a horizontal merger 2 companies offering similar products in the same industry combine to gain a larger share of the market. A tender offer is when a corporation offers to purchase some of the shares currently held by investors at a premium. With an exchange offer, which is a type of tender offer, the corporation offers shareholders the option of trading in their common stock shares for another security such as a bond or preferred stock.

An investor has a long call position with a strike price of $50 and the premium paid for the option was $3. When is this option out-of-the-money?

When the market price of the stock is below $50 A call option is out-of-the-money when the market price of the stock is BELOW the strike price. In this example the strike price is $50, so when the market price of the stock is below $50 the option is out-of-the-money.

An investor writes a call option. If they own the same amount, or more, of the underlying security they are:

covered