SIE Ch 4: Equity Securities

Jack owns 300 shares of cumulative, convertible preferred stock. All of the statements below are true

Jack will receive any deferred or omitted dividends before common shareholders can receive a dividend, Jack receives dividend payments before common shareholders, Jack can convert his shares to common stock at any time.

If a client does not subscribe to the shares entitled by his preemptive rights during a stock rights issue, his proportionate ownership will

decrease because there will be an increase in outstanding shares owned by others after the offer.

Preferred stock

dividends are always paid prior to common stock dividend being pad, bond interest payments are considered senior to preferred stock dividend payments, preferred stock certificates can be "callable" for a period of time throughout their ownership.

Callable preferred

issued if a corporation wishes the retain the right to buy back their preferred stock ata future date. allows a corporation to buy back its securities. the call price is usually at a premium to the stock's par value to ake callable issues attractive to purchasers.

Cash trades

may be executed on the record date and the buyer will receive the dividend. This is because the buyer's name is recorded in the stockholder record on the record date and is present when the corporation consults the record. The ex-dividend date is the day after the record date. DREP.

Preferred stock

must NOT be paid annually regardless of corporate profitability

James owns 300 shares of LYPA stock, which is currently trading at $60 per share. The company announces a 1:3 reverse split. What will James own after the split?

100 shares at $180 per share. In a reverse split, the # of shares is reduced and the price per share increases proportionately. 1/3 x 300 shares before the split = 100 shares after; 3/1 x $60 price before the split = $180 price after. James will own 100 shares at $180 per share.

Which is true about treasury stock?

It has been issued (sold to the public) and repurchased by the company. It has no voting rights and receive no dividends.

A corporation may distribute dividends in the form of

Cash, company stock and stock of another corporation.

What is the chronological order of the four dates surrounding a dividend?

DERP - Declaration date, Ex-date, Record date and then Payable date. The ex-dividend date is one business day before the record date for trades settling in a regular way.

The record date for ABC Growth Fund's quarterly dividend is Thursday, December 20. When is the ex-dividend day?

December 21. B/c for mutual funds, the ex-dividend date is the first business day after the record date.

Which type of preferred stock would potentially pay dividends in addition to the stated dividend if a company has excess earnings?

Participating preferred.

Declaration date

The date on which the board of directors declares the dividend and it becomes a current liability. The board of directors chooses this date.

Jack owns 300 shares of cumulative, convertible preferred stock. All of the statememts below are true EXCEPT

The issuing company could call the stock at par value.

outstanding stock

active stock that represents the number of shares owned by the pubiseta

Straight preferred (noncumulative) preferred stock

pays a stated dividend but does not "catch up" dividends that may have gone unpaid during any given period.

Issued stock

shares of stock that have actually been sold to the public

preemptive rights entitle current shareholders

the first opportunity to purchase a sufficient number of the new shares to maintain their current percentage of ownership in the company. the stock is offered to the general public only after current shareholders exercise their preemptive rights.

Debentures

unsecured bonds backed only by the general credit of the issuer, rather than a specific lien on particular assets.

ABC Corporation shares are currently trading at $50 per share. ABC is about to perform a two-for-one stock split. After the split, an investor who currently owns 100 shares of ABC stock would own

200 shares at $25. It is important to remember that the

The board of directors chooses which dates?

Declaration date, Record date, and Payable date

"Selling dividends"

Prohibited practice for registered representatives advising an investor to purchase a stock for the sole purpose of receiving the dividend.

Cumulative preferred

Type of stock a person would own for the best assurance of receiving dividend income because no dividends can be paid to common stockholders if any preferred stock dividends are in arrears (owed).

Unissued shares

authorized stock that has not been sold or distributed

Trade date

customer places an order to buy a security with his broker/dealer.

Cumulative preferred/Dividend preferred

offers the stockholder any unpaid dividends in arrears. Any accumulated dividends must be paid to the preferred stockholder before dividends may be paid to the common stockholder.

Convertible preferred

permits owners to convert or exchange their preferred stock for a designated number of common shares. Attractive to investors b/c it offers immediate benefits associated with the dividend and bankruptcy priority, as well as the potential price appreciation of the common stock in the future. Therefore, corporations can issue convertible preferred with lower stated dividends than straight preferred.

conversion price

price at which a convertible bond or other convertible security can be exchanged for common stock.

Warrant

represents an opportunity to purchase securities at a specified price (the subscription price or exercise price), for a set period of time.

voting by proxy means

they grant limited power of attorney to someone to vote on their behalf. they do this b/c attendance is usually inconvenient, so most stockholders vote by proxy.

ABC Corporation originally authorized 1 million shares and has issued 600,000 shares. ABC Corporation has decided to buy 50,000 of their shares back and place them in treasury. How many shares are currently outstanding?

550,000 shares. The formula to calculate the # of outstanding shares is as follows: Total issued shares - Treasury stock = Number of outstanding shares (or in this scenario, 600,000 - 50,000 = 550,000 outstanding shares).

Outstanding stock

Active stock that represents the number of shares owned by the public. Issued stock less any treasury stock reacquired by the corporation.

Four dates surrounding a dividend for mutual funds purchases

All =4 dates are chosen by the board of directors. Almost always designates the ex-date after the record date. This is because mutual funds are purchased by application, and the buyer's name is recorded the day on which the application is received by the fund. Therefore the buyer's name is in the stockholder record on the record date.

XYZ Corporation has been experiencing some financial difficulty in the last few years. However, they are confident that the company will be profitable again in the next few years. XYZ would like to borrow some money from investors by issuing bonds, but they are concerned that the interest rate they will have to pay will be too high based on their most recent financial report. If XYZ would like to reduce the interest rate on the bonds and increase the marketability of their bonds, which of the following could XYZ do?

Attach warrants to the bonds. By issuing warrants with their new bond offering, XYZ, would reduce its interest rate and also increase the marketability of the new bonds.

If a company decides to liquidate its assets, which of the following is correct regarding the order of the liquidation?

Bondholders are paid first, then preferred stockholders and finally, common stockholders.

Corporations generally issue warrants in connection with which of the following?

Bonds, in order to secure a lower interest rate. Warrants are generally sweeteners attached to bonds to lower the interest rate the issuing corporation has to pay. But primarily, the warrants increase the marketability of the bond.

The ex-dividend date for XYZ is Monday, March 23. Under which of the following conditions would an investor purchasing XYZ receive the dividend?

Buys XYZ Friday, March 20 in a regular way trade. Tuesday, March 24 is the record date. Therefore, a regular-way purchase on Friday, March 20 would buy (or receive) the dividend because settlement occurs on Tuesday, March 24 (or T+2) meeting the requirement that settlement must occur on or before the record date.

Rights

Can be used to purchase stock, can be sold for value in the marketplace, or can be left to lapse or expire. Typically short-term expiring 30 to 60 days after they are issued. For every share outstanding, the corporation will issue one right. Value is determined by the difference between the current market value of the underlying stock and the exercise price of the right, divided by the number of rights it takes to buy one new share at the exercise price. Ex. if current market value of the security is $50 a share and the exercise price is $49, the difference of $1 would be divided by the number of rights it takes to buy one share. If it took 10 rights to purchase one new share, you would divide $1 by 10 and the cost basis of the rights would be $.10 each.

Which type of stock would a person own for the best assurance of receiving dividend income?

Cumulative preferred - no dividends can be paid to common stockholders if any preferred dividends are in arrears (owed).

If a common stockholder received a dividend this year, which of the following would also be paid a dividend?

Cumulative preferred, Convertible preferred, and Participating preferred. Preferred stockholders are always guaranteed a dividend before common stockholders. If a common stockholder received a dividend all classifications of preferred stock would also have received a dividend.

Conversion ratio

Determines the # of shares that will be received for each share of preferred stock, and can be calculated by dividing the par value of the preferred stock by the conversion price. For example, suppose a convertible preferred stock is convertible into common stock at $20 per share. B/c the preferred stock's par value is $100, upon conversion the investor will receive 5 shares of common stock for each share of preferred stock surrendered. The conversion ratio is 1:5. Convertible into 5 shares" means the same thing as "convertible at $20 per share". CV into 5SH or CV at $20/SH

The SRO sets which date?

Ex-dividend date.

Negative consequences of purchasesing stock just before the ex-date

Investor experience two negative events: 1) investor suffers unrealized loss on the stock when the price drops. 2) investor generates a tax liability, since the dividend is a taxable income. Therefore, it is seldom advisable for an investor to purchase a stock just before the ex-dividend date.

American Depository Receipts (ADRs)

Issued by banks in the US to represent a certain amount of shares of a foreign company on a foreign exchange.

Treasury Stock

Issued shares minus outstanding shares. Previously outstanding. It has been bought back by the corporation and placed in the corporate treasury. Total shares issued minus shares currently outstanding equals the number of shares bought back by the corporation.

Individuals holding shares of common stock have the right to particpate in the underlying corporation's earnings. Which of the following statements is true?

Lower earnings yield lower dividends. Dividends are usually paid quarterly, and as earnings fluctuate, so does the amount of payout per share issued by the company.

Preemptive rights allow a stockholder to..

Maintain proportionate interest in the company by having the first opportunity to buy new shares. It is the right to maintain the same percentage of ownership in a corporation when new shares are issued.

All of the following are true concerning preferred stock EXCEPT

Preferred stock dividends must be paid annually regardless of corporate profitability. Dividends are not required to be paid annually and may be retained for payment at a later date.

If ABC Company's 5% cumulative preferred stock has not paid a dividend in two years, how much must preferred shareholders be paid before any common stockholders are paid a dividend?

Since the par value of preferred stock is $100, it would yield a $5 annual dividend ($100 x 5% = $5). ABC Company must make up all dividends in arrears: 2 past years ($10, which is $5 per year for the previous 2 years) dividends plus this year's dividends ($5). Preferred shareholders will recieve $15 ($5 + $5 + $5 = $15).

A convertible preferred is a convertible at $20 per share. The stock is currently selling on the market at $120. Which of the following are correct statements is correct?

The common stock must be selling at $24 to be at parity with the preferred stock. The conversion ratio is the par value of the preferred stock divided by the conversion price, or in this case, 1:5. It identifies the number of common shares received upon conversion. The parity price of the common stock is determined by dividing the conversion ratio into the market value of the preferred stock, or 120/5 = $24. It only makes sense to convert at a price above the parity price.

Payable date

The date on which the corporation actually distributes dividends to those shareholders of record (as of the record date). The board of directors chooses this date.

Record date

The date on which the corporation consults the stockholder record. Only those owners recorded in the stockholder record receive the dividend. The board of directors chooses this date.

ex-dividend date

The first date on which the stock trades without the divided. On the ex-date, the stock price drops by the amount of the dividend, and the stock is said to be trading ex-dividend. The first trade date on which the stock purchaser is not legally entitled to receive the dividend. SRO sets this date. For a regular transaction, the ex-dividend date will be 1 business day prior to the record date.

The capital structure is the total of all securities issued by a corporation. Which of the following statements is INCORRECT concerning corporate securities?

Treasury stock has voting rights. Correct: Outstanding stock receives dividends, Most corporations will issue fewer shares than authorized in order to keep stock available for future use. The amount of stock actually sold is referred to as issued shares.

All of the following types of stocks would be eligible for dividends EXCEPT

Treasury stock. It has no voting rights and does not receive dividends since the corporation holds these shares.

Which of the following securities is considered to be a long-term instrument?

Warrants. Provide investor with an opportunity to purchase securities at a specified price for a set period of time. Warrants are long-term, while rights are short-term.

Stock trade

When done for a cash settlement, trade date and settlement date are the same; the purchases becomes the owner of the record on that date.

Conversion price

determined at the stock's issuance. Represents the price at which the shareholder may convert to common shares.

conversion ratio

formula that determines the number of shares of common stock that will be received in exchange for each convertible bond or preferred stock during a conversion

preferred stock

gives its owner the right to be paid dividends before common stockholders

Participating preferred

offers investors the potential to receive dividends in addition to the stated dividend. In order words, they may "participate" in excess earnings remaining after the company's normal interest and dividend obligations have been met.

warrant

similar to a right in that it represents an opportunity to purchase securities at a specified price (the subscription price or exercise price), for a set period of time. The difference is that warrants are long-term instruments lasting several years (sometimes perpetual), and are initially issued with an exercise price above the current market value of a stock, while rights are short-term and allow purchase below the public offering price. Act as a "sweetener" when attached to other securities, meaning they make the other security more marketable. Can be used to lower the interest rate on a bond issued by a corporation. They are a debt instruments and require issuers to pay interest on the money they borrowed. Warrants are usually attached to bonds (but may also be issued with stock). When two or more securities are trading together, they are said to be trading as a unit. Usually detachable, meaning they can be traded in the marketplace separately from the security with which they were issued. The value is the difference between its subscription price and the market price of the underlying stock. If the subscription price is below the market price, the warrant has intrinsic value. Warrants initially have no intrinsic value b/c they are issued at a price above market value of the stock. As the stock price rises above the subscription price, the warrant represents an opportunity for profit to the investor.