SIE - EQUITY SECURITIES
All of the following pay dividends EXCEPT [A]preferred stock. [B]warrants. [C]mutual fund shares. [D]American Depository Receipts (ADR's).
B. warrants Explanation: Warrants do not pay dividends
Which of the following statement concerning Real Estate Investment Trusts are correct? I. They are considered investment companies under Federal Securities Laws II. They redeem securities at net asset value III. They must be registered with the SEC before a public sale IV. They are not considered tax shelter investments because operating losses do not pass through to the owners of the REIT
III and IV EXPLANATION REITs (Real Estate Investment Trusts) trade like a stock trade and are not considered to be an investment company. They also are not classified as a tax shelter investment.
What is the Current Yield for a Preferred stock which has a par value of $100 and a current market price of $95 with an annual dividend payment of 5%? [A] 5.26 % [B] 1.9% [C] 1.31% [D] 5%
[A] 5.26 % EXPLANATION Annual dividend of $5.00 / CMV of $95 = 5.26%
Of the securities listed below, which of the following would have the greatest market risk? [A] Common stock [B] Preferred stock [C] Debentures [D] Zero coupon bonds
[A] Common stock EXPLANATION Common Stock is considered the riskiest of the securities listed. This type of security is the last to receive residual claim on the corporate assets if liquidation occurs.
A corporation increases the dividend payments to common stockholders. Assume that the price of the common remains unchanged. How does this affect the dividend yield of the stock? [A] Increases [B] Decreases [C] Remains constant [D] Cannot be determined with information provided.
[A] Increases EXPLANATION Because the dividend has increased and the market value of the stock has stayed the same, the yield would increase. The formula for current yield is: Annual Dividend / Market price = Current Yield
A stock dividend would be paid on which of the following securities? [A] Common stock [B] Preferred stock [C] Treasury notes [D] Treasury bills
[A]Common stock EXPLANATION Treasury notes and bills are forms of debt issued by the US Government. They do not pay dividends and would not pay stock dividends. Normally, preferred stock pays dividends in the form of cash, not stock. It is more typical to have stock dividends with common stocks.
As inflation increases over time, the best hedge against it has historically been provided by which of the following types of securities? [A] Common stocks [B] Preferred stocks [C] Government Securities (T-Bonds, etc.) [D] Convertible bonds
[A]Common stocks EXPLANATION Choices B, C, and D are fixed income instruments which are vulnerable to inflation and/or purchasing power risk. Common stock carries the greatest risk as well as the greatest reward potential. Historically, common stock has outperformed the other choices and has been the best hedge against inflation.
Which of the following statements regarding ADRs is correct? [A] One ADR share may be comprised of more than one share of the ordinary foreign shares. [B] ADRs are created so that one ADR is equal to one share of the foreign ordinary share. [C] An advantage of ADRs is that their dividends are exempt from federal taxes. [D] Voting privileges of ADRs are allowed.
[A]One ADR share may be comprised of more than one share of the ordinary foreign shares. EXPLANATION The correct statement is one ADR share may be compromised of more than one share of the ordinary foreign shares. In fact, an ADR can represent a ratio or fractional ownership of the foreign ordinary shares. For example, three ordinary (foreign) shares may comprise one ADR share (3 to 1 ratio) or one ADR may be comprised of fractional ordinary share ownership such as 10% of the ordinary share. The other statements are false: there is no tax exemption of dividends, there are no voting privileges, and ADRs do not have to be a one-to-one relationship with the ordinary foreign shares.
In relation to limited partnerships, the "flow-through principal" refers to: [A] The flow-through of partnership income and expenses to its members so that they can be reported on the members' individual tax returns. [B] A provision in the partnership agreement that before a partnership interest is offered to anyone else it must first be offered to a general or limited partner. [C] The right of limited partners to inspect the books and records of the limited partnership. [D] Borrowing against the investment to create a greater asset value.
[A]The flow-through of partnership income and expenses to its members so that they can be reported on the members' individual tax returns. EXPLANATION The "flow-through principal" refers to the flow of profits and losses from the partnership to the investor. This is what made limited partnerships attractive tax shelter investments prior to change in the legislation.
Which of the following is TRUE of warrants? [A] When the warrants are issued, the market price of the underlying stock would be below the exercise price. [B] They are all issued as perpetual warrants. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.
[A]When the warrants are issued, the market price of the underlying stock would be below the exercise price. EXPLANATION Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
A round lot unit of trading in common stock is [A] 10 shares [B] 100 shares [C] 500 shares [D] 1000 shares
[B] 100 shares EXPLANATION A round lot unit of trading in common stock is normally 100 shares.
The stock of a corporation is selling at $55 per share and the corporation pays a quarterly dividend of $1.30. The yield is? [A] 2.4% [B] 9.5% [C] 4.2% [D] 4.7%
[B] 9.5% EXPLANATION ( 5.20 Annual Div / 55 Mkt px) = .0945 = 9.5% Remember: To calculate the current yield, you must multiply the QUARTERLY dividend by 4. The yield is based on the annual dividend.
An emerging growth company is generally defined as a company with total annual [A] gross revenues of more than $1 billion for its most recent fiscal year. [B] gross revenues of less than $1.07 billion for its most recent fiscal year. [C] gross profits of less than $1 billion for its most recent fiscal year. [D] net profits of more than $1.07 billion for its most recent fiscal year.
[B] gross revenues of less than $1.07 billion for its most recent fiscal year. EXPLANATION The generally accepted definition of an emerging growth company (EGC) is a company with total annual gross revenues of less than $1.07 billion in its most recent fiscal year. The threshold was previously $1 billion but the SEC has updated the figure to $1.07 billion. An EGC is usually a young company in a fast growing industry. This kind of company is often characterized by high risk, high return, and high failure rates.
Equity Real Estate Investment Trusts will usually invest in which of the following? [A] properties in oil and gas [B] income producing properties [C] residential mortgage loans [D] public municipal facilities
[B] income producing properties EXPLANATION Equity Real Estate Investment Trusts will generally invest in income producing properties such as apartment buildings.
Which of the following would NOT be a right of a common stockholder? [A] to receive dividends declared by the company [B] to vote for officers of the company [C] to vote for the board of directors of the company [D] participate in a rights offering presented by the company
[B] to vote for officers of the company EXPLANATION Common stockholders have the right to vote for the Board of Directors but NOT to vote for officers of the company
Which of the following would probably be most leveraged? [A] A chemical company [B] A utility company [C] An automobile company [D] A steel company
[B]A utility company EXPLANATION Utility companies are usually highly leveraged. They can do this safely because they supply a commodity everyone will always need; they are not constrained by a diminishing or volatile market.
A corporate stockholder has a "residual claim". This refers to the stockholder's right to: [A]Any additional dividends paid by the corporation out of its paid-in surplus.[B]Corporate assets remaining at dissolution after the satisfaction of senior obligations.[C]The remainder of a rights offering not taken by the principal investors.[D]Any dividends the corporation has not paid in the past.
[B]Corporate assets remaining at dissolution after the satisfaction of senior obligations. EXPLANATION A "residual claim" means that the stockholder has a claim on any assets remaining after the satisfaction of the creditors of the corporation that is in bankruptcy.
Risks or disadvantages that may arise from participation as a limited partner in a limited partnership generally include all of the following EXCEPT: [A]Examination of the program by the IRS as a possible "abusive shelter". [B]Full participation in all liabilities incurred by the general partner(s). [C]Application of alternative minimum tax resulting from over-sheltering of personal income. [D]Relative illiquidity of the investment during the program's life.
[B]Full participation in all liabilities incurred by the general partner(s). EXPLANATION Limited partnerships are illiquid investments that have come under close scrutiny from the IRS because of abuse of the tax-shelter advantage. Limited partners are only subject to limited liability, which differs from full participation in all liabilities incurred by the general partner(s). Only general partners are subject to unlimited liability.
Which of the following types of industries would be affected most by changes in interest rates? [A] Automotive [B] Utilities [C] Steel companies [D] Transportation
[B]Utilities EXPLANATION Since utilities are highly leveraged, they are greatly affected by changes in interest rates.
Which one of the following types of securities over time (long-term) has best provided a hedge against inflation? [A] Callable preferred stock. [B] Corporate bonds rated A or higher. [C] Common stock. [D] Municipal bonds rated AAA.
[C] Common stock. EXPLANATION Common stock, over the long-term, has proven to be the best hedge against inflation. Bonds are usually subject to inflationary risk. The money that purchased the bonds may not buy as much at maturity.
Which two of the following are true about REITs (Real Estate Investment Trusts)? I. They are set up as Limited Partnerships II. They are generally set up as publicly traded companies III. They could be subject to double taxation IV. They pass-through both profits and losses [A] I and III [B] I and IV [C] II and III [D] II and IV
[C] II and III EXPLANATION Choices II and III are true of REITs. They could become subject to double taxation if they do not distribute at least 90% of its net earnings and most of them are publicly traded.
An investor that has received rights through a Pre-emptive Rights Offering could do all of the following with the rights EXCEPT: [A] Sell the rights in the open market [B] Exercise the rights and subscribe to additional common shares [C] Redeem the rights for their cash value [D] Let the rights expire worthless
[C] Redeem the rights for their cash value EXPLANATION Rights may be exercised, sold, or allowed to expire but may not be redeemed for cash.
Which would be a counter-cyclical industry? [A] The computer software industry [B] The pharmaceutical industry [C] The gold mining industry [D] The automobile industry
[C] The gold mining industry EXPLANATION Counter-cyclical industries are industries that either perform equal or better during down times in the economy. Gold mining and silver mining companies are companies that would likely remain stable or perform better during a down economy.
A single 25-year-old investment banker has income of $300,000 and net worth in excess of a million dollars. Her investment objective is capital appreciation. All of the following would be appropriate for this investor except: [A] equities in emerging markets [B] small cap equity securities [C] high yield preferred stocks [D] aggressive growth funds
[C] high yield preferred stocks EXPLANATION Since her objective is capital appreciation, the high yield preferred stock would be the least appropriate since preferred stocks are generally less volatile than common stocks.
When a company does a Rights Offering, the rights are [A] sold to the general public. [B] sold to only existing shareholders. [C] only given to existing shareholders, proportionately to shares held. [D] given to the public on a first come, first serve basis.
[C] only given to existing shareholders, proportionately to shares held. EXPLANATION Rights are a short-term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a price that is lower than the public offering price before the public is allowed to purchase the new shares. Rights are distributed to the existing shareholders at no cost.
An investor is long 100 shares of ABC common stock trading at $60 per share. ABC announces a 5 for 1 split. After the split, this investor would [A] own 250 shares with a value of $24 per share. [B] own 500 shares with a value of $60 per shares. [C] own 500 shares with a value of $12 per share. [D] own 250 shares with a value of $12 per share.
[C] own 500 shares with a value of $12 per share. EXPLANATION 5/1 X 100/1 = 500/1 = 500 shares $60 x 100 shares = $6000 $6000/500 shares = $12 per share When calculating a stock split you would multiply the ratio of the stock split (5/1) by the number of shares owned (100/1) to arrive at the new number of shares: 5/1 X 100/1 = 500/1 = 500 shares after the split Next, you would take the former total value ($60/share x 100 shares = $6000) and divide this by the new number of shares (500 shares after the split) to find the new market value: $6000 divided by 500 shares = $12 new market value per share after the split
A company has authorized 10,000,000 shares of common stock. 8,000,000 shares have been issued. 4,000,000 shares are treasury. This means: [A] 8,000,000 shares are outstanding [B] 10,000,000 shares are outstanding [C] 4,000,000 shares are outstanding [D] 14,000,000 shares are outstanding
[C]4,000,000 shares are outstanding EXPLANATION Issued stock minus Treasury stock = Outstanding Stock Therefore, 8,000,000 issued - 4,000,000 Treasury would equal the 4,000,000 outstanding shares.
Which of the following factors tends to affect the price of utility common stocks more than industrial common stocks? [A] Earnings per share. [B] The book value of the company. [C] Interest rates. [D] The consumer Price Index.
[C]Interest rates EXPLANATION Utility stocks are very strongly tied to interest rates since they are so highly leveraged (carry a lot of debt).
Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)? [A] Risks associated with changes in inflation [B] Risks associated with changes to legislators and political climate [C] Risks associated with the call of such securities by the issuers [D] Risks associated with fluctuations in currency exchange rates
[C]Risks associated with the call of such securities by the issuers EXPLANATION ADRs are not normally issued in callable form, so the risk of call by the issuer would NOT normally be a major factor when analyzing ADRs. Each of the other items listed would be a consideration when considering investing in ADR
Which of the following securities receives no dividends and has no voting rights? [A]American Depository Receipts. [B]Preferred stock. [C]Treasury stock. [D]Common stock.
[C]Treasury stock. EXPLANATION Treasury Stock is stock which has been issued and repurchased by a corporation. Once it is repurchased, it does not receive dividends or voting privileges.
When the owner of common stock receives Proxy Material, which of the following do they then have? [A] First choice on new shares being issued by the company [B] their right to vote has been waived [C] the right to vote their shares in the voting matter presented at the shareholders meeting [D] the right to set the amount of the next dividend to be paid to the shareholders
[C]the right to vote their shares in the voting matter presented at the shareholders meeting EXPLANATION Proxy material is like an absentee vote and allows shareholders to vote their choice when the shareholder is unable to attend the shareholders meeting.
Of the following assets, which are most likely to be included in the investment portfolio of a real estate investment trusts: [A] Farmland and parks [B] Airports and stadiums [C] Single family housing and raw land [D] New apartment houses and shopping centers
[D] New apartment houses and shopping centers EXPLANATION Shareholders in a REIT look for income from rents received from apartment buildings and shopping centers as well as capital gains as buildings are sold at a profit. Funding for airports and stadiums would generally come from the issuance of municipal bonds, not reits.
ADR's are used to facilitate [A] foreign trading of domestic securities. [B] foreign trading of U.S. Government securities. [C] domestic trading of U.S. Government securities. [D] domestic trading of foreign securities.
[D] domestic trading of foreign securities. EXPLANATION American Depository Receipts (ADR's) Domestic trading of foreign securities.
A security which gives the holder the privilege of investing in a company's stock at a pre-determined price at any time, over a long period of time is known as a [A] coupon. [B] right. [C] bond. [D] warrant.
[D] warrant. EXPLANATION A warrant gives an individual the privilege of buying a stock at a pre-determined price for a long term specified period of time.
NOTICE OF RIGHTS OFFERING Rights issued to: Holders of Common Stock of Brim Co. Record Date: May 20, 20XX Ex-Rights: (NYSE) May 21, 20XX Subscription To: Additional Shares Price: $25.50 per share Ratio: 1 Share for Each 6 Now Held Rights Expire: June 12, 20XX Agents: ABC Trust Co. & Brim Co. Principal Underwriter: Solar Securities, Inc. Remarks & Conditions: Holders of rights not evenly divisible by 6 may subscribe to the next full share. Rights must be received by June 12 at which of the following: [A] Investor's individual broker-dealer [B] Solar Securities, Inc. [C] The ABC Trust Co. [D] Either the ABC Trust Co. or Brim Co.
[D]Either the ABC Trust Co. or Brim Co. EXPLANATION Rights are delivered to the "agents" listed on the offering sheet.
Which of the following statements regarding warrants is not true? [A] They allow the owner to purchase additional shares of common stock. [B] They can be used to increase the attractiveness of a new issue. [C] They are generally long-term. [D] They are an obligation which must be issued by the corporation.
[D]They are an obligation which must be issued by the corporation. EXPLANATION Warrants are always "want to" by a corporation, not a "have to."
