SIE - Part 1
ABC Corp. issues 4.5% preferred stock with a par value of $100. If the shares are currently trading at $90, the annual dividend each share can be expected to pay is
$4.50 Preferred stock dividends are quoted as a percentage of par value, not the market value of the shares. Therefore, it is calculated as par value multiplied by the dividend rate. $100 X 4.5% = $4.50.
The term penny stock generally refers to a security issued that trades OTC at a price of less than
$5 per share According to the SEC, the term penny stock generally refers to a security that trades OTC at a price of less than $5 per share.
According to SEC rules, an issuer must give advance notice of a dividend distribution to the exchange where the security trades
10 business days prior to the record date An issuer is required to give advance notice of a dividend distribution 10 business days prior to the record date. This notice is required for all such distributions, including stock dividends, stock splits, reverse stock splits and rights or other subscription offerings.
ABC stock is traded on the New York Stock Exchange. If a dividend is declared by the ABC Board of Directors, the NYSE must be notified no later than
10 business days prior to the record date The exchange must be notified 10 business days before the record date when a dividend is to be paid.
An investor has 100 shares of XYZ stock at $90 per share. After a 3-for-1 split, the investor can expect to own
300 shares at $30 per share A stock split doesn't affect the total value of stock owned. In this example, the shares are worth $9,000 before and after the split. But three times as many shares are owned. To calculate the new number of shares, multiply the shares by the first number of the split and divide by the second number of the split: 100 shares x 3 / 1 = 300 shares.
A shareholder owns 1,000 shares of a corporation's stock with pre-emptive rights. There are a total number of 100,000 shares outstanding. If 5,000 new shares are issued the shareholder may purchase
50 additional shares Pre-emptive rights enable a current shareholder to maintain proportionate ownership interest when new shares are issued. The shareholder in this example may purchase 1% of the new shares or 50 shares.
ABC corporation declares a 4 for 1 stock split. After the split, a shareholder that currently has 200 shares will have
800 shares A 4 for 1 split means the investor will receive 4 shares of stock for every 1 share previously owned, so the investor will have 800 shares (200 shares x 4), and each share will be worth ¼ the original value.
When a company engages in a stock split, the result is
A change in the number of shares outstanding and share price, but no true valuation change to the investor A stock split represents an artificial adjustment of a company's stock price and shares outstanding. The goal is to either increase the share price (for a low-priced stock) or to reduce the share price (for a high-priced stock).
Authorized stock is best described as common shares that
A corporation is permitted to sell to the public Authorized stock represents the number of shares a corporation may sell to the public in the future.
Which of the following is an inaccurate statement regarding preferred stock? A) Bondholders are usually lower in priority than these shareholders with respect to creditor claims B) Dividends on these shares are usually paid before common dividends C) The shares do not typically carry voting rights D) If the issuer goes bankrupt, these shareholders are paid before common shareholders
Bondholders are usually lower in priority than these shareholders with respect to creditor claims Bondholders are higher than preferred stockholders in the creditor priority sequence
Brunswick issues a Series A $2.40 cumulative convertible preferred voting stock. This stock I. is convertible into common stock II. pays dividends in arrears III. receives excess dividends on a pro rata basis with common stock
I and II only Cumulative convertible preferred stock can be converted into common stock. Additionally, all dividends in arrears from cumulative stock must be paid before any dividends are paid on the common stock. Participating preferred stock may receive excess dividends based on better than expected earnings for the company.
An investor who owns shares in ABC company is notified of a rights offering. If the investor decides to participate in this offering I. her stake in company ownership will not be diluted II. she must sell all her ABC shares III. she will acquire more ABC shares IV. she will convert her equity holdings to a senior debt position
I and III A rights offering raises new equity capital by giving existing shareholders the right to acquire more shares in proportion to their current holdings. Shareholders who exercise their rights will not have their ownership stakes in the company diluted.
Which of the statements below correctly describe the par value of common stock? I. Par value and market value are rarely equal II. Par value and market value are typically equal III. Par value of common stock is typically $1 or less IV. Par value of common stock is typically $100
I and III Par value is assigned to common stock when it is issued. It is typically $1 or less for common stock, and is simply an accounting value that is not related to the market value of the stock.
Which of the following statements about warrants are TRUE? I. They may be sold with a bond as a sweetener II. They have shorter expiration periods than options III. They function very much like call options IV. They trade exclusively on exchanges
I and III Warrants are often added to bonds as sweeteners to make the issue more attractive to investors. Like a call option, they give the holder the right to buy a specified number of shares of stock at a specified price. However, they have a longer expiration period than options Â- sometimes up to 15 years. Though some warrants are listed on exchanges, most trade over-the-counter.
When issuers include warrants in bond offerings, the issuer I. typically pays a lower interest rate on the bonds II. typically pays a higher interest rate on the bonds III. has made the bond more marketable IV. has made the bond less marketable
I and III when warrants are added as sweeteners to a bond offering, the issuer is able to attract greater investor interest. The bond is more marketable and the issuer can sell it with a lower interest rate.
ABC corporation will elect 2 members of the Board of Directors at its annual meeting. A shareholder that owns 200 shares of stock may I. Vote 200 shares of stock for each director under statutory voting II. Vote 100 shares of stock for each director under statutory voting III. Split a total of 200 votes any way between the two directors under cumulative voting IV. Split a total of 400 votes any way between the two directors under cumulative voting
I and IV Under statutory voting, a shareholder has one vote per share for each director that is to be elected. Under cumulative voting, the shareholder may pool together the total votes (400 in this example, 2 directors x 200 votes) and cast them as preferred.
When comparing rights and warrants, which of the following statements are TRUE? I. Rights are longer term than warrants II. Warrants are longer term than rights III. At issue, the exercise price of a right is lower than the market price of the underlying stock IV. At issue, the exercise price of a warrant is lower than the market price of the underlying stock
II and III Rights are short term instruments that allow the holder to buy the stock at a price that is typically lower than the current market price of the stock. Warrants are long-term instruments. The exercise price of the stock is typically higher than the market price of the stock at the time the warrants are issued. Warrants have value only if the price of the stock appreciates.
Which of the following statements regarding preferred stock are TRUE? I. Like common, preferred shares generally have voting rights II. Unlike common, preferred shares generally do not have voting rights III. Preferred shares typically have greater appreciation potential than common IV. Preferred shares typically have less appreciation potential than common
II and IV Preferred shares differ from common shares in that they do not typically have voting rights. There are exceptions, however, which permit voting under unique circumstances like a takeover or merger. Preferred stock typically does not have as much appreciation potential as common.
Arrange the dates below in the order in which they occur, first to last, in a typical cash dividend payment process for a regular way transaction. I. Ex-dividend date II. Record date III. Declaration date IV. Payable date
III, I, II, IV The process of cash dividend payment typically takes place over approximately a three week period. They must first be declared, and they will be paid on the payable date, which is the last date in the process. They are paid to persons who own the stock on the date of record. In order to own the stock on date of record, an investor must buy the stock before the ex-date (regular way settlement requires 2 business days), which is 1 business day before the record date.
When must proxy materials be filed with the SEC?
In advance of the shareholder solicitation The information contained in proxy materials must be filed with the SEC in advance of the shareholder solicitation, and it must disclose all important facts upon which shareholders are asked to vote.
The regular-way trade cycle for most trades is
T+2 the regular-way trade cycle for most trades settles on the second day after trade execution - T+2.
A cash dividend will be paid to shareholders of record on Thursday, June 24. What is the ex-dividend date?
Wednesday june 23rd The ex-dividend date normally is one business day before the dividend record date. For transactions on or after the ex-date, the buyer will not receive the dividend.
The sale of an asset at a price higher than its purchase price is
a capital gain a capital gain occurs when an investor sells an asset for a higher price than he bought it for
An individual would receive an annual report of a corporation's recent results if they are
a stockholder As a common stockholder, an individual would be entitled to receive financial reports directly from the corporation.
A company can declare dividends in which of the following ways? A) Stock or stock of a subsidiary company B) Goods produced by the company C) Cash D) All of the above
all of the above A company may pay a dividend in cash, stock or stock of a subsidiary company, or even goods produced by the company
Participating preferred stock is best characterized as stock that
allows the holder to receive an additional dividend distribution Participating preferred stock allows the holder to receive an additional dividend distribution, usually contingent on the occurrence of a specific event, such as a particular level of common stock dividend.
An investor owns a security which carries currency risk but not interest rate risk. This investor is likely holding a(n)
american depository receipt (ADR) An American Depository Receipt is an equity instrument which facilitates the trading of a foreign security in the US. This asset category carries currency risk but not interest rate risk, because it is an equity, and not a debt instrument.
What equity security, traded on U.S. exchanges, gives investors the ability to purchase foreign stocks denominated in U.S. dollars?
american depository receipts American Depository Receipts (ADRs) are receipts issued by U.S. banks, with each ADR representing one or more shares of foreign stock. ADRs are denominated in dollars and make it possible for U.S. investors to invest in foreign companies through domestic (U.S.) markets, without currency transaction costs.
Which of the following is the mechanism through which shares of non-U.S. companies trade on U.S. stock exchanges?
american depository receipts American Depository Receipts (ADRs) are used by non-U.S. companies to enable U.S. investors to purchase shares of their company's stock and for that stock to trade on a U.S. stock exchange. ADRs are issued by a U.S. depository bank and are quoted and pay dividends in U.S. dollars. American Depository Shares (ADSs) refer to the individual shares of an ADR. Though ADSs represent claims on foreign shares, they are subject to fluctuations in currency prices. Global Depository Receipts (GDRs) are blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange. Global Depository Shares (GDSs) refer to the individual shares of a GDR.
Who is allowed to buy stock rights during the ex-rights period?
any interested investor The ex-rights period begins on the ex-rights date and continues until the rights expire, usually several weeks later. During this period, the rights are detached from the stock and trade separately, under their own symbol. Anyone can buy them.
Issuers are required to provide to FINRA notice of stock splits and stock dividends
at least 10 days prior to the record date Issuers are required to provide notice of a dividend distribution, stock split or stock dividend no fewer than 10 days before the record date.
Treasury stock is best characterized as
authorized stock that was previously outstanding but has been repurchased by the issuer. Treasury stock are shares that were previously sold to the public but have since been repurchased by the issuer. These shares do not carry voting rights nor pay dividends.
Pre-emptive rights are available to current shareholders of a company as a means of
avoiding dilution Pre-emptive rights are available to current shareholders. They give shareholders the right to maintain their proportionate interest when a company does a follow-on offering. This, in effect, helps prevent dilution.
In a cash transaction on the record date, when does the ex-dividend date occur?
business day following the record date For a cash transaction, the ex-dividend date is the business day after the record date. For a non-cash transaction, the ex-dividend date is one business day before the record date.
A technology company commits millions of dollars to advertising that fails to attract attention, causing its stock price to drop. This is an example of
business risk Business risk, also called non-systematic risk, is created by negative events that impact one company or stock, such as management changes, poor business execution, or failure to reach profit targets.
In which type of transaction does the confirmation and settlement occur on the trade date?
cash For cash transactions, confirmation and settlement occur on the trade day (T) - i.e., "same-day settlement."
Systematic risk can often be attributed to all of the following factors except A) Major political events B) Economic conditions C) Changes in corporate management D) Socio-political conflicts
changes in corporate management Systematic risk focusses on large scale events which can have negative consequences for markets in general. Changes in corporate management would be attributable to non-systematic, or company specific risk.
A preferred shareholders' right to exchange their preferred stock into common stock at any time is known as which of the following?
conversion rights Conversion rights refer to the preferred shareholders' right to convert their preferred stock into common stock at any time. The amount of shares to be converted is determined as the issue price of the preferred divided by the conversion price. Liquidation preference refers to the amount of money per share that a preferred shareholder will receive prior to any distribution to common shareholders in the event of a liquidation of the company. This amount is typically determined as a multiple of the issue price of the preferred. Antidilution provisions refer to provisions in preferred stock that protect the holder against transactions such as stock splits, dividends, and other dilutive transaction the issuer may undertake. Redemption rights refer to the preferred holders' right to force the issuer to buyback the issue at some point in the future. Preferred holders will typically exercise their rights if the company doesn't perform well, doesn't go public, or engages in a change of control transaction.
The type of voting that enables a shareholder to pool their votes together and cast them as desired is
cumulative voting This is known as cumulative voting. The alternative process is statutory voting.
A proven way to reduce non-systematic risk in an equity portfolio is to
diversify among different stocks The best protection against non-systematic risk is to broadly diversify - not put all eggs in one basket.
Investors who are concerned about non-systematic risk may try to
diversify their portfolio Non-systematic risk can often be managed through a process of diversification.
All of the following statements about the differences between common stock and preferred stock are true except A) common stock has voting rights, but preferred stock does not. B) preferred stock has a higher liquidation priority than common stock. C) dividends are less certain in preferred stock. D) common stock has higher profit potential than preferred stock.
dividends are less certain in preferred stock Preferred stock tends to make regular dividend payments, whereas common stock may or may not based on the company's profits.
An investor owns ten warrants of XYZ Co. These warrants are considered
equity securities, as they may be exercised for shares in XYZ. Warrants are considered equity securities of a company, as their exercise will allow the holder to receive shares of the underlying company. Note that warrants do not make interest payments to investors.
The number of shares an investor owns will increase and the price per share will decrease in the event of a (n)
forward stock split In a forward stock split (3:2 for example), the number of shares owned by the investor will increase while the price per share will decrease proportionately.
On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for cash settled trades in the security?
friday, jan 13 Cash settled trades settle on the same day. Therefore, an investor could buy stock on the record date and still settle in time to receive the dividend. Therefore, the ex-dividend date for a cash settled trade will be the business day after the record date.
Common stock is most often purchased to satisfy which of the following investment objectives?
growth Common stock is typically recommended to satisfy growth or capital appreciation objectives. Income objectives are met with fixed income instruments such as bonds or preferred stock. Government securities are often recommended when there is concern for loss of principal, and municipal securities are used to achieve tax minimization.
The stock of an issuer that reinvests most of its earnings back into the business is most likely classified as a(n)
growth stock Growth stocks are stocks of companies that reinvest most of their earnings into their business. Because of their high potential for growth, they generally do not pay dividends.
Preferred stockholders are entitled to certain rights, including
having a claim on corporate assets before common stockholders if the corporation is dissolved Preferred stockholders receive dividends before common stockholders, preferred dividends are based on a percentage of par value (usually $100), and have a claim on assets before common stockholders.
To earn a profit on a short sale position, the short sale transaction price must be
higher than the buy-to-cover price
Common stock holders will receive a dividend
if the board of directors has declared a dividend The corporation must first declare a dividend, which then entitles a common stockholder to receive the dividend.
All of the following risks are common with ADR ownership EXCEPT
interest rate risk Interest rate risk is typically more common with debt instruments; ADRs are equity investments. Political risk, exchange rate risk and inflationary risk are all risks that must be evaluated by ADR owners. Inflationary risk can be significant because it can cause devaluation of the currency in the home country of the ADR.
The shares of authorized stock that are sold to the public are known as
issued stocks Issued stock are the authorized shares of a corporation that have been sold to the public.
Which of the following best characterizes a defensive stock?
it will be largely unaffected by changes in economic activity
Investors purchase common stock primarily for
its appreciation potential Common stock is purchased by investors for its capital appreciation potential. Historically it has kept pace with the rate of inflation and is used to meet growth objectives. It is most junior in terms of claims to assets in a corporate liquidation, and does not protect investors from investment risk.
XYZ Co. has engaged in a 4:1 stock split. As a result, holders of XYZ shares will now have
more shares with a lower per share value Upon the occurrence of a forward stock split, an investor will have more shares with a lower per share value. The important point with a stock split is that the investor does not gain or lose any absolute value with respect to their holdings in the company.
A security that can be freely transferred, assigned or delivered to another entity is called
negotiable a negotiable security is one that can be freely transferred, assigned, or delivered to another entity. Listed equities are negotiable when they are traded or assigned by an authorized owner, unless they are encumbered as debt or collateral.
A computer company develops a product which contains significant flaws, resulting in a diminished share price. This is an example of
non-systematic risk Non-systematic risk, also called business risk, is a risk specific to an individual company, rather than the market as a whole.
Which of the following dates relating to dividends generally occurs last?
payable The key dates for dividend payments always follow the same order for regular way transactions: declaration, ex-dividend, record, payable. Remember the acronym DERP.
An OTC equity security worth less than $5 per share is defined as a
penny stock A penny stock, as defined by the SEC, is an OTC equity security worth less than $5 per share.
Preferred stock has a lower potential for appreciation and capital gains than common stock issued by the same company because
preferred stock pays a fixed dividend Because preferred stock pays a fixed dividend, it has a lower potential for appreciation and capital gains than common stock. Shares can appreciate modestly as interest rates fall, because the fixed dividend then becomes more valuable.
If an investor is holding callable preferred stock, she should be
prepared to sell her shares back to the company Investors holding callable preferred stock may be required to sell their shares back to the company, if their particular shares are called by the company.
An effective technique for reducing the systematic risk of an equity portfolio is to
protect the portfolio by using hedging strategies Systematic risk cannot be avoided by diversification or by selecting specific types of stocks. It can be hedged with derivatives, such as buying put options on a stock market index.
Dividends are typically paid
quarterly Dividends are typically paid on a quarterly basis and, therefore, must be annualized to calculate the implied dividend yield for a given public company.
In order to receive a dividend, a shareholder must own stock as of the
record date An investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business days before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process.
A common investment strategy is "selling short". An investor who sells short is
selling stock that he intends to own but does not own at this point A short sale is the sale of a security that the seller does not currently own. It is regarded as an investment strategy for investors who believe the value of the security will fall.
The standard default registration method for most securities today is
street name The default registration method is typically street name, which means a security is registered in the name of the broker-dealer and the broker-dealer holds the security for the investor in "book-entry" form. "Book-entry" means that the investor does not receive a certificate, but a record of the ownership is maintained on the books of the broker-dealer.
An issuer will send proxy statements directly to the beneficial owner of the securities when they are held in all of the following forms EXCEPT
street name When securities are held in street name the broker-dealer is the nominal, or named, owner, and the issuer sends proxy statements and all other information about the securities to the firm, which must then distribute the information to the customer, who is the beneficial owner. DRS, DWAC and registered physical securities all list the customer as the named owner, so the issuer can communicate with the customers directly.
When comparing rights and warrants, which of the following statements is TRUE?
the exercise of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued Rights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution.
For most quarterly stock dividends paid in cash, the ex-dividend date is
the first business day before record date For cash dividends, ex-dividend is the first business day before record date. Stock purchased on the ex-date that settles regular-way (T+2) will not settle in time for the buyer to be the owner of record on the record date. Therefore the dividend will be paid to the seller of the shares (who is the owner of record on the record date). Investors who wish to receive the dividend must trade before the ex-date.
The advantages of owning American Depositary Receipts include all of the following EXCEPT A) The owner of the shares does not have foreign currency risk B) The owner of the shares does not have to deal with foreign currency conversions C) The owner of the shares does not have to deal with cross border administrative hassles D) The owner of the shares is able to trade them in domestic markets
the owner of the shares does not have foreign currency risk Owning American Depositary Receipts (ADRs) shares enables U.S. investors to access shares of foreign companies through U.S. markets. When purchasing these shares, investors do not have to deal directly with rules of the foreign country and the shares are denominated in U.S. dollars. Although shareholders do not have to deal with currency conversions, there is foreign currency risk, as the exchange rate between the U.S. Dollar and the foreign currency will affect the price of shares as well as any dividend payments, which must be converted into U.S. dollars.
What usually happens to the price of a stock at the opening of trading on the ex-dividend date?
the price declines by the amount of the dividend At the opening of trading on the ex-dividend date, stock trades are made ex-dividend, meaning buyers are no longer entitled to dividends. The stock price normally declines by the amount of the dividend, since it was included in the price of the stock before the ex-dividend date but not after.
Public corporations must make sure that their stock ownership records are accurate by matching each share of stock with an owner. This task is performed by
the registrar The registrar maintains records of ownership by matching each share of stock against an ownership record. The registrar also makes sure there is no unauthorized stock issuance.
When a company engages in a reverse stock split,
the share price will increase, creating potential heightened interest in the company As the result of a reverse stock split, the company share price will rise, thus possibly increasing the marketability of the stock, as investors will no longer perceive it as a low- priced stock.
Who maintains records of the change in ownership of securities, whenever they are transferred or sold?
the transfer agent When securities are transferred or sold, the transfer agent records the change in ownership on the books of the securities issuer. In many cases, the transfer agent doubles as registar for the same company.
The entity responsible for ensuring that investors receive the appropriate number of shares in a stock split is
the transfer agent The transfer agent records changes of ownership in securities and maintains records of ownership. During events such as stock splits and stock dividends, the transfer agent is responsible for allocating the appropriate number of shares to each investor.
Penny stocks present added risk to customers because of
their potential lack of liquidity Penny stocks, or stocks priced below $5 per share that do not trade on an exchange, are frequently thinly traded, which means that there may be no market for the stock if customers want to liquidate their positions. Because of this market risk additional disclosure must be made to all buyers of penny stock.
Which of the following statements is not accurate with respect to a warrant? A) They will have value if the share price appreciates above the exercise price. B) There is no secondary market available for these securities. C) They usually have longer timeframes than a right, another type of equity security. D) They are typically issued in connection with other securities
there is no secondary market available for these securities There is an active secondary market for warrants, as well as for rights and other equity related instruments.
XYZ Inc. declares a $0.45 dividend payable on Monday, July 14, to all shareholders of record as of Monday, July 7. When is the ex-dividend date for a regular way trade in the stock?
thursday july 3 For regular way trades in equities, the ex-dividend date is one BUSINESS day before the record date. In this case, July 4 is a holiday. Therefore, the ex-date will be Thursday, July 3.
What option does a shareholder receive under a "stock rights" event? A) To maintain proportional ownership B) To participate in a stock dividend C) To sell shares back to the company D) To vote shares in a special election
to maintain proportional ownership Stock rights give shareholders the right, but not the obligation, to maintain proportionate share ownership, rather than be diluted when new shares are issued.
The process of issuing new stock certificates and cancelling existing certificates is typically the domain of the
transfer agent This is a functionality normally performed by the transfer agent of the corporation.
If Janice sells short 100 shares of Microsoft stock at $20 per share, what is the maximum she can lose on the trade?
unlimited Potential losses on short sales are unlimited. If the stock price soars, the investors must buy back the stock at a very high price, to replace the shares borrowed. This is why short-selling can be so risky.
An investor buys equity securities that convey the right to purchase shares of a company's common stock at a fixed price. These securities are called
warrants Warrants are considered a form of equity security because they give holders the right to purchase shares of a company's common stock at a fixed price or on specified terms.
On Monday, January 2nd, ABC Inc. declares a $0.10 dividend payable on Monday, Jan 16 to all shareholders of record as of Thursday, Jan 12. When will be the ex-dividend date for regular way trades in the security?
wednesday jan 11 For regular way trades, the ex-dividend date is one business day before the record date. Investors who buy the stock two business days before the record date will receive the dividend. Investors who purchase the stock on or after the ex-dividend date will not receive the dividend.
The registrar is best characterized as the entity
who maintains records of ownership of securities The registrar maintains records of ownership of securities by matching each share of stock against the company's ownership record. A transfer agent records changes of ownership in securities. Often the transfer agent and the registrar are the same entity.
At the time of the issuance of a warrant by a corporation, the warrant
will not have any intrinsic value A warrant is a type of equity instrument issued by a corporation, where at the time of issuance the exercise price of the warrant will be higher than the current market price of the company's common stock. In other words, warrants are not issued with intrinsic value.
