SIE Prep- Chapter 1 Questions
A round lot unit of trading in common stock is
100 shares EXPLANATION A round lot unit of trading in common stock is normally 100 shares.
ABC Company raised its cash dividend from 18 cents to 19 1/2 cents and also declared a 5% stock dividend. The record date of the cash dividend is Thursday, May 20 and the record date of the stock dividend is Wednesday, May 12. An investor buys 1,000 shares of ABC regular way on Wednesday, May 12. The customer will receive a cash dividend of?
$195.00 EXPLANATION 5% Stock Div 19 1/2 cent Cash Div Record Date May 12 (Wed) Record Date May 20 (Thur) Ex-Date May 11 (Tues) Ex-date May 19 (Wed) May 12 Trade Date Since the ex-date is prior to purchase date, the investor is not entitled to the stock dividend. Since the ex-date is after the purchase date, the investor is entitled to the cash dividend.
Which of the following can authorize the repurchase of a company's own stock in the secondary market?
Board of Directors EXPLANATION Stockholder approval is not required for repurchasing a company's own stock in the secondary market; it only needs to be approved by the Board of Directors
Treasury stock has which of the following features? I. Treasury stock refers to stock that the issuing corporation has repurchased. II. Treasury stock has not been issued to the public. III. Treasury stock is traded on margin by the issuing corporation. IV. Treasury stock does not receive dividend payments and does not participate in voting matters.
I and IV EXPLANATION Treasury stock is stock that has been issued by a corporation and then repurchased by that corporation. Because it is held by the corporation, it does not participate in voting matters and does not receive dividends.
A correct statement concerning the federal tax treatment of a "qualified" Real Estate Investment Trust (REIT) is that it is:
Must pay out a specified portion of its ordinary income as dividends. EXPLANATION REIT's require the pass through of 90% of ordinary income as dividends in order to qualify for special tax treatment. They do not allow the pass through of losses.
The primary purpose of a stock split is to
decrease the market price of the common stock. EXPLANATION The primary purpose of a stock split is to reduce the market price of the stock which increases the stock's marketability.
Mortgage Real Estate Investment Trusts generally invest in which of the following?
properties handled by developer or builders EXPLANATION Mortgage Real Estate Investment Trusts lend money to builders and developers and then pass the income on to shareholders.
Which of the following are reasons for a corporation to repurchase its own stock? [A] To increase "Earnings Per Share" [B] To fund stock option plans [C] To finance future acquisitions [D] All of the above
All of the above EXPLANATION All choices offered represent reasons why a corporation would want to buy back some of their own company's stock on the open market.
All of the following are characteristics of common stock EXCEPT
Annual dividend payments are guaranteed. EXPLANATION Annual dividend payments for common OR preferred stock are not guaranteed. Dividends are declared by the Board of Directors at its discretion.
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
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 is planning to distribute new shares of common stock to its existing shareholders. This would be described as a [A] Best Efforts Agreement [B] Secondary Distribution [C] Rights Offering [D] Private Placement
Rights offering Explanation The key is that the shares are being offered to the existing shareholders, which would be done through a Rights Offering.
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.
Either the ABC Trust Co. or Brim Co. EXPLANATION Rights are delivered to the "agents" listed on the offering sheet.
Which of the following are characteristics of a growth stock? High price/earnings ratio Low dividend payout ratio Stock price fluctuates within a narrow range Low dividend yield
I, II, and IV EXPLANATION Growth Stock prices may fluctuate widely and are known for their volatility. Therefore, number III is incorrect because it says, "fluctuates within a narrow range" and that is not true.
Which of the following are true concerning treasury stock? It: I. Does not vote II. Is authorized, issued, and outstanding stock III. Does not receive dividends IV. Appears on the balance sheet as a deduction from issued stock
I, III and IV EXPLANATION Choice II is not correct because treasury stock is not classified as outstanding stock.
Place the following in order, highest to lowest, in terms of asset distribution if a corporation is liquidated: I. Preferred stockholders II. Owners of secured debt instruments III. Common stockholders IV. Owners of unsecured debt instruments
IV, II, III, I EXPLANATION The order of asset distribution is taxes, secured debt, unsecured debt, preferred stockholders, and common stockholders. Common stockholders are last on the list and are considered residual owners in the event of a corporate liquidation.
Which of the following are true of warrants?
The market price of the stock is below the exercise price when they are issued. 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.
In looking at a particular stock's patterns, you notice that the stock has historically mirrored economic performance. Which of the following would be the BEST characterization of this stock?
This would be a cyclical stock. EXPLANATION A stock that tends to fluctuate with changes in the economy would be known as a cyclical stock.
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:
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 is a defensive stock? [A] Aerospace company [B] Food company debenture. [C] Blue chip [D] Public utility
Public utility EXPLANATION Defensive stocks (not defense) are stocks that remain stable during good and bad times. A Debenture is a type of bond, and is not a stock.
Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)?
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 ADRs.
The Eskimo Cup Company announces a 20 cent dividend payable March 15th to owners of record Thursday, February 19th and declares a 5% stock dividend payable March 15th to owners of record Friday, February 13th. An investor buys 2,000 shares regular way on Monday, February 16th. He would expect a cash dividend of
20 cents per share on 2,000 shares. EXPLANATION Trade date Feb 16 $.20 Div 5% Stock Div Thurs., Record Date Feb 19 Friday, Record Date Feb 13 Wed., Ex-date Feb 18 Thurs., Ex-date Feb 12 Feb 16 Trade date Since the investor purchases the stock BEFORE the ex-date they would be entitled to the $.20 dividend. Since the investor purchased the stock AFTER the ex-date, they would NOT be entitled to the stock dividend.
Blake currently owns 200 shares of ABC common stock. ABC announces a 3 for 1 stock split. After the split, how many shares of ABC will Blake own?
600 shares To determine the number of shares an investor will own after a 3 for 1 split you would multiply the split ratio (3/1) by the number of shares owned (200/1) to arrive at the new number of shares: 3/1 X 200/1 = 600/1 = 600 total 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?
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.
Which of the following companies is most likely to pay a stock dividend? [A] A company with 25% of its assets in cash and no growth in earnings [B] A company with earnings growing at 3% per year [C] A company with 20% of its assets in cash and earnings growing at 5% per year [D] A company with a small cash balance and earnings growing at 20% per year
A company with a small cash balance and earnings growing at 20% per year EXPLANATION A company with a small cash balance would be the company most likely to pay a stock (shares of stock) dividend.
Which of the following is most likely to fluctuate in value during a period of stable interest rates?
Convertible preferred. EXPLANATION Because convertible securities try to maintain parity with the Common Stock - Convertibles would fluctuate more than non-convertibles even when interest rates are stable.
ABC Corporation will be performing a preemptive rights offering. Which of the following is TRUE? [A] The corporation is offering long-term options to buyers of bonds to buy stock at a price that is currently above the current market price. [B] The corporation is changing the rights that shareholders have in association with their shares. [C] The corporation is attempting to preempt a takeover bid from a competitor. [D] The corporation is selling additional shares and must provide existing shareholders with the ability to maintain their proportionate ownership.
D] The corporation is selling additional shares and must provide existing shareholders with the ability to maintain their proportionate ownership. EXPLANATION A preemptive rights offering occurs when a company wishes to issue new shares of stock. The rights must be offered to existing shareholders to ensure that shareholders can maintain their proportionate share of ownership of the underlying company. Rights are short-term securities which typically allow the investor to buy additional shares of common stock before the public is permitted to participate and at a lower price than what will be offered to the public.
ABC Corp. has declared a cash dividend to owners of record July 17. The last date for the customer to buy the stock regular way and still receive the dividend is:
July 13 EXPLANATION Using the month of July calendar, you would count back one business day from July 17, which tells you the ex-date is July 16. Therefore to receive the dividend, the investor would have to own the stock the business day before the ex-date or July 13th.
Crystal Keep is a publicly traded company. It declares a dividend on May 19th for shareholders of record as of May 17th. The dividend is paid on June 5th. On which date does the investor incur a tax liability for this dividend?
June 5th EXPLANATION The payable date is the date that the dividend is actually paid. This date also creates the taxable event for the investor.
Which of the following is not a right of a limited partner according to the Uniform Limited Partnership Act, assuming the limited partner wants to preserve his limited liability status? [A] Make secured and unsecured loans to the partnership [B] Negotiate with suppliers to the partnership [C] Assign his limited partnership to the general partner [D] Inspect and make copies of the books and records of the partnership
Negotiate with suppliers to the partnership EXPLANATION If a limited partner engages in management, they will become liable for debts and actions as a general partner.
Cash dividends paid to investors: [A] are exempt from tax liability [B] are subject to Federal, State, and Local tax [C] reduce the cost basis of the common stock [D] increase the cost basis of the common stock
[B] are subject to Federal, State, and Local tax EXPLANATION Cash dividends received by investors are fully taxable at the Federal, State, and Local level. Qualified Dividends are taxed at the rate of 15%.
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
Compared with owning corporate stock, a person investing in a limited partnership would normally receive which one of the following? [A] A much greater management role in the business [B] Much greater investment security [C] A more direct share in profits and losses [D] Much greater liquidity
[C] A more direct share in profits and losses EXPLANATION Investing in a limited partnership, normally you would receive a more direct share in profits and losses, because the income and expenses flow through to the Limited Partners.
All of the following are TRUE about the types or kinds of preferred stock EXCEPT: [A] Participating where shares may receive a dividend higher than the fixed dividend if the company's profits are larger than expected [B] Cumulative where shares accumulate dividends that were skipped in past years [C] Callable where shares may be redeemed by the company at a stated discount from par on certain dates [D] Convertible where shares may be exchanged for shares of common stock at the option of the shareholder
[C] Callable where shares may be redeemed by the company at a stated discount from par on certain dates EXPLANATION Callable shares are redeemed at a premium above par, not a discount from par.
Which of the following are characteristics of a growth stock? High price/earnings ratio Low dividend payout ratio Stock price fluctuates within a narrow range Low dividend yield [A] I and II [B] III and IV [C] I, II, and IV [D] I, II, III, IV
[C] I, II, and IV EXPLANATION Growth Stock prices may fluctuate widely and are known for their volatility. Therefore, number III is incorrect because it says, "fluctuates within a narrow range" and that is not true.
Which of the following are true concerning treasury stock? It: Does not vote Is authorized, issued, and outstanding stock Does not receive dividends Appears on the balance sheet as a deduction from issued stock [A] I and II [B] III and IV [C] I, III and IV [D] All
[C] I, III and IV EXPLANATION Choice II is not correct because treasury stock is not classified as outstanding stock.
A warrant that is issued with a debenture
allows the holder a long-term ability to exercise and buy a specific number of shares of common stock. EXPLANATION A warrant is a long-term derivative security that allows the holder the ability to buy a specific number of shares at a specific price. Warrants differ from rights in that warrants are normally good for years or in perpetuity (until the company no longer exists). Rights are short-term and generally expire after 90 days. Warrants are derivative securities that will not pay dividends or interest, however once converted, the stock that is purchased as a result of the warrant may pay dividends.
