SIE Questions Review Chapter 1: Equities

A company's common stock is selling in the market at a "multiple of 20". If the market price of the common stock is currently $10, what is the earnings per share?

$.50: When a stock is selling at a "multiple" of 20, this means that the market price is 20 times the current earnings per share. Since the market price is at $10 and the P/E ratio is 20, earnings per share is $.50. Market Price/ Multiple = Earnings Per Share $10/20= $.50

All of the following terms describe rights EXCEPT?

A Exercisable B Negotiable C Correct Answer Redeemable D Giftable Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.

At issuance, the exercise price of a warrant is set at:

a premium to the current market price of that issuer's common stock: At issuance, the exercise price of a warrant is set higher than the current market price of the stock. The stock's price must appreciate for the warrant to have any intrinsic value. Stock warrants can be attached to preferred stock and bond offerings to make them more attractive to potential purchasers.

In a corporate liquidation, common stockholders are paid:

after bondholders and preferred stockholders: in liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.

Preferred stock market valuation is based primarily upon:

long term market interest rate levels

If a company repurchases its own common shares, the number of:

outstanding shares will decrease: If a company repurchases shares, the number of outstanding shares decreases. NOT ISSUED SHARES

American Depositary Receipts pay dividends in

American Depositary Receipts pay dividends in U.S. dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend that was received in the foreign currency into U.S. Dollars

During periods of stable interest rates, which type of preferred stock will have the greatest price volatility? A Cumulative B Participating C Callable D Adjustable Rate

B Participating Participating preferred gives the preferred shareholder the right to participate with common in any "extra" dividends declared by the Board of Directors. If these extra dividend payments are made, this can cause the preferred stock price to rise even though interest rates have not fallen.

Which statement is TRUE about the intrinsic value of rights and warrants when issued? A Warrants have no time value but significant intrinsic value B Warrants have no intrinsic value but significant time value C Rights have limited time value but no intrinsic value D Rights have intrinsic value and substantial time value

B Warrants have no intrinsic value but significant time value Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value." Rights are very short term options (30-60 days) granted to existing shareholders that allow them to buy the stock at a discount to the current market price. The discount is the "intrinsic value" of the right. However, because rights are so short term, they have virtually no "time value."

Which statement is TRUE about American Depositary Receipts? A ADR holders have voting and pre-emptive rights B ADRs facilitate domestic trading of U.S. securities in foreign markets C holders are entitled to dividends if declared D ADRs are issued by foreign banks

C holders are entitled to dividends if declared ADRs facilitate domestic trading of foreign securities. They are issued by domestic banks. ADR holders receive dividends but have neither voting nor pre-emptive rights.

A corporation wishes to raise funds to build a new manufacturing facility. Which method is suitable for the issuer to obtain financing?

Issue rights to outstanding shares of common stock: The only method listed that will raise new funds for the corporation is to sell additional common shares through a rights offering.

Which statement is correct concerning cumulative voting?

It allows for a disproportionate voting weight and helps smaller investors: Cumulative voting allows a disproportionate voting weight to be placed on selected directors who are up for election. This is considered to be advantageous for the smaller investor, who wishes to have a specific director (or directors) elected.

The common stockholder has all of the following rights EXCEPT:

Management rights: Common stockholders have no management rights; they are passive investors. Common stockholders have voting rights, pre-emptive rights, and dividend rights (if a dividend is declared by the Board of Directors).

Preferred stock has all of the following features EXCEPT:

Voting rights: Preferred stock lacks voting rights - remember that it is a fixed income security that is very "bond-like." Preferred stock does not have a fixed maturity date - it has an indefinite life.

PDQ Company $10 par common stock is currently trading at $40. PDQ is currently paying a quarterly common dividend of $.90 per share. The current yield of PDQ stock is:

Yields are based on annual returns. This stock is paying a $.90 dividend quarterly, so the annual dividend rate is $3.60. The formula for current yield is: Annual Income/Market Price = Current Yield $3.60/$40 = 9%

If a corporation's stock price rises to an extremely high level:

trading volume tends to decline and the corporation is likely to split its stock to reduce the market price: When a corporation's stock price rises too high, this cuts out small investors from buying the shares. Corporations desire a broad, diversified investor base - they do not want to see the stock concentrated in the hands of a few wealthy investors. To increase investor access, the company often splits its stock to reduce the per share market price.

All of the following statements are true regarding warrants EXCEPT:

warrant holders have pre-emptive rights: Warrant holders do not receive dividends, nor do they have other shareholder rights such as the right to vote or the pre-emptive right. Warrants are much cheaper than the actual stock, because they only have value if the underlying stock rises. Thus, they give the holder greater leverage if the common stock does appreciate in value.

All of the following securities represent ownership of a corporation EXCEPT:

warrants: Warrants do not represent ownership of a corporation; only if they are exercised do they represent ownership, since exercise results in the purchase of the common stock of the issuer. Common stock and preferred stock are both securities that represent ownership.

ABC 8% $100 par preferred is trading at $105 in the market. The current yield is:

100 x.08 = $8 Dividend Income/Current Market Value = Current Yield $8/$105= 7.6%

Which statement is TRUE about non-sponsored ADRs?

A CORRECT ANSWER These ADRs are created without the participation of the foreign corporation B These ADRs are sponsored by the country in which the foreign corporation resides C These ADRs must provide financial statements to the ADR holder in English D These ADRs are typically NASDAQ or NYSE listed Non-sponsored ADRs are assembled without the participation of the issuer and trade over-the-counter. These trade over-the-counter while sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. Non-sponsored issued may provide reports in the issuer's native language.

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

Expectations for future dividend payouts by the company: The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the number of Board of Director seats have no direct bearing on the market price of the common.

Which terms describe common stock?

Negotiable and non-callable: Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.

A corporation has issued 50,000,000 shares of common stock at $2 par. The corporation has 10,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is:

Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000) = 40,000,000 shares outstanding at $2 par = $80,000,000.

A proxy given to a caretaker to vote a stockholder's shares is a: Correct answer A. You did not choose this answer.

power of attorney

Corporate dividend payments can be made in all of the following ways EXCEPT:

"Listed options of that company": Corporations can pay dividends as cash or company products (the distribution of company products as a dividend is pretty much obsolete, however). A corporation can also make a distribution of additional shares of that company or can issue a dividend consisting of shares of another company (typically a subsidiary). Options are created and issued by the Options Clearing Corporation, not the company, and cannot be used as a form of dividend payment.

XYZ Company has issued 10%, $100 par non-cumulative preferred stock. Two years ago, XYZ omitted its preferred dividend. Last year, it paid a preferred dividend of $5 per share. This year, XYZ wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of:

$10: Since the preferred stock is noncumulative, to make a dividend distribution to common shareholders, the company need only make this year's preferred dividend distribution. The stated dividend rate on the preferred is 10% based on $100 par, so $10 of preferred dividends must be paid per share. If this preferred were cumulative, then all omitted dividends must be paid before a distribution can be made to common. Please note that almost all preferred stock issues are cumulative - but non-cumulative issues must still be known for the exam. Since this is noncumulative preferred stock, the corporation will only have to pay 10% - or this year's dividend, before paying a common dividend. Please note that virtually every preferred issue is cumulative - noncumulative issues are basically unmarketable.

A customer holds 100 shares of ABC Corp $100 par convertible preferred stock convertible at a 10 to 1 ratio. If ABC declares and pays a 10% stock dividend, then as of the payable date, the customer will now have:

100 shares of ABC preferred stock: If ABC declares and pays a 10% "common" stock dividend, the customer who holds convertible preferred stock still would have 100 shares. However, the conversion ratio which was initially 10 to 1 would reflect the stock dividend and would get adjusted to an 11 to 1 ratio (10% additional common shares into which the preferred is convertible). With a new conversion ratio of 11 to 1, the conversion price per share becomes: $100 par / 11 shares = $9.09 per share. If ABC declares and pays a 10% "common" stock dividend, the customer who holds non-convertible or convertible preferred stock would not benefit in any way. Thus, due to the payment of a common stock dividend, the customer would still have 100 shares of the non-convertible preferred stock.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have:

100,000 preferred shares and 25,000 common shares: Since each unit consists of 1 preferred issue, 100,000 units x 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units x 1/4 = 25,000 common shares issued if the warrants are exercised.

An ADR has been issued where each ADR equals 600 ordinary shares of the foreign issuer. If a client wished to buy enough ADRs to cover 6,000 ordinary shares, how many ADRs must be purchased?

10: Since each ADR equals 600 ordinary shares, then 10 ADRs equals 6,000 ordinary shares. Note that when the foreign shares are inexpensive, it is typical for the ADR to cover a "multiple" of shares; and when the foreign shares are expensive, it is typical for the ADR to cover a "fraction" of shares.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have:

200,000 preferred shares and 100,000 common shares

All of the following statements about ADRs are correct EXCEPT:

A ADR holders receive dividends B CORRECT ANSWER ADR holders can vote for the Board of Directors C ADR holders receive the cash value of pre-emptive rights D Many ADRs are listed on national stock exchanges ADR holders receive dividends that are remitted by the depositary bank, which converts them from the foreign currrency into U.S. dollars. The ADR holder cannot subscribe to a rights offering since the actual underlying stock is not registered in the United States, hence the shares cannot be issued directly to U.S. holders. Instead, the depositary bank sells off any rights and remits the money to the receipt holders. ADRs trade on national stock exchanges, and trade over-the-counter as well.

Which statement is TRUE regarding ADRs?

A ADRs are vehicles for trading United States securities in foreign countries B ADRs are vehicles for trading foreign securities in other overseas markets C CORRECT ANSWER ADR market prices are influenced by foreign currency exchange fluctuations D ADRs must be redeemable with the sponsor ADRs are vehicles for trading foreign securities in the United States. Since dividends on ADRs are declared by the foreign company in local currency, and are then converted into U.S. dollars and remitted to the receipt holders by the depositary bank, market prices of ADRs will be influenced not only by the performance of the company's stock, but also by foreign currency exchange fluctuations. ADRs are not redeemable - they trade like any other stock.

All of the following statements about warrants are true EXCEPT:

A At issuance, warrants are "out of the money" B Warrant valuation is influenced by the life of the instrument C Warrant valuation is directly influenced by the valuation of the company's common stock D CORRECT ANSWER Warrant valuation rises as the security approaches its maturity: Warrant prices will erode as the instrument nears maturity since the time value is constantly decaying. Warrant valuation is directly influenced by its life - the longer the warrant, the greater its value; the shorter the remaining life, the lower its value. warrant valuation is influenced by market expectations for future corporate earnings, and hence the future price of the common stock.

All of the following are types of preferred stock EXCEPT:

A Performance B Participating C Cumulative D Correct answer Refundable There is no such thing as refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year.

Which statement is TRUE regarding rights?

A Rights give the holder the long term option to buy stock B Rights typically give the holder a 6-9 month option to buy stock C The exercise price of a right is set at a premium to the stock's current market price D CORRECT ANSWER The exercise price of a right is set at a discount to the stock's current market price: Rights are very short term options (about 1 or 2 months) that give existing shareholders the right to subscribe to new shares at a discount to the stock's current market price. Warrants give the holder the long term option to buy stock - they usually have a life of 5 years or so. for a warrant to have real value, the price of the common stock must subsequently rise in the market.

Which statement is TRUE regarding participating preferred stock? Participating preferred:

A participates in any bond interest payments B participates in a portion of the price appreciation of the issuer's common stock C CORRECT ANSWER has a dividend rate that is fixed as to a minimum but not as to a maximum D has a dividend rate that is fixed as to a maximum but not as to a minimum Participating preferred pays a fixed dividend rate but also participates with common in "extra" dividends declared by the Board of Directors. Therefore, the dividend is fixed as to the minimum amount but not as to the maximum amount.

A foreign security held in foreign branches of U.S. bank is a(n):

ADR: An American Depositary Receipt is a foreign security that is held in a foreign branch of a U.S. bank. The bank issues receipts against these shares, and the receipts are registered in the United States as securities and are listed and traded on U.S. stock exchanges. In this manner, the foreign corporation does not have to register its shares with the SEC in order to have trading take place in the U.S.

All of the following statements are true regarding the trading of ADRs EXCEPT:

ADRs are traded on the Chicago Board Options Exchange: listed and traded on U.S. stock exchanges, including the NYSE, AMEX (now renamed the NYSE American) and NASDAQ stock markets. Note that only options trade on the Chicago Board Options Exchange (CBOE) - neither stocks nor ADRs trade in this market.

Dividends are paid to the holders of which of the following?

ADRs: American Depositary Receipts - receive dividends. The bank that issues the receipts against foreign securities "passes through" dividends paid on the stock to the receipt holders. Warrants and rights do not receive dividends nor are there dividends paid on Treasury shares

If interest rates fall, issuers most likely will call: A all preferred issues B preferred issues with below market interest rates C preferred issues with above market interest rates D only preferred issues with high call premiums

C preferred issues with above market interest rates If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. The "call premium" is any amount that the issuer will pay the preferred stockholder above par value as "extra" compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

All of the following statements about warrants are true EXCEPT: A warrants have a longer term than rights B warrants are issued to make corporate senior securities offerings more attractive to investors C warrants give the holder a perpetual interest in the issuer's underlying common stock D warrants trade separately from the stock of the company:

C warrants give the holder a perpetual interest in the issuer's underlying common stock This is accomplished because the warrant gives growth potential to these senior security holders if the common stock price should rise in the future. Warrants typically have a fixed life of 5 years or less and then expire. Companies can issue perpetual warrants, but rarely do so.

Which statement is TRUE regarding warrants? A The exercise price of a warrant is set at a premium to the stock's current market price and the warrants are exercised when the exercise price is above the market price B The exercise price of a warrant is set at a discount to the stock's current market price and the warrants are exercised when the exercise price is above the market price C The exercise price of a warrant is set at a premium to the stock's current market price and the warrants are exercised when the exercise price is below the market price C The exercise price of a warrant is set at a premium to the stock's current market price and the warrants are exercised when the exercise price is below the market price D The exercise price of a warrant is set at a discount to the stock's current market price and the warrants are are exercised when the exercise price is below the market price

C. The exercise price of a warrant is set at a premium to the stock's current market price and the warrants are exercised when the exercise price is below the market price. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. The warrants will only be exercised when the market price rises above the exercise price (why would you want to buy the stock at a price HIGHER than the current market?)

Dividends on preferred stock may be paid in:

Cash: Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company.

Common dividends are usually paid:

Common dividends are usually declared and paid quarterly.

If a corporation wishes to sell additional shares, which of the following persons can subscribe using pre-emptive rights?

Common stockholders: Only common stockholders have pre-emptive rights. Holders of senior securities (preferred stock and bonds) do not have pre-emptive rights; nor do warrant holders

Which statement is TRUE when comparing convertible preferred stock and non-convertible preferred stock?

Convertible preferred stockholders benefit as the market price of the common stock rises: Convertible preferred holders benefit if the stock rises above the issues conversion price since they would have the opportunity to buy common stock below market. Non-convertible preferred yields are higher than convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common's price rises, so growth potential is included.

All of the following statements are true about preferred stock EXCEPT:

Corporations must pay preferred dividends: Preferred stock has preference over common as to the payments of dividends and as to assets upon liquidation. Preferred dividends are, in most cases, paid semi-annually. The Corporation will only pay the preferred dividend if the Board of Directors decides. There is no legal obligation to pay the preferred, however, if it is not paid, investors will not find the stock attractive and won't invest in it.

Which of the following actions by a corporation would be prohibited? A Making a cash distribution to shareholders B Making a stock distribution to shareholders CDistributing the stock of another company to shareholders D Distributing tax credits to shareholders

D Distributing tax credits to shareholders Tax credits cannot be distributed to shareholders under the corporate business form; they can only be passed to owners of partnerships.

Which security of the same issuer is likely to give the highest current yield? A warrant B common stock C convertible preferred stock D non-convertible preferred stock

D non-convertible preferred stock Warrants give no yield. Common stocks give the lowest yields since there is direct growth potential in the price of the stock as reported earnings increase. Convertible preferred yields are higher than common yields but not as high as non-convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common's price rises, so growth potential is included. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

All of the following terms describe rights EXCEPT: A exercisable B negotiable C giftable D redeemable

D redeemable Rights are not redeemable with the issuer. The rights have a value based upon the lower subscription price available to the holder of the rights than the current market price. The holder of the rights has a number of choices as to their disposition. The holder can sell them in the market at this value, since the rights are negotiable. The holder can exercise the rights, buying the stock at the subscription price. Finally, the holder can give the rights as a gift to someone else.

Dawn owns 100 shares of ACME Company common stock, currently trading at $60 per share. She receives a notice that ACME has declared a 20% stock dividend. What does this mean to Dawn?

Dawn will receive 20 additional shares of stock: A stock dividend means that the company will issue additional shares to current shareholders instead of paying a cash dividend. Companies often "pay" stock dividends, as opposed to cash dividends, when they are young and growing and want to conserve cash to fund their growth. The percentage indicates how many additional shares each stockholder receives. In this case, 20% of 100 shares = 20 additional shares to be issued. Assume that each share was worth $60 before the 20% stock dividend was declared. The aggregate holding was worth $60 x 100 = $6,000. After the stock dividend is paid, Dawn will own 100 + 20 = 120 shares (same as 100 x 1.2). However, each share will now be worth $60/1.2 = $50. The aggregate holding is worth $50 x 120 shares = $6,000. The stock declines in value from $60 to $50, which is a $10 decrease from the original $60 value, for a $10/$60 = 16.66% decline in price.

What term would apply to Authorized, Issued, Outstanding or Treasury Stock?

Par Value: Authorized stock is the total number of shares that the company is "authorized" to sell. Issued stock is the number of shares that have actually been sold to the public out of the authorized total. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). The only stock that votes and that receives dividends is Outstanding shares. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.

A customer buys 100 shares of preferred at $80 per share. The par value is $100. The dividend rate is 10%. The customer will receive how much in each dividend payment?

Preferred dividends are based on a stated percentage of par value. The stated rate is 10% of $100 par = $10 annual dividend per preferred share. Since there are 100 shares, the annual dividend is $1,000. Remember, though, that preferred dividends are paid twice a year, so each payment will be for $500.

Which statement is TRUE regarding preferred stock payments?

Preferred dividends are usually higher than those paid to common: Preferred dividends are typically fixed and are generally higher than those paid to common stockholders. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly.

All of the following are terms associated with preferred stock EXCEPT?

Redeemable: Preferred stock is not a redeemable security - it is a negotiable security. The stock cannot be redeemed with the issuer - an investor who wishes to liquidate must sell the stock in the market. Preferred stock can be callable, cumulative, and convertible.

As interest rates fall, preferred stock prices will:

Rise: Preferred stock is a fixed income security whose prices move inversely with interest rates. As interest rates fall, preferred stock prices rise, so that the preferred will give a yield that is competitive with the current market.

At issuance, a warrant has:

Time value only: for the warrant to have any value, the common stock must double in price and then some! So warrants have no intrinsic value at issue. They are issued "out the money." They have time value - as long as the stock price more than doubles over the ensuing 5 years, the warrant will become valuable.

Which statement is FALSE regarding Treasury Stock?

Treasury Stock has voting rights: Treasury stock does not vote nor receive dividends. Treasury stock is deducted from outstanding shares, and since outstanding shares are reduced, Earnings Per Share increases.

To determine if a stock appears to be overpriced, what would be examined?

The company's Price to Earnings Ratio: The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued.

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT:

The number of authorized shares will be reduced: Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock's price in the market. The purchase of Treasury Stock has no effect on authorized shares. This is the legal amount of shares that the company is authorized to sell, established in the company's corporate charter.

A customer owns 210 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 20 rights tendered, a shareholder may purchase one additional share at $20 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE?

The shareholder can buy a maximum of 11 shares by paying $220: The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 210 shares and thus, will receive 210 rights. 210 rights / 20 rights per share = 10.5 shares, which is rounded up to 11 shares @ $20 each = $220 necessary to subscribe.

All of the following actions will dilute shareholders' equity (individual common shareholder's equity) EXCEPT:

payment of a stock dividend: Dilution of an individual stockholder's equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. However, in total, the shareholder has the same percentage interest in the corporation. If the holders of convertible securities convert, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. Similarly, if the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their "pre-emptive" rights. Finally, if officers are granted stock options, their exercise of those options results in the issuance of additional common shares, diluting existing shareholders' equity.

A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. This is called (a):

proxy: When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.

A corporation has been in financial difficulty and its stock price has fallen to an extremely low level. To avoid delisting, it wishes to raise its stock and it wants to conserve its cash. To do this, it should declare a:

reverse stock split: When a corporation's stock price falls too low, the company might be delisted from its principal exchange, which would make the stock very difficult to trade. To keep the stock trading in the market, the corporation could raise the per share price by declaring a reverse stock split. Declaring stock split would reduce the price per share. Buying back shares uses cash, which the company wants to conserve. The same is true if the company pays a cash dividend.

Stockholder approval is needed if a corporation wishes to:

split its stock 2 for 1: Stockholder approval is needed for a stock split, because it changes the par value of the stock. The state in which the company is incorporated typically requires shareholder approval of a par value change. In contrast, dividend decisions, either in cash or stock, do not require shareholder approval because they are "paid" out of retained earnings and do not affect par value per share. They are made solely by the Board of Directors of the company.