Unit 01: Practice Test 2 <Equity Securities>

*If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to:* A) 0.3. B) 0.4. C) 0.32. D) 0.48.

Your answer, 0.32., was correct!. Stock splits will change the par value of the stock. To calculate the new value multiply the original par by the inverse of the split: 4/5 × $.40 = $.32.

A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 15%. B) 1%. C) 10%. D) 5%.

Your answer, 10%., was incorrect. The correct answer was: 5%. The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield).

*Smith and Co., Inc. has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares?* A) 100 rights, 20 per share. B) 200 rights, 20 per share. C) 100 rights, 5 per share. D) 200 rights, 5 per share.

Your answer, 200 rights, 20 per share., was incorrect. The correct answer was: 200 rights, 5 per share. Stockholders receive one right per share owned. Hence, Joe receives 200 rights. The purpose is to maintain shareholders' proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares (200 / 40 = 5 rights per share).

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 1 round lot. B) 25 round lots. C) 25 odd lots. D) 1 odd lot.

Your answer, 25 round lots., was correct!. For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.

*While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of:* A) 150. B) 15. C) 600. D) 60.

Your answer, 600., was correct!. The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.

Which of the following must be paid before a corporation may pay its cumulative preferred stock arrearages? 1.This year's preferred dividends. 2.Bond interest. 3.Corporate taxes. 4.Common stock dividends. A) II and III. B) I and III. C) I and IV. D) II and IV.

Your answer, II and III., was correct!. Before paying any dividends, the corporation must pay wages, taxes, and both interest and principal on debts that are due. Once the debt obligations have been satisfied, it may pay arrearages on cumulative preferred stock, then current fixed dividends on preferred stock, and finally common dividends.

Which of the following activities are NOT a registrar's function(s)? 1.Audit the transfer agent. 2.Accounting for the number of shares outstanding. 3.Canceling old shares. 4.Transferring shares into the new owners' names. A) II and III. B) III and IV. C) I and IV. D) I and II.

Your answer, III and IV., was correct!. The registrar accounts for the number of shares and audits the transfer agent.

*Which of the following statements about warrants is NOT true?* A) Warrants have an exercise price above the current market price of the common stock when issued. B) Warrants have longer lifetimes than rights. C) Warrants may be attached to another of the issuer's securities. D) Warrants may not be traded in the secondary market.

Your answer, Warrants may not be traded in the secondary market., was correct!. Warrants usually have lifetimes of 2-10 years; rights expire in 30-45 days. A corporation may attach warrants to other securities, such as bonds, to make the bonds more marketable. Warrants have no intrinsic value when issued and may expire without ever having intrinsic value. Before expiration, they may be, and often are, traded in the secondary market.

A new bond issue will include warrants to: A) increase the price of the issue to the public. B) increase the attractiveness of the issue to the public. C) increase the spread to the underwriter. D) increase the capital raised by the issuer through the bond offering.

Your answer, increase the attractiveness of the issue to the public., was correct!. By including warrants with debt issues, issuers increase the marketability of bonds. The warrants offer a long-term opportunity to buy the underlying stock at a fixed price. In addition to increasing the marketability of the issue, the issuer can offer the bonds with a lower coupon rate and, as a result, reduce fixed costs.

Shareholder approval is required for all of the following corporate events EXCEPT: A) the issuance of convertible bonds. B) dividends. C) the acceptance of a tender offer from a non-affiliated company. D) stock splits.

Your answer, the acceptance of a tender offer from a non-affiliated company., was incorrect. The correct answer was: dividends. Shareholder approval is not required for the payment of dividends, but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.