UNIT 1 Checkpoint

Your customer owns 100 shares of DWQ trading at $50 per share. He hears that DWQ has declared a 25% stock dividend and wants to know how that will affect his holdings after the stock dividend is paid. You should advise the customer that based on the current price he will own

. 125 Shares at $40 The number of shares increased by 25%, or 25 shares. Total market value remains the same. To calculate the new market price, divide $5,000 (total market value) by 125 to get the after-dividend price of $40 per share.

A corporation authorized to issue 1 million shares of common stock originally issued 600,000 shares and later repurchased 40,000 shares for its treasury. How many shares of common stock will remain outstanding?

. 560,000 Stock issued minus stock reacquired equals the amount of stock outstanding. Shares repurchased are called treasury stock

Which of the following is a function of a registrar? a) Accounting for the number of shares outstanding B)Transferring shares into the name of a new owner C) Canceling old shares D)Recording the names of stockholders on the corporation's books

. A) Accounting for number of shares outstanding The registrar's function is to ensure that the number of shares outstanding does not exceed the number accounted for on the corporation's books. The transfer agent records the names of stockholders on the corporation's books, cancels old shares, and transfers shares into a new owner's name.

Which of the following are characteristics of a REIT? I. It is traded on an exchange or over the counter. II. It is professionally managed. III. It passes through both gains and losses to investors. IV. It is a type of limited partnership. A. I and II B. I, II and III C. III and IV D. I, II, III and IV

. A. REITs are traded on exchanges and OTC, and they are professionally managed. REITs share some features with a limited partnership, but they are a different type of business entity. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide passthrough of losses.

All of the following statements describe warrants EXCEPT A)short-term instruments that become worthless after the expiration date B)issued by a corporation C)traded in the secondary market D)most commonly offered in connection with debentures to sweeten the offering

. A. Short-term instruments that become worthless after the expiration date Warrants are commonly used to make debenture offerings more attractive and have long lives (generally 2 to 10 years). Warrants need not be exercised, but may be traded in the secondary market.

All of the following are characteristics of a rights offering EXCEPT A)the subscription period is up to 2 years B)it is issued to current stockholders C)the rights are marketable D)the subscription price is below the CMV

. A. The Subscription period is up to 2 years Rights offerings are usually very short-lived (30 to 45 days).

■ No preemptive rights ■ Dividends in dollars ■ Currency risk

. ADRs

All of the following characteristics are advantages of a REIT investment EXCEPT A. liquidity B. tax deferral C. diversification D. professional management

. B. A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. Many REITs are actively traded on exchanges and OTC, thereby providing liquidity. REIT portfolio losses are not passed through to investors.

To avoid taxation at the corporate level, REITs must derive at least 75% of their income from real property and must distribute to shareholders A. 75% of net income B. 90% of net income C. 95% of net income D. 98% of net income

. B. REITs must distribute at least 90% of their net investment income to shareholders to avoid corporate taxation.

Stockholders must approve A. a declaration of a cash dividend B. a 3:1 stock split C. a repurchase of 100,000 shares for the treasury D. a declaration of a 15% stock dividend

. B. Shareholder approval is required to change the stated value of stock, which occurs with a stock split. Decisions regarding payment of dividends or repurchase of stock are made by the board of directors (management only) since these are considered operational decisions.

At the annual meeting of ABC Corporation, 5 directors are to be elected. Under the cumulative voting system, an investor with 100 shares of ABC would have a total of A. 100 votes to be cast among 5 directors B. 500 votes to be cast in any way the investor chooses for 5 directors C. 500 votes to be cast for each of 5 directors D. 100 votes to be cast for only 1 director

. B. With cumulative voting rights, this investor may cast 500 votes for the 5 directors in any way the investor chooses.

ABC Corporation declares a 5-4 stock split. On the ex-date, the price of ABC common will be reduced by A. .5 B. .2 C. .25 D. .8

. B. .2 As a result of a stock split, an investor will have more shares at less value per share, but overall value of the investment will remain the same. For example: an investor owns 100 shares at $50 per share worth $5,000. After a 5-4 split, the investor will have 125 shares (100 × 5/4); the total ownership interest of $5,000 is divided by the new number of shares to determine the per share price of $40. The decrease of 50 to 40 is a 20% reduction. Generally, the percent decrease in price will always be less than the percent increase in the number of shares. The percent increase in shares in a 5-4 split is 25%.

—— 1. Number of shares that a corporation is permitted to issue —— 2. Dollar amount assigned to a share of stock by its issuer —— 3. Liquidation value of each share of common stock —— 4. Issued stock - treasury stock

. B. Authorized stock D. Par value C. Book value A. Outstanding stock

The board of directors is responsible for setting all of the following EXCEPT A. Record Date B. Ex-Dividend Date C. Declaration Date D. Payable Date

. B. Ex-Dividend Date The ex-date for a distribution is set by the appropriate self-regulatory organization. The issuer determines the other dates listed

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 may not be traded in the secondary market. C)Warrants have longer lifetimes than rights. D)Warrants may be attached to another of the issuer's securities.

. B. Warrants may not be traded in secondary market 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.

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders, each preferred share must be paid a dividend of A. 25 B. 15 C. 10 D. 5

. C. 10 Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shares

The residual right of common stockholders refers to their right to A)vote in elections for the board of directors and in other important business decisions, such as changes to the charter B)receive all announced dividends in accordance with the number of shares held C)claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid D)examine the corporation's annual reports and other reports, and take legal action if irregularities are found

. C. Claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid The residual right of common shareholders refers to their position in the event of bankruptcy.

A subscription right or privilege is best defined as A)the right of shareholders to buy any future issue of the company's preferred stock prior to submitted public orders B)the right of shareholders to purchase company shares at a specific price within the next 5 years C)the right of shareholders to maintain their percentage ownership of a company by selling a proportional number of warrants D)the right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock

. D) Current shareholders may maintain their percentage of ownership of a company by buying a proportional number of shares of any future issue of common stock. Purchasing shares prior to public orders is also known as a "preemptive right" and is often available only if made explicit in a company's corporate charter.

ADRs are used to facilitate A. the foreign trading of domestic securities B. the foreign trading of U.S. government securities C. the domestic trading of U.S. government securities D. the domestic trading of foreign securities

. D. ADRs are tradable securities issued by banks, with the receipt's value based on the underlying foreign securities held by the bank.

Cumulative voting rights A. benefit the large investor B. aid the corporation's best customers C. give preferred stockholders an advantage over common stockholders D. benefit the small investor

. D. The cumulative method of voting gives an investor 1 vote per share owned times the number of directorships to be elected. For example, if an investor owns 100 stock shares and there are 5 directorships to be elected, the investor will have a total of 500 votes. The stockholder may cast all of his votes for one candidate, thereby giving the small investor more voting power.

A customer owns 200 shares of GHI common stock at $10 per share and 300 shares of GHI preferred Class A stock at par. If GHI declares a 2:1 split for its common shares, how will the customer's preferred Class A shares be adjusted? A)600 shares at $50 per share B)300 shares at $200 per share C)1,000 shares at $30 per share D)No adjustment is made

. D. No adjustment is made Splits or adjustments to the common stock do not impact the preferred share classes, just as adjustments to any preferred class shares would not impact the common shares

In a portfolio containing common stock, preferred stock, convertible preferred stock, and ADRs, changes in interest rates would most likely affect the market price of the A)common stock B)ADRs C)convertible preferred stock D)preferred stock

. D. Preferred Stock Preferred stock has the closest characteristics to bonds and would be most affected by a change in interest rates. Convertible preferred stock would also be affected by price changes in the underlying common stock.

Callable preferred stock is advantageous to the issuer because it allows the company to A)issue fixed-rate securities at a yield lower than usual B)call in the stock at less than par value and capture the difference as income C)take advantage of high interest rates D)replace a high, fixed-rate issue with a lower issue after the call date

. D. replace a high, fixed-rate issue with a lower issue after the call date By issuing a callable preferred stock, a corporation can call in a high dividend payment issue and replace it with a lower one when interest rates decline. Callable preferred allows the company to take advantage of reduced interest rates by calling in high-rate issues and replacing them with lower ones. The marketplace requires that the company pay a higher dividend yield compared to one that is not callable. This compensates the investor for taking the risk of a future call.

—— 1. Party responsible for recording security owners' names and holdings and delivering new securities —— 2. Assigned to each security for identification —— 3. Stockholders may maintain proportionate ownership by purchasing newly issued shares before they are offered to the public —— 4. Party responsible for accounting for all of an issuer's outstanding stock —— 5. Annualized dividend divided by current market price

. E. Transfer agent A. CUSIP number B. Preemptive right D. Registrar C. Current yield

Which of the following statements regarding real estate investment trusts are TRUE? I.Hybrid REITs invest in both commercial property and residential property. II.Some REITs hold no real property but hold mortgages on commercial property instead. III.All dividend disbursements made by REITs will be recognized as qualified dividends by the IRS. IV.Dividends are taxed at the investor's ordinary income tax rate.

. Equity REITs can hold residential and commercial property, mortgage REITs hold mortgages on property, and hybrid REITs do both. Dividend disbursements made by the trusts are not recognized as qualified dividends and, therefore, will be taxable to the investor at their ordinary income tax rate.

If a stock undergoes a 1:5 reverse split, which of the following are TRUE? I. Market price per share increases. II. The number of shares outstanding increases. III. Earnings per share typically increase.

. I and III After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share should increase.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? I. Residual claim to assets at dissolution II. Right to a vote for stock dividends to be paid III. Right to receive an audited financial report on an annual basis IV. Claim against dividends in default

. I. & IV. Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends

Which of the following represent(s) ownership, or equity, in a company? I. Corporate bonds II. Common stock III. Preferred stock IV. Mortgage bonds

. II and III Owning either common or preferred stocks represents ownership, or equity, in a corporation. The other two choices represent debt instruments. Clients purchasing corporate or mortgage bonds are considered lenders, not owners.

Treasury stock I. has voting rights and is entitled to a dividend when declared II. has no voting rights and no dividend entitlement III. has been issued and repurchased by the company IV. is authorized but unissued stock

. II and III Treasury stock is stock a corporation has issued but subsequently repurchased from investors in the secondary market. The corporation can either reissue the stock at a later date or retire it. Stock that has been repurchased by the corporation has no voting rights and is not entitled to any declared dividends.

Which of the following are TRUE of treasury stock? I.Treasury stock is authorized but not yet issued. II.Treasury stock may pay a reduced dividend. III.Treasury stock is issued but has no voting or dividend rights. IV.Treasury stock is previously issued stock that has been repurchased by the issuing company

. III and IV Treasury stock is a company's stock that has been issued, sold through an offering, and then bought back by the company. When a company repurchases its own stock, that stock has no voting rights or dividend rights and is held in the issuer's treasury

Which of the following statements regarding the Committee on Uniform Securities Identification Procedures (CUSIP) number is CORRECT?

. It facilitates tracking and identification of a security. The CUSIP assigns a unique number to each class of common and preferred stock and to each issue of corporate and municipal bond; this number is used to identify and track a particular security. The stock certificate itself, not the CUSIP number, is evidence of ownership in the issuing company. The presence of a CUSIP number does not make a security negotiable.

Not a limited partnership ■ Not an investment company ■ Pass through income, not losses ■ 75% of total investment assets in real estate Unit 1 Equity Securities 33 ■ 75% of gross income from rents or mortgage interest ■ Must distribute 90% or more of income to shareholders to avoid taxation as a corporation ■ Trade on exchanges or OTC ■ Dividends received from REITS are taxed as ordinary income

. REITs

GHI currently has earnings of $4 and pays a $.50 quarterly dividend. If GHI's market price is $40, the current yield is

. The quarterly dividend is $.50, so the annual dividend is $2; $2 /· $40 market price = 5% current yield

An ADR represents a

. foreign security trading in the U.S. market ADRs are receipts issued by U.S. banks that represent ownership of a foreign security and are traded in U.S. securities markets