Unit 1: Equities
Which of the following preferred stocks allows the issuer to pay the shareholders par and cease dividend payments following a stated period? A) Callable B) Redeemable C) Adjustable D) Puttable
A) Callable The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.
Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares? A) Convertible B) Participating C) Adjustable rate D) Callable
A) Convertible Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common.
Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Convertible B) Noncumulative C) Callable D) Cumulative
A) Convertible Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.
Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) 1% B) 4% C) 3% D) 6%
A) 1% Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last four weeks' trading volume (whichever is greater), every 90 days.
A penny stock is best described as A) an unlisted stock valued at less than $5 per share. B) an exchange-listed stock valued at less than $5 per share. C) an unlisted stock valued at less than $2 per share. D) an unlisted stock valued at less than $1 per share.
A) an unlisted stock valued at less than $5 per share. A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.
All corporations will issue A) common stock. B) preferred stock. C) different classes of common stock. D) common and preferred stock.
A) common stock. All corporations will issue common stock, of which there can be only one class, but not all corporations issue preferred stock. Corporations that choose to issue preferred shares can issue more than one class.
The growth potential in the price of preferred shares is generally considered to be A) less than that of the issuer's common shares. B) no different than that of the issuer's common shares. C) greater than that of the issuer's common shares. D) unrelated to the financial well-being of the issuer.
A) less than that of the issuer's common shares. While the growth potential of both common and preferred shares can be tied to a company's financial well-being, preferred share growth is generally less than that of the common shares. The trade-off is that the preferred shares have preference with dividends received, enjoy a fixed rate of return via those dividends, and have a priority claim over common shareholders in the event of bankruptcy and the dissolution of assets.
An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? A) Warrants will be distributed to existing stockholders and they will have two to five years to decide whether or not to buy the stock at the strike price. B) Rights will be distributed to existing stockholders with an exercise price lower than the current market value. C) Warrants will be distributed to existing stockholders with an exercise price equal to the current market value. D) Rights will be distributed to existing stockholders; they have only two options: exercise the rights or let them expire.
B) Rights will be distributed to existing stockholders with an exercise price lower than the current market value. Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.
An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances? A) The investor's account is approved for margin purchases. B) The investor is an established customer. C) The investor is already exempt from the risk disclosure requirements. D) The investor has already received the risk disclosure statement.
B) The investor is an established customer. Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.
Mr. Smith bought an American depositary receipt (ADR) in a French company at $13.03 and recently sold the shares for $24.88. How would this trading profit be taxed? A) The profit is taxed as income in the United States only. B) The profit is taxed as a capital gain in the United States only. C) The profit is taxed as income in France only. D) The profit is not taxed because ADRs are tax-exempt securities.
B) The profit is taxed as a capital gain in the United States only. Any trading profits (capital gains) from an ADR would only be taxable here in the United States. A capital gain is the profit realized when buying then selling the shares. Remember, dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability.
Which of the following best describes the trade execution of American depositary receipts (ADRs)? A) Trades are executed overseas in a foreign currency. B) Trades are executed domestically in U.S. dollars. C) Trades are executed domestically in a foreign currency. D) Trades are executed overseas in U.S dollars.
B) Trades are executed domestically in U.S. dollars. ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. Trades in these securities are dollar denominated. ADRs trade and settle in the same fashion as a traditional U.S.-based common stock.
An affiliate has held restricted shares fully paid for six months. In anticipation of the desire to divest the shares, the affiliate should know that A) the shares are no longer restricted, having been held fully paid for six months. B) any shares sold will be subject to volume restrictions if still an affiliate. C) no limit on the number of shares that can be sold will be imposed. D) while no longer restricted, all sales of these shares must be approved by the issuer's board of directors (BOD).
B) any shares sold will be subject to volume restrictions if still an affiliate. Although held fully paid for six months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for six months could now be sold completely unrestricted.
Preferred shareholders who expect missed dividend payments to be eventually paid are most likely to own A) straight preferred stock. B) cumulative preferred stock. C) convertible preferred stock. D) callable preferred stock.
B) cumulative preferred stock. Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.
CDT Corporation has issued 4.5% callable preferred shares. If these shares are ever called in, stockholders should expect that the shares would be called in at A) par value. B) par value or higher. C) par value or lower. D) current market value.
B) par value or higher. In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.
A corporation that has issued cumulative preferred stock A) pays only current dividends with no liability for missed or past-due dividends. B) pays past and current preferred dividends before paying dividends on common stock. C) pays the preferred dividend before paying the interest payments due on its outstanding bonds. D) pays only the current dividends on the preferred, before paying a dividend on the common and then pays any past-due dividends.
B) pays past and current preferred dividends before paying dividends on common stock. Dividends in arrears (those missed) on cumulative preferred have the highest priority of dividends to be paid. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest, however, is always paid before any dividends, preferred or common.
The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as A) market risk. B) purchasing power risk. C) interest-rate risk. D) decreased dividend risk.
B) purchasing power risk. Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.
Under penny stock rules, what is required for a broker-dealer to consider an investor an established customer? A) Signed risk disclosure statement B) Open cash account for six months or more C) At least three separate penny stock purchases D) Signed transaction agreement
C) At least three separate penny stock purchases Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least one year before the penny stock transaction, or have purchased at least three different penny stocks from the same broker-dealer.
While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be A) convertible. B) callable. C) adjustable rate. D) participating.
C) adjustable rate. Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.
Once a dividend is initially declared by the board of directors (BODs), any future dividend payments A) are guaranteed to be paid in at least the same amount as the initial declaration. B) are guaranteed to be paid, but no amount is stipulated. C) carry no guarantee of payment in any amount. D) are not guaranteed to be paid, but if they are paid, they must be at least equal to the initial declaration.
C) carry no guarantee of payment in any amount. While the potential to share in the company's profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way.
Preferred shareholders have A) voting rights only. B) both voting and preemptive rights. C) no voting or preemptive rights. D) preemptive rights only.
C) no voting or preemptive rights. Preferred shareholders have no voting rights, nor do they have preemptive rights, which is the right to maintain the same percentage ownership in the corporation should additional shares be issued.
The rate on an adjustable preferred stock would most likely be indexed to A) the Dow Jones Industrial Average (DJIA). B) the Consumer Price Index (CPI). C) the Treasury bill (T-bill) rate. D) the Producer Price Index (PPI).
C) the Treasury bill (T-bill) rate. The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.
A corporation with 1 million shares of stock outstanding wishes to sell another 250,000 shares. When management conducts a rights offering, a shareholder owning 100 shares will be given stock rights to purchase how many additional shares? A) 100 shares B) 250 shares C) 125 shares D) 25 shares
D) 25 shares Stock rights (also known as preemptive rights or subscription rights) give current shareholders the ability to preemptively purchase enough shares to maintain their proportionate ownership of the corporation. This prevents their dividend and voting power from being diluted. The shares outstanding in this case will go from 1,000,000 to 1,250,000. This investor must thus go from owning 100 shares out of 1,000,000 to 125 shares out of 1,250,000. This would require that the investor be able to purchase an additional 25 shares.
What is the primary purpose of an issuer sponsoring an American depositary receipt (ADR)? A) These securities are created to provide tax relief for U.S. investors. B) These securities are created to facilitate foreign investment in U.S. companies. C) These securities permit the issuer to avoid Securities and Exchange Commission (SEC) jurisdiction. D) These securities are created to attract a U.S. investor base.
D) These securities are created to attract a U.S. investor base. ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR trades in the U.S and is denominated in U.S. currency making the process of buying a foreign stock much easier for an American investor. ADRs are subject to U.S. securities regulations.
An investor having no affiliation with CDS Company has just purchased shares that were sold subject to Rule 144. This investor A) must wait six months before any sales can be made. B) must wait six months before selling shares subject to volume limits. C) can only sell subject to volume limits. D) can sell the shares unrestricted at any time.
D) can sell the shares unrestricted at any time. Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.
In the dividend disbursement process three of the four critical dates are determined by the board of directors (BOD) but one is determined by either Financial Industry Regulatory Authority (FINRA) for OTC stocks or the exchange for listed stocks. Which one is it? A) record B) payable C) declaration D) ex-dividend
D) ex-dividend Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.