Chapter 1: Series 6/SIE

A common stockholder in a corporate liquidation has: [A]A priority claim on the assets. [B]A claim on the assets prior to preferred stockholders. [C]A residual claim on the assets. [D]A claim on the assets prior to subordinate lenders but after secured creditors.

A residual claim on the assets. Common Stock holders have a residual claim on the corporate assets. If liquidation occurs common stockholders would be the last to be paid.

When a common stock has had a long record of growth, quality management, and services, and consistently pays a moderate dividend, it would generally be referred to as a: [A]Blue Chip stock [B]Growth stock [C]Income stock [D]Defensive stock

Blue Chip stock Blue Chip common stocks generally have a long record of growth, quality management, and service that maintains a consistent dividend payout ratio of about 50%

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 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.

Which of the following are true concerning a Real Estate Investment Trust (REIT)? It must pay out a specified percentage of its earnings. It can only be purchased by persons in the 28% tax bracket. It cannot make short-term real estate construction and development loans. It makes money on the difference between its interest expenses and the interest it receives. [A]I and II [B]III and IV [C]II and III [D]I and IV

I and IV In order to qualify as an REIT, it must pay out 90% to shareholders. The REIT makes its profit on the difference between the interest expenses and the interest it receives. It can make short-term real estate construction and development loans, and anyone considered a suitable investor can invest in an REIT.

Which of the following factors tends to affect the price of utility common stocks more than industrial common stocks? [A]Earnings per share. [B]The book value of the company. [C]Interest rates. [D]The consumer Price Index.

Interest rates. Utility stocks are very strongly tied to interest rates since they are so highly leveraged (carry a lot of debt).

All of the following companies are examples of non-cyclical or defensive stocks except: [A]Public utilities such as water and gas [B]Companies selling pharmaceuticals [C]Energy providers [D]Manufacturers of appliances

Manufacturers of appliances Cyclical stock tends to rise quickly when the economy turns up and to fall quickly when the economy turns down. Housing and appliances manufacturers are examples of cyclical stocks

A customer wishes to sell a stock just after the stock pays a dividend with a record date of Friday, October 20th. Assuming a regular-way settlement, the earliest that the customer could sell the stock and still receive the dividend is [A]Monday, October 16th. [B]Tuesday, October 17th. [C]Wednesday, October 18th. [D]Thursday, October 19th.

Thursday, October 19th. The ex-date on a dividend is one business day prior to the record date. In this case, the record date is listed as Friday, October 20th. This would mean that the ex-date for the security is Thursday, October 19th. The customer would have to sell on or after October 19th to still receive the dividend, making 10/19 the earliest that the customer could sell the stock and still receive the dividend.

Which of the following would NOT be considered an advantage when investing in Real Estate Investment Trusts (REITs)? [A]Potential appreciation in property values [B]Dividend income with competitive yields [C]Provides a liquid investment in an illiquid investment area [D]Weakening demand for real estate

Weakening demand for real estate If property demand was slowing down, that would reduce interest in investments in REITs.

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 [A]20 cents per share on 2,000 shares. [B]20 cents per share on 2,100 shares. [C]21 cents per share on 2,000 shares. [D]21 cents per share on 2,100 shares

20 cents per share on 2,000 shares. 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.

Mr. Smith has owned 400 shares of ABC common stock for several years. ABC announces a 3:2 stock split. How many additional shares of ABC will Mr. Smith own after the stock split? [A]200 shares [B]400 shares [C]600 shares [D]1200 shares

200 shares Mr. Smith will end up with a total of 600 shares: 3/2 x 400/1 = 1200/2 = 600 shares However, the question is asking how many "additional" shares will be owned by the customer which would be 200 shares: 600 total shares - 400 original shares = 200 additional shares

Which of the following are true concerning rights? They may be listed on a stock exchange. They entitle the holder to subscribe to stock at less than the market price. They normally have a short-term life span. They are freely transferable. [A]I and II [B]III and IV [C]I, III and IV [D]All

All Rights allow the holder to subscribe to stock at less than the current market price. Rights can be freely traded on the exchanges and usually have a maximum maturity of 90 days.

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

Callable where shares may be redeemed by the company at a stated discount from par on certain dates Callable shares are redeemed at a premium above par, not a discount from par.

Which of the following securities could pay a dividend in cash or in other securities? [A]Common stock [B]Mutual funds [C]Municipal bonds [D]Corporate bonds

Common stock Common stock can pay dividends in the form of cash, stock, stock of other corporations, treasury stock, or products.

A corporation that issued several types of securities is being liquidated. Investors who own which of the following securities will have the most junior claim to company assets? [A]Common stock [B]Convertible bonds [C]Preferred stock [D]Collateral bonds

Common stock Common stock has the most junior claim of the choices listed. Common stock has a "residual" claim on company assets during liquidation, meaning that holders of common stock are lowest on the list of those receiving a portion of company assets.

A stock dividend would be paid on which of the following securities? [A]Common stock [B]Preferred stock [C]Treasury notes [D]Treasury bills

Common stock Shares of stock can be paid on common stock. Preferred stock of a corporation may pays cash dividends at a fixed dividend rate to the shareholders. Treasury bills and Treasury notes are forms of debt and would never pay dividends of any kind, cash or stock.

Which of the following would be considered advantages to investors investing in REITs? There are no minimum investment requirements Investors must be accredited prior to making an investment REITs have a direct correlation to the value of other financial assets REITs have a low correlation to the value of other financial assets [A]I and III [B]I and IV [C]II and III [D]II and IV

I and IV No minimum investment is required, and REITs have a low correlation to other financial assets since the assets of a REIT are real estate.

Which of the following are reasons why Direct Participation Programs are formed as Limited Partnerships? The partnership is taxed at a lower rate than the rate of the partners The advantages of limited liability for the limited partners The tax advantages of the pass-through of profits and losses to the limited partners [A]I and II [B]II and III [C]I and III [D]All

II and III Limited partnerships have pass-through taxation. This creates a tax advantage when compared to a corporation, while also offering limited liability to limited partners. The partnership is not taxed as an entity and partners, both general and limited, are responsible for their own taxes related to the partnership after gains and losses are passed through.

An "owner" of a corporation would include: Holders of company debentures Holders of the company's common stock Holders of company bonds Holders of the company's preferred stock [A]I and III [B]II and IV [C]I, III, and IV [D]I, II, III, and IV

II and IV "Ownership" of a company is expressed as equity in the company. Common and preferred stock are both forms of equity ownership in a company. Holders of bonds and debentures are considered debtors or lenders to the company, rather than owners.

Of the choices listed below, which represent an equity interest in a corporation? Corporate Bonds Common Stock Debentures Preferred Stock [A]I and III [B]II and IV [C]II, III and IV [D]I, II, III, and IV

II and IV "Stocks" represent ownership equity in a corporation. "Bonds" are evidence of a loan to the corporation and do not represent ownership.

Which of the following is typically considered a unit of trading when dealing in common stock? [A]Lots with a value of $10,000 or more [B]Lots with a value of $100 or less [C]Lots of 10,000 shares [D]Lots of 100 shares

Lots of 100 shares

Customer A owns a common stock that offers cumulative voting, while Customer B owns a common stock that offers statutory voting. Which of the following statements would be TRUE regarding the voting rights of Customer A and Customer B? [A]Customer A must vote for more than one director, whereas, Customer B can cast all votes for one director. [B]Minority stockholders of Customer A's company have a better chance of electing a director of their choice, than do the minority stockholders of Customer B's company [C]Customer A's company directors must be elected by a majority, whereas Customer B's company only requires plurality. [D]Customer A's company allows uncast votes to be carried forward to the next election whereas, Customer B's company does not.

Minority stockholders of Customer A's company have a better chance of electing a director of their choice, than do the minority stockholders of Customer B's company Cumulative voting gives minority shareholders a better chance of electing directors that they prefer.

Which of the following is true of cumulative preferred stock? [A]It allows the investor to receive extra dividends at the expense of common stockholders. [B]Past dividends must be paid before common stockholders are paid a dividend. [C]It permits the company to retire the preferred shares at a predetermined amount. [D]It is paid off prior to a debenture in a corporate liquidation

Past dividends must be paid before common stockholders are paid a dividend. Preferred stockholders are always paid dividends before common stockholders. The "cumulative" feature means that any time the company is in arrears in paying dividends, the preferred stockholder is entitled to all unpaid dividends before the common shareholder is paid anything.

In a limited partnership, which one of the following would represent the least potential for a conflict of interest? [A]The general partner is allowed to lend money to the limited partnership. [B]The general partner owns leases next to leases owned by the limited partnership. [C]The general partner has a substantial amount of funds at risk in the limited partnership. [D]The general partner is allowed to borrow money from and lend money to the limited partners.

The general partner has a substantial amount of funds at risk in the limited partnership. If the general partner has a substantial amount invested in the partnership that would not be a conflict of interest, it would help assure that the general partner will work toward the success of the partnership.

Which one of the following is true regarding a stock split? [A]The corporate assets of the company will lose book value. [B]The par value of the stock is unchanged. [C]The existing stockholders are given more rights than they had before the split. [D]The stockholder's percentage ownership remains unchanged.

The stockholder's percentage ownership remains unchanged. EXPLANATION Since a stock split affects all existing shareholders equally, each investor's percentage ownership would not be changed by the split.

An emerging growth company is generally defined as a company: [A]With total annual gross revenue of more than $1 billion for its most recent fiscal year [B]With total annual gross revenue of less than $1 billion for its most recent fiscal year [C]With total annual gross profits of less than $1 billion for its most recent fiscal year [D]None of the above

With total annual gross revenue of less than $1 billion for its most recent fiscal year The definition in choice B is the generally accepted definition of an emerging growth company. It is usually a young company in a fast growing industry. These kinds of companies are usually characterized by high risk, high return, and high failure rates.

One of your clients holds a preferred stock on ABC and ABC has not paid dividends for the past two quarters. ABC requires that unpaid dividends on preferred stock be paid prior to paying any dividends to common stockholders. What kind of preferred stock does your client hold? [A]Your client has a cumulative feature on their preferred stock.[B]Your client has a conversion feature on their preferred stock.[C]Your client has a participating feature on their preferred stock.[D]Your client has a call feature on their preferred stock

Your client has a cumulative feature on their preferred stock. Cumulative features require that all dividends in arrears (dividends that have not been paid) must be paid to preferred stockholders PRIOR to any payment of dividends to common stockholders.

ABC Corporation has 2,000,000 shares of common stock outstanding and decides to issue 500,000 new shares in order to raise capital. The Corporate Charter includes a Preemptive Rights Clause. Assuming that ABC Corporation also has 10,000,000 shares of common stock authorized and 1,000,000 Treasury shares, which of the following are correct? [A]ABC could choose to offer the new shares directly to the public [B]10,000,000 rights will be issued by ABC Corporation [C]an investor that owns 200 shares could subscribe to 50 shares of the new issue [D]the 1,000,000 Treasury shares would participate in the Rights Offering

an investor that owns 200 shares could subscribe to 50 shares of the new issue If you take the 2,000,000 outstanding shares divided by the 500,000 new shares, you determine that this is a 4:1 Rights Offering. An investor that owns 200 shares would be allowed to subscribe to 50 new shares (200/4 = 50).

A single 25-year-old investment banker has income of $300,000 and net worth in excess of a million dollars. Her investment objective is capital appreciation. All of the following would be appropriate for this investor except: [A]equities in emerging markets [B]small cap equity securities [C]high yield preferred stocks [D]aggressive growth funds

high yield preferred stocks Since her objective is capital appreciation, the high yield preferred stock would be the least appropriate since preferred stocks are generally less volatile than common stocks.

On the ex-date for a 20% stock dividend, a customer with a short position of 300 shares of common stock would: [A]receive an additional 60 shares of common stock. [B]not be affected by the distribution. [C]owe an additional 60 shares of common stock. [D]Their account would be debited for the dollar value of the 60 shares of common stock.

owe an additional 60 shares of common stock. Investors with "short" positions always owe any dividends and distributions that occur while they are short, whereas "long" positions receive any dividends and distributions. Since this investor was short 300 shares of stock they would "owe" 60 shares of common stock ( 300 shares X .20 = 60 shares )

When existing shareholders are given the opportunity to subscribe to additional shares that are offered by the corporation, this is called a(n) [A]secondary offering [B]preemptive rights offering [C]equity option [D]stock dividend

preemptive rights offering

When the owner of common stock receives Proxy Material, which of the following do they then have? [A]First choice on new shares being issued by the company [B]their right to vote has been waived [C]the right to vote their shares in the voting matter presented at the shareholders meeting [D]the right to set the amount of the next dividend to be paid to the shareholders

the right to vote their shares in the voting matter presented at the shareholders meeting Proxy material is like an absentee vote and allows shareholders to vote their choice when the shareholder is unable to attend the shareholders meeting.

American Depositary Receipts are used to facilitate [A]the trading of domestic stocks abroad. [B]the trading of foreign stocks domestically. [C]currency exchange for transactions from the US to foreign nations. [D]currency exchange for transactions from foreign nations to the US.

the trading of foreign stocks domestically. Most foreign company stocks are traded domestically in the US with the use of American Depositary Receipts (ADRs). The ADR represents the ownership of or right to acquire the foreign stock. ADRs are not used in relation to foreign currency exchange. Products like banker's acceptances and foreign currency options are better suited for those purposes

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

to vote for officers of the company

Common stockholders have all of the following rights EXCEPT: [A]attend the issuer's annual meeting [B]vote for the senior management of the company [C]Assign the right to vote for directors to another person [D]receive a pro rata share of the remaining assets upon liquidation of the company

vote for the senior management of the company Officers and senior management are selected by the Board of Directors, not the stockholders.

Bobbie purchased 100 shares of ABC common stock several years ago. Which of the following rights does Bobbie have by owning common stock that preferred stock holders do not have? The right to [A]sell his shares. [B]receive dividends. [C]vote on important matters such as stock splits. [D]inspect certain books of the corporation.

vote on important matters such as stock splits Both common and preferred stockholders have the right to sell their shares, receive dividends, and inspect certain books of the corporation. Only common stockholders are given the right to vote on important matters such as stock splits and elections for members of the Board of Directors.

If a preferred stock is "cumulative", it means that the stock [A]accumulates equity growth in a similar manner to common stock.[B]participates in additional earnings at a rate that is not fixed.[C]must pay all dividends in arrears prior to the payment of dividends on common stock. [D]pays dividends that increase over time with the rate of inflation.

must pay all dividends in arrears prior to the payment of dividends on common stock.

Prior to repurchasing its own shares in the open market, a corporation would usually be required to: [A]Amend its initial Registration Statement. [B]Get approval of the holders of common stock. [C]Get approval from the Securities Exchange Commission. [D]Get approval of the Board of Directors.

Get approval of the Board of Directors A corporation would usually be required to get the approval of the Board of Directors of the company.

A corporation has authorized common stock of 10,000,000 shares. 8,000,000 shares have been issued and 4,000,000 shares are treasury stock. Which of the following is true? [A]14,000,000 shares are outstanding. [B]10,000,000 shares are outstanding. [C]8,000,000 shares are outstanding. [D]4,000,000 shares are outstanding.

4,000,000 shares are outstanding. Issued stock minus Treasury stock equals outstanding stock.