Equity

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: A. 90 shares of ABC preferred stock B. 100 shares of ABC preferred stock C. 100 shares of ABC preferred stock and 10 shares of ABC common stock D. 110 shares of ABC preferred stock

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.

A customer buys 100 shares preferred at $110 per share. The par value is $100. The dividend rate is 5%. Each dividend payment will be: A. $250 B. $275 C. $500 D. $550

A. $250 The annual rate is 5% X $100 par value = $5 per share X 100 shares = $500. Since preferred dividends are paid semi-annually, each payment is $250.

A proxy given to a caretaker to vote a stockholder's shares is a: A. power of attorney B. trading authorization C. discretionary authority D. voting trust

A. Power of attorney 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.

ABC 10% $100 par preferred is trading at $120 in the market. The current yield is: A. 5% B. 8.33% C. 10% D. 125

B. 8.33% Annual Income/Market Price $10/$120= 8.33%

Which of the following influences the market price of common stock? A. The par value of the shares B. Investor expectations about the future of the company C. Stated value of the shares D. Book value of the shares

B. Investor expectations about the future of the company The market price of common stock is determined by investor expectations about the future of the company. Par value (which is the same as stated value) and book value have no bearing on the market price of the common shares.

Which statement is TRUE regarding a corporation that has adopted cumulative voting? A. Each stockholder must accumulate his votes and cast them for one director B. Minority stockholders have the ability to elect the director of their choice C. Each director must be elected by a majority of the shareholders D. Minority stockholders are given proportionately more votes than majority stockholders

B. Minority stockholders have the ability to elect the director of their choice Under "cumulative" voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. The statement that each shareholder must accumulate his votes and cast them for 1 director is false - the votes are accumulated and can be cast as the stockholder sees fit. The statement that each director must be elected by a majority of the shareholders is incorrect - each director must be elected by a majority of the outstanding shares. The statement that minority shareholders are given proportionately more votes than majority shareholders is incorrect - the benefit of cumulative voting is that the minority shareholder can vote all of his votes for 1 (or for a few) director(s), and by virtue of the extra weight of those votes, get the director(s) elected.

In a corporate liquidation, common stockholders are paid: A. before bondholders and preferred stockholders B. after bondholders and preferred stockholders C. after bondholders but before preferred stockholders D. before all creditors

B. after bondholders and preferred stockholders In a liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.

Callable preferred stock is likely to be redeemed by the issuer if: A. interest rates rise B. interest rates fall C. the common stock price rises D. the common stock price falls

B. interest rate falls If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

Common dividends are usually paid: A. monthly B. quarterly C. semi-annually D. annually

B. quarterly Common dividends are usually declared and paid quarterly.

As interest rates rise, preferred stock prices will: A. remain unaffected B. rise C. fall D. fluctuate

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

Which of the following statements are TRUE regarding cumulative voting? Cumulative voting: I. gives the shareholders disproportionate voting weight as compared to statutory voting II. gives the shareholders proportionate voting weight as compared to statutory voting III. is considered to be an advantage to the small investor IV. is considered to be an advantage to the large investor

I, III Cumulative voting gives the shareholders disproportionate voting weight as compared to statutory voting and is considered to be an advantage for the small investor. Under the statutory method, the number of shares held is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships and apply them to favored individuals. Thus, cumulative voting is considered to be an advantage to the small investor.

During periods of stable interest rates and increasing stock prices, which type of preferred stock will have the greatest price volatility? A. Cumulative B. Reset C. Callable D. Convertible

Convertable Preferred stock is a fixed income security, similar to a bond, where the price of the security moves inversely to interest rate movements. If interest rates are stable, this implies that preferred stock prices will be stable as well. However, convertible preferred stock, if the price of the stock moves up above the conversion price, trades at parity to the equivalent number of common shares into which the preferred stock can be converted. Thus, as the market price of the common stock rises (which has nothing to do with interest rate movements), the price of the preferred will move up as well. Virtually all preferred stock is cumulative - if the company misses preferred dividend payments, then before it can pay a common dividend, it must make up all unpaid preferred dividend payments. Callable preferred gives the issuer the right to call in the preferred at a pre-established price, which the issuer would do if market interest rates fell. This would tend to suppress the upward movement of the stock price to no more than the call price as market interest rates fell. In a period of stable interest rates, the issuer has no reason to call the preferred stock. Reset preferred "resets" the dividend rate as market interest rates move (also called adjustable rate preferred) - so it is a variable rate security. In a period of stable interest rates, the dividend rate would be unchanged and therefore the price of the preferred stock will be stable as well (unless the credit quality of the issuer deteriorated, jeopardizing the dividend payment - this event would cause the price of the preferred shares to drop).

XYZ Company has issued 10%, $100 par 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: A. $5 B. $15 C. $20 D. $25

D. $25 Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be paid). The stated dividend rate on the preferred is 10% based on $100 par. Two years ago the entire dividend was omitted, so $10 per share must be paid. Last year, the corporation only paid $5, so there is another $5 that must be paid. Also, this year's dividend of $10 must be paid. The total dividend that must be paid is $25 per preferred share before a common dividend can be paid.

What term would apply to Authorized Stock? A. Issued B. Outstanding C. Voting D. Par Value

D. 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, or Outstanding.

Common stockholders and preferred stockholders BOTH have: A. voting rights B. pre-emptive rights C. dividend rights D. subscription rights

Dividend Rights Both common and preferred shareholders have the right to receive dividends, if declared by the Board of Directors. Common shareholders have both voting rights and preemptive/subscription rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive/subscription rights.

Dividends on preferred stock may be paid in: I Cash II Common shares of the same issuer III Common shares of another issuer IV Preferred stock of the same issuer

I 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.

The market price of common stock will be influenced by which of the following? I. Expectations for future earnings of the company II. Expectations for future dividends to be paid by the company III. Book value per share IV. Par value per share

I, II The market price of common stock is determined by investor expectations about the future of the company. Par value and book value have no bearing on the market price of the common.

Which of the following are types of preferred stock? I Performance II Participating III Cumulative IV Refundable

I, II, III There is no such thing a 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. Cumulative preferred "accumulates" any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.

Which statements are TRUE when comparing statutory versus cumulative voting? I. Cumulative voting is considered to be an advantage for the small investor II. Statutory voting is considered to be an advantage for the small investor III. Cumulative voting allows for disproportionate voting weight to be placed on selected directors IV. Statutory voting allows for disproportionate voting weight to be placed on selected directors

I, III Under "cumulative" voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. This is why cumulative voting is considered an advantage for the small investor. With statutory voting, one cannot accumulate votes. Under this method, each shareholder can only cast as many votes as he or she has shares for each directorship.

Corporate dividend payments can be made in the form of: I. Cash or company products II. Listed options of that company III. Additional common shares of another company IV. Additional common shares of that company

I, III, IV Corporations can pay dividends as cash or company products. 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.

Which of the following statements are TRUE about preferred stock? I. Dividends are paid before common II. Dividends are paid monthly III. Dividends are based on corporate earnings IV. Preferred shareholders have a prior claim to common shareholders

I, IV Preferred stock dividends are paid before common dividends can be paid and preferred shareholders have a prior claim to assets in a liquidation before common shareholders. Whereas common dividends are typically paid quarterly, preferred dividends are typically paid semi-annually - similar to bond interest payments (remember, both preferred and bonds are fixed income securities; common stock is not).

A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. Which statements are TRUE? I. This is known as a proxy II. This is known as a voting trust III. Once given, the power of attorney cannot be revoked IV. The power of attorney can be revoked prior to the annual meeting

I, IV 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. A power of attorney is revocable at any time as long as it is revoked in writing. The customer can revoke the power of attorney if he decides to change his vote or decides to go to the annual meeting himself. 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.

Cumulative voting is considered to be an advantage as it: I allows a proportionate voting weight II allows a disproportionate voting weight III is considered to be an advantage for the smaller investor IV is considered to be an advantage for the larger investor

II, III 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.

If interest rates fall, issuers most likely will call: I preferred issues with low interest rates II preferred issues with high interest rates III preferred issues with low call premiums IV preferred issues with high call premiums

II, III 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).

Which of the following statements are TRUE when comparing convertible preferred stock and non-convertible preferred stock? I Convertible preferred issues will have a higher yield than similar non-convertible yields of the same issuer II Non-convertible preferred issues will have a higher yield than similar convertible yields of the same issuer III Convertible preferred stockholders can benefit as the common stock price rises IV Non-convertible preferred stockholders can benefit as the common stock price rises

II, III 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. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

Which of the following actions by a corporation will affect an individual common shareholder's equity? I Declaration of a stock dividend or stock split II Conversion of convertible preferred stock III Repurchase of common shares IV Issuance of additional common shares

II, III, IV 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. If the issuer forces conversion of convertible securities, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. If the corporation purchases Treasury Stock, then with fewer shares outstanding, the reported earnings per share, and book value per share will increase - thus common equity increases. If the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their "pre-emptive" rights.

A customer owns 1,000 common shares of ABC Corporation. Which of the following actions will dilute the shareholders' equity? I. ABC declares a 10% stock dividend II. ABC declares that it will call its convertible preferred stock, which is currently trading at a premium III. ABC declares a 2:1 stock split IV. ABC declares that it will issue an additional 1,000,000 common shares

II, IV 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 issuer forces conversion of convertible securities, 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.

Stockholder approval is needed if a corporation wishes to: I. pay a cash dividend II. split its stock 2 for 1 III. repurchase shares for its Treasury IV. issue convertible securities

II, IV 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. Issuance of convertible securities requires shareholder approval because it is potentially "dilutive" (if the securities are converted, there will be more common shares outstanding, and earnings per common share will fall). The repurchase of shares for Treasury will boost earnings per share, because there will be fewer shares outstanding. This boosts the value of the existing common shares, so no shareholder approval is required. This is another decision that is made solely by the Board of Directors.

All of the following are terms associated with preferred stock EXCEPT: A. renewable B. cumulative C. negotiable D. convertible

Renewable Preferred stock is not a renewable security; there is no stated maturity or redemption date. Preferred stock is a negotiable security, meaning that it is traded. Preferred stock can be callable, cumulative, and convertible.

Common stockholders have all of the following rights EXCEPT: A. voting for the Board of Directors B. transferring share ownership without restriction by the issuer C. inspecting minutes of executive meetings D. maintaining proportionate ownership in the company

inspecting minutes of executive meetings Common stockholders do not get to inspect the minutes of executive meetings. They do have the right to vote; to sell their shares without issuer restriction; and to maintain proportionate ownership in the company.

All of the following actions will dilute the shareholders' equity EXCEPT: A. payment of a stock dividend B. conversion of convertible preferred stock C. exercise of stock options granted to officers D. issuance of additional common shares

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.