Final: Equities
A foreign security held in foreign branches of U.S. bank is a(n): A. ADR B. LIBOR C. Eurodollar deposit D. Banker's Acceptance
The best answer is A. An American Depositary Receipt is a foreign security that is held in a foreign branch of a U.S. bank. The bank issues receipts against these shares, and the receipts are registered in the United States as securities and are listed and traded on U.S. stock exchanges. In this manner, the foreign corporation does not have to register its shares with the SEC in order to have trading take place in the U.S.
Common dividends are usually: I declared quarterly II declared semi-annually III paid quarterly IV paid semi-annually A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Common dividends are usually declared and paid quarterly.
If a company repurchases its own common shares, the number of: A. outstanding shares will decrease B. outstanding shares will increase C. issued shares will decrease D. unissued shares will increase
The best answer is A. If a company repurchases shares, the number of outstanding shares decreases.
A corporation has issued $100 par, 4% cumulative convertible preferred stock, callable at par. The preferred is convertible into 4 shares of common stock. Currently, the preferred stock is trading at $103 while the common stock is trading at $26. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions): A. $100 gain B. $100 loss C. $7,400 gain D. $7,400 loss
The best answer is A. If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $103 per share = $10,300. Since each share of preferred is convertible into 4 common shares, the 100 preferred shares will be converted into 4 x 100 = 400 common shares. The sale of 400 common shares at the current market price of $26 will yield $10,400. The net gain is: $10,400 - $10,300 = $100.
The transfer agent is typically responsible for all of the following functions EXCEPT: A. maintaining the integrity of the record of all shareholder names and addresses B. acting as disbursement agent for the corporation C. issuing new stock certificates D. canceling old stock certificates
The best answer is A. The transfer agent cancels old shares and issues new shares. It is the responsibility of the registrar to maintain the shareholder list, and to ensure that the number of shares transferred from one shareholder to another always matches. The transfer agent typically performs the role of paying agent as well. When a corporation makes a distribution, the paying agent actually prepares and mails the checks (using the current shareholder list provided by the registrar - the registrar is responsible for maintaining the integrity of the shareholder list).
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
The best answer is A. 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.
Which of the following statements are TRUE regarding American Depositary Receipts? I Non-sponsored ADRs trade over-the-counter II Non-sponsored ADRs trade on exchanges III Non-sponsored ADRs provide quarterly reports to shareholders IV Non-sponsored ADRs provide annual reports to shareholders A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. All exchange listed ADRs are sponsored. Issuers that sponsor ADRs provide quarterly and annual financial reports to shareholders in English. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade over-the-counter.
Common shareholders have all of the following rights EXCEPT the right to: A. attend the annual meeting of the company and physically cast their votes B. vote for the general managers of the company C. give their voting ability to a proxy by signing a power of attorney D. vote for each individual proposed for election to the Board of Directors
The best answer is B. Common stockholders have the right to vote. They get to vote on who is on the company's Board of Directors - they do not vote on the general managers of the company. If the shareholder cannot physically show up at the annual meeting to vote, then he or she can appoint a proxy by signing a power of attorney to cast his or her vote(s) at the meeting. The proxy given the power of attorney is usually the management of the company. Also note that shareholder vote is required if the company wishes to merge with another company; divest itself of a subsidiary; or if the company wants to take any action that would dilute the ownership interest of the common shareholders, such as issuing convertible securities.
A customer holds 100 shares of ABC Corp $100 par non-convertible preferred stock. If ABC declares and pays a 10% common 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
The best answer is B. If ABC declares and pays a 10% "common" stock dividend, the customer who holds non-convertible or convertible preferred stock would not benefit in any way. Thus, due to the payment of a common stock dividend, the customer would still have 100 shares of the non-convertible preferred stock.
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
The best answer is B. The formula for current yield is: Annual Income/Market Price = Current Yield $10 $120 = 8.33%
ABC Corporation has declared a cash dividend to stockholders of record on Friday, December 10th. The last day to buy ABC shares BEFORE they go ex dividend is? A. Tuesday, December 7th B. Wednesday, December 8th C. Thursday, December 9th D. Friday, December 10th
The best answer is B. The regular way ex date is 1 business day prior to the record date for cash dividends. The record date is Friday, December 10th, therefore the ex date is Thursday, December 9th. To buy the shares before they go ex dividend, the shares must be purchased before December 9th, meaning they must be purchased on Wednesday, December 8th.
ABC Corporation has declared a cash dividend to stockholders of record on Monday, November 21st. The last day to buy ABC shares BEFORE they go ex dividend is? A. Wednesday, November 16th B. Thursday, November 17th C. Friday, November 18th D. Sunday, November 20th
The best answer is B. The regular way ex date is 1 business day prior to the record date. The record date is Monday, November 21st, therefore the ex date is Friday, November 18th. To buy the shares before they go ex dividend, the shares must be purchased before Friday, November 18th, meaning they must be purchased on Thursday, November 17th.
Preferred stock is issued with an "anti-dilutive" covenant. If the corporation declares a 5% stock dividend, which statements are TRUE? I The conversion ratio is increased II The conversion price is increased III The conversion ratio is decreased IV The conversion price is decreased A. I and II B. I and IV C. II and III D. III and IV
The best answer is B. When a senior convertible security is issued with an "anti-dilutive" covenant, should the company issue additional common shares, the terms of conversion are adjusted. When additional common shares are issued, there are more common shares outstanding, with each share being worth proportionately less. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible (the conversion ratio) is increased.
Which statements are TRUE regarding ADRs? I ADRs are vehicles for trading United States securities in foreign countries II ADRs are vehicles for trading foreign securities in the United States III ADR market prices are influenced by foreign currency exchange fluctuations IV ADR market prices are not influenced by foreign currency exchange fluctuations A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. ADRs are vehicles for trading foreign securities in the United States. Foreign companies do not want their actual shares traded in the U.S. because the shares would then have to be registered with the SEC (and what time and money would have to be spent on that!) Since dividends on ADRs are declared by the foreign company in local currency, and are then converted into U.S. dollars and remitted to the receipt holders by the depositary bank, market prices of ADRs will be influenced not only by the performance of the company's stock, but also by foreign currency exchange fluctuations.
At issuance, the exercise price of a warrant is set at: A. a discount to the current market price of that issuer's common stock B. the current market price of that issuer's common stock C. a premium to the current market price of that issuer's common stock D. any of the above, depending on market conditions
The best answer is C. At issuance, the exercise price of a warrant is set higher than the current market price of the stock. The stock's price must appreciate for the warrant to have any intrinsic value. Stock warrants can be attached to preferred stock and bond offerings to make them more attractive to potential purchasers.
Common stockholders have which of the following rights? I Inspecting minutes of executive meetings II Maintaining proportionate ownership in the company III Voting for the Board of Directors IV Transferring share ownership without restriction by the issuer A. I and III only B. I, II, IV C. II, III, IV D. I, II, III, IV
The best answer is C. Common shareholders have the right to maintain proportionate ownership in the company, to vote, and to sell their shares without restriction. They do not get to inspect the minutes of executive meetings.
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 A. I and II B. III and IV C. II and IV D. I, II, III, IV
The best answer is C. 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.
Which of the following are rights of a common shareholder? I Right to manage II Right to transfer shares III Right to receive a dividend IV Right to vote A. I and III only B. II and IV only C. II, III, IV D. I, II, III, IV
The best answer is C. The common shareholder does not manage the company! All the other choices - the right to transfer shares, the right to receive a dividend and the right to vote, are rights of the common shareholder.
ABC Corporation has declared a cash dividend to stockholders of record on Thursday, October 24th. The last day to buy ABC shares BEFORE they go ex dividend is? A. Friday, October 18th B. Monday, October 21st C. Tuesday, October 22nd D. Wednesday, October 23rd
The best answer is C. The regular way ex date is 1 business day prior to the record date. The record date is Thursday, October 24th, therefore the ex date is Wednesday, October 23rd. To buy the shares before they go ex dividend, the shares must be purchased before Wednesday, October 23rd, meaning they must be purchased on Tuesday, October 22nd.
In a corporate liquidation, the last to get paid is: A. Unpaid wages and taxes B. Bondholders C. Preferred stockholders D. Common stockholders
The best answer is D. In a corporate liquidation, common stockholders are paid after everyone else.
All of the following features are common to both preferred stock and bonds EXCEPT: A. fixed rate B. periodic payments C. can be callable D. fixed maturity date
The best answer is D. Preferred stock has no maturity - its life is indefinite. Bonds have a stated maturity date. Both preferred and bonds are fixed rate, can be callable, and typically make semi-annual payments to holders.
The regular way ex date for a dividend payable to stockholders of record on Monday, June 11th, is: A. Tuesday, June 5th B. Wednesday, June 6th C. Thursday, June 7th D. Friday, June 8th
The best answer is D. The regular way ex date is set at 1 business day prior to record date. The ex date is the very first date the stock trades without the value of the dividend. If the record date is Monday, June 11th, 1 business day prior is Friday, June 8th. If an individual purchases the stock on Friday, he or she will not be entitled to the dividend because the trade will settle AFTER the record date, or on Tuesday, June 12th.
The regular way ex date, for a dividend paid to stockholders of record on Friday, June 15th, is: A. Monday, June 11th B. Tuesday, June 12th C. Wednesday, June 13th D. Thursday, June 14th
The best answer is D. The regular way ex date is set at 1 business day prior to record date. The ex date is the very first date the stock trades without the value of the dividend. If the stock is bought on Wednesday, June 13th in a regular way trade, the trade settles in 2 business days on Friday, June 15th, so the holder is on record to receive the dividend (to receive the dividend, the trade must settle no later than the record date). If the stock is bought on Thursday, June 14th, the trade settles on Monday, June 18th. The stockholder would not have been on the record book as of the evening of June 15th (the record date) to receive the dividend. Thus, the first day that the stock trades without the purchaser receiving the dividend is Thursday, June 14th. This is the ex date.