Module 01: Equities Quiz 2

An ADR has been issued by a bank. For which of the following is the ADR developed?

To facilitate the trading of foreign securities on U.S. exchanges. ADRs represent foreign stock of companies that trade in the U.S. on the various exchanges or over-the-counter markets.

A customer owns 300 shares of 4% nonconvertible cumulative preferred stock (par $100) of UAL. If UAL only pays $2 per share three years ago, $1 two years ago, and $3 last year, how much must UAL pay the preferred stockholders now to give the common stockholders a $0.25 dividend this year?

$10 per share. This question asks how much of a dividend will be paid to owners of a nonconvertible cumulative preferred stock. Therefore, this stock will receive cumulative dividends. When a stock is cumulative, all past dividends that are unpaid must be paid. In this case, the company should have been paying $4 each year, because the stated stock dividend is "4% preferred." Over the past three years, the company missed dividends of $2 in the first year, $3 in the second, and $1 in the third, for a total of $6 missed dividends. Add these missed dividends to the latest dividend of $4 that must be paid to the preferred stockholders before the common stockholders receive their $0.25 -- $6 + $4 = $10.

EZ Sleep Beds, Inc. uses the cumulative voting method of electing directors. In a race where eight candidates are vying for five spots on the board, how many votes could a shareholder who owns 100 shares of stock vote?

500 total votes among the five new directors to be elected in any manner chosen by the stockholder. Cumulative voting allows the shareholders to vote in any manner they choose with the number of shares they have times the number of directors being elected to the board. In this case, 100 shares x five directors allow this shareholder to cast 500 votes (100 votes x 5 open director positions). These votes can be cast in any manner the shareholder wishes

The purpose of cumulative voting is to:

Give small stockholders the chance to gain representation on the board of directors. These small stockholders may not have fair representation if they are not able to accumulate their votes in an attempt to elect a favored candidate to the board of directors. In this way, small shareholders may be able to sway management or the board of directors to accept some of their ideas about running the corporation. The object of cumulative voting is for small shareholders to gain seats, not to gain complete control, of a corporation's board of directors.

Shareholders of common stock:

Have part ownership in a corporation. Stockholders have part ownership in a corporation because stock represents an investment in the company -- unlike debt, which represents a loan to the company. Each initial stockholder invests money in the corporation and becomes a part owner. Bondholders or debt holders do not purchase an ownership interest in a company. Rather, these investors will expect to receive interest for lending money to the company. A debtor is defined as a person or business that owes money to the corporation. A creditor, on the other hand, is a person or business that is owed money by the company.

Amber Corporation has issued 40 million shares of common stock and 2 million shares of preferred stock. Which two of the following are rights of the common stockholders? I. Vote for the board of directors II. Vote on the election of officers III. Vote on the decision to give cash dividends IV. Vote on the takeover of another company

I and IV. Common stockholders have the right to vote for the members of the board of directors and on any major issues, such as mergers, some major takeovers, and changing or continuing the corporate strategy. The board is responsible for the election of officers and the declaration of dividends

A customer owns 300 shares of $8 nonconvertible preferred stock (par $35) of UAL. If the company only pays a dividend of $6 per share in one year and a dividend of $3 per share in the next, how much must the company pay the preferred stockholders in the following year to give the common stockholders a $0.30 dividend?

$8 per share. This question asks how much must be paid to the owners of nonconvertible preferred stock. Nonconvertible preferred stockholders are not entitled to any makeup dividends; only cumulative preferred shareholders will receive missed dividends. Unless a preferred stock is cumulative, past dividends that weren't paid will not be made up. If the stock had been cumulative preferred, the past dividends and the latest dividend would have to be paid before the common shareholders could receive any dividends. In this question, the nonconvertible preferred stockholders only receive the current dividend, which is the "stated" dividend of $8 per share. The common stockholders will receive the $0.30 dividend only after the preferred shareholders are paid.

PNDA, Inc. follows the statutory method in voting for its board of directors. If a shareholder owns 100 shares of stock, and elects four new directors out of six people running, the shareholder can vote:

100 votes for each of the four directors the shareholder wishes. Statutory voting allows one vote per share per director of the shareholder's choice. The shareholder can vote the total number of votes equal to the number of shares owned for each of the directors being elected. The shareholder cannot combine the number of votes allotted for each director and cast the total number of votes to one candidate, which is allowed with cumulative voting.

Mobil Oil is paying a quarterly dividend of $0.57. If the present price of Mobil Oil Co. is $102.50, what is the yield from Mobil Oil for the stockholders?

2.22%. Don't forget that the dividend shown is a quarterly dividend, or $0.57 x 4 quarters = $2.28. Now, yield is always the dividend or interest divided by the going market price. In this case, 2.28 divided by 102.50 = .0222, or 2.22%.

The board of directors of CMI Inc. announces a 7-for-5 stock split. If an investor has 200 shares of CMI, how many shares would he own after the 7-for-5 stock split?

280 shares. To calculate this, multiply the number of shares presently held by the split or ratio of 7-for-5: 200 shares presently held x 7 divided by 5, which equals 280. The investor with 200 shares will own 280 shares after receiving the stock dividend, or stock split. The investor's holdings have increased by 80 shares or 40%.

To help support the price of its common stock, CCD Worldwide recently purchased 2.5 million shares of its common stock in the open market. CCD Worldwide had previously issued 82 million shares of common stock. After these recent purchases, it now holds 9 million shares of its common stock as treasury stock. How many shares of CCD Worldwide common stock are outstanding?

73 million shares. Outstanding stock is shares of the company that are owned by investors and not the company itself. In this case, CCD Worldwide had issued 82 million shares but then repurchased 9 million shares as treasury stock. This leaves 73 million (82 million issued - 9 million treasury = 73 million) shares of stock outstanding. Always be sure to read each question very carefully

The board of directors at Ampex declares a 10% stock dividend to holders of record as of September 15, payable on October 1. A person who owns 300 shares of stock worth $20 on September 15 will receive which of the following?

A certificate for 30 shares of stock shortly after October 1. Since this dividend is a stock dividend, shareholders on record as of September 15 will receive 10% of their current ownership in new shares. The investor owns 300 shares, and 10% of 300 is 30, so the investor will receive 30 more shares. Another way of finding this answer is to calculate that holders of outstanding shares will receive one new share for every 10 shares owned.

Beachwear, Inc. is a large company with a number of smaller companies as part of the corporation. One of the smaller companies is not doing well, so the board of directors has decided to divest the small company from the large corporation by issuing shares of the small company to the existing stockholders. What is this called?

A spin-off. A spin-off occurs when the company issues new shares of stock of a company that will dispersed to the existing stockholders. This keeps the value for the shareholders. A leveraged buyout would occur if the small company had issued stock and bonds and bought itself out of the large corporation.

A customer is interested in buying stock in a closely held corporation with a small number of outstanding shares. The customer's registered rep should advise her:

About the risk inherent in buying thinly-traded issues. A closely held company is a company where a small group of people, generally the original owners, holds most of the shares. Thus, any others that have shares are not going to have much voice in the company and may not have much of an impact on the market price of the stock. However, thinly-traded stocks may be prone to high fluctuations in price, since few shares are available if the demand for shares increases

Pan Am has been in arrears in the payment of dividends. Before paying dividends to the common shareholders, which of the following shareholders must be paid past dividends when dividends are resumed?

Cumulative preferred shareholders. All of the preferred shareholders are entitled to receive dividends if and when they are granted. Only cumulative preferred shareholders will receive dividends that have not been paid in past years as well as the current dividend. All other stockholders, both preferred and common, lose any dividends when the board decides not to pay a dividend.

A company gives the stockholders of record a 100% stock dividend. To stockholders owning shares of stock, this means which two of the following? I. Stockholders will receive one new share for each share they now own. II. Stockholders will receive one new share for every two shares they now own. III. The value of their holdings will double. IV. The value of their holdings will stay the same.

I and IV. Stockholders will receive one new share for each share they now own and the value of their holdings will stay the same. When a company gives the stockholders a stock dividend, the total value of the stockholders' holdings remains the same. If the dividend is paid in cash, the stockholder will receive cash and the value of the shares will decrease by the amount of the cash dividend. The customer will still have the original shares -- at a reduced price -- plus the cash received, which together total the original value before the dividend. If the dividend is in the form of more shares of stock, the value of each share will decrease, but the amount of shares owned will increase. In this case, each shareholder will receive one new share for every share presently held, but the value of each share will be cut in half. The total value will remain the same. For example, if this investor had 100 shares with a value of $40 per share, the investor would end up owning 200 shares with a value f $20 per share after the stock dividend. The total value of the investor's holdings will still equal $4,000.

Who decides for a company if some of the outstanding shares of stock are bought back and made into treasury stock?

The board of directors. The board of directors determines if stock is to be issued, called back in and retired, or treated as treasury stock. The SEC and the state securities department have no say in what a company can and cannot do regarding its stock. They just register the securities before they are issued. The stockholders do have some say in the issuance of more shares, but not the calling in of stock.

Which of the following is true regarding statutory voting for the directors of a company by the common shareholders?

The shareholders only get to vote one vote per share of stock owned for each director being elected. In statutory voting, the shareholders can only vote as many times for each director being elected as they have shares of stock. This is different from cumulative voting. In statutory voting, if a person has 300 shares and four directors are being elected, they can vote three hundred shares for each of four directors that are running for election. If it had been cumulative, all 1,200 votes could have gone to one director.

Which of the following industry's stock is considered defensive stock?

Utilities. Utilities are defensive issues. Aerospace is a defense industry stock and automotive manufacturing is considered a cyclical stock. A defensive stock is issued by a company that does well in both good and bad times. For instance, grocery store stocks may be considered defensive stocks since grocery stores may perform better during slow economic times than during good economic times -- fewer people frequent restaurants or spend money on entertainment when times are bad. High-tech stocks are generally associated with volatile businesses that are prone to wide fluctuations in value.

All of the following types of investments can pay dividends to the shareholder, except: A. Common stock B. Preferred stock C. ADRs D. Warrants

Warrants. Warrants do not pay dividends. Warrants represent promises by a company to sell shares of stock at some future date at a price that is higher than the current market price. Warrants themselves are not actual shares of stock, only a right to buy stock. Common and preferred stock pay dividends if dividends are declared, and ADRs represent ownership of foreign stock in which the investor is entitled to dividends if dividends are declared