Series 7 chapter 4 - Equities

Which of the following statements is NOT a characteristic of an electronic communication network (ECN)? AECNs act as market makers BECNs permit trading electronically CECNs permit trading anonymously DECNs permit trading after-hours

A Electronic communication networks allow market participants to display quotes and execute transactions. These participants are referred to as subscribers and pay a fee to the ECN to trade electronically through the system. ECNs allow subscribers to trade after-hours, and to quote and trade without disclosing their names (anonymously). ECNs act in an agency capacity and will not buy or sell for their own account as with a market maker.

Math Industries is seeking to maximize shareholder value by spinning off its Algebra Analytics Division. If this action is undertaken, Math Industries' current shareholders would own stock in: ABoth companies with no immediate tax consequences BBoth companies with capital gains due on the spinoff CThe parent company and would receive a special dividend in the form of the spinoff DThe parent company and would receive a special capital gains distribution from the spinoff

A In a spinoff, each shareholder retains shares in the parent corporation and is also granted shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers with the expectation that the combined valuation of the two entities will be greater than that of the single entity.

All of the following are characteristics of sponsored ADRs, EXCEPT: AThey have no currency risk. BThey're created with cooperation from the foreign issuer. CThey pay dividends in U.S. dollars. DThey're liquid securities.

A Sponsored ADRs are created when a foreign company issues shares and puts them into a trust that's held at a U.S. bank. Shares of the ADR are then registered and listed on an exchange, which makes it easy for U.S. investors to buy and sell shares (i.e., ADRs are liquid). ADRs pay dividends to U.S. investors in U.S. dollars. However, dividends are originally paid in a foreign currency and then exchanged for U.S. dollars by the trust. Although this minimizes exchange rate fees for ADR owners, it doesn't eliminate foreign currency risk. (15681)

ABC Corporation's charter authorized the issuance of up to 1,000,000 shares of stock. The company has issued 100,000 shares, but has 5,000 shares of treasury stock. How many shares of ABC's stock are outstanding? A95,000 B100,000 C105,000 D900,000

A The number of shares outstanding is equal to the number of shares issued, minus any treasury stock (stock the company has bought back in the open market). 100,000 shares issued minus 5,000 shares of treasury stock equals 95,000 shares outstanding.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock?The securities do not have a fixed maturity dateThe price of these securities is more volatile than common stockThe dividend will be paid annuallyThe price will fluctuate based primarily on changes in interest rates AI and III BI and IV CII and III DII and IV

B Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

All of the following statements are TRUE regarding ADRs, EXCEPT: AThe securities are priced in dollars BThe instrument's price reflects the value of the underlying stock and currency fluctuations of the underlying issuer's host country CThe increased trading volume and enhanced liquidity in the U.S. markets lead to prices that are virtually identical to those of the underlying stock in the issuer's host country DThe securities may be listed on an exchange, and may be sponsored by the company

C American Depositary Receipts (ADRs) are priced in dollars and are sensitive to the value of the stock and the fluctuations of the currency in the underlying issuer's host country. ADRs may be listed on an exchange and may be sponsored by the company (issuer). The trading volume of ADRs varies considerably among issues. Securities that are not heavily traded may have significant disparities between the price of the ADR and the underlying stock.

When investors choose the shares that will make up their cost basis for tax purposes, they're using: AFirst-in, first-out (FIFO) BLast-in, first-out (LIFO) CSpecific identification DAverage cost

C The IRS only recognizes two methods for calculating the cost basis for capital gains or losses on stock transactions: 1) first-in, first-out (FIFO) or, 2) specific identification. FIFO uses the oldest shares (i.e., shares purchased first) to calculate the cost basis. Specific identification allows taxpayers to choose which of their shares will be used to find the cost basis. The average cost may only be used for sales of mutual fund shares.

An investor wishes to establish a tax loss but still wants to own the same security. The customer sells the security and repurchases it two weeks later. The tax loss is: AEstablished BRecognized CDisallowed DAmortized

C The tax loss is disallowed. The customer must wait more than 30 days before repurchasing the same security or any security convertible into the security (a right, option, warrant, or convertible bond). The customer repurchased the same security two weeks later. This is considered a wash sale for tax purposes by the IRS and the loss is disallowed.

A special disclosure document may be required for investing in: AMunicipal bonds BConvertible bonds CMutual funds DPenny stocks

D A special disclosure document may be required if a broker-dealer will be executing transactions for a customer in penny stocks. Under SEC rules, a penny stock is generally defined as an equity security with a bid price of less than $5.00, which is not listed on an exchange (e.g., the NYSE or Nasdaq).

An investor would have the right to buy the stock of a corporation for the longest period of time by purchasing a: ARight BCall option CPut option DWarrant

D A warrant is the right to purchase a fixed number of shares, at some future time, at a fixed price. This is also true of rights and call options but warrants may be exercised over a longer period of time. A put option is the right to sell securities at a fixed price within a fixed period of time.

A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. Each existing share receives one right. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would she need to buy 100 new shares of stock? A95 B100 C350 D950

D The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights. (10 rights x 100 shares = 1,000 rights.) The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 950 rights.

A client has inherited stock from a relative. The relative had originally purchased the stock at $11 per share, which had a current market value of $46 per share at the time of the inheritance. If the client sells that stock at some later date for $50 per share, what cost basis will be used to determine the gain or loss? A$11 B$35 C$46 D$50

c When securities are inherited, the cost basis is stepped up to the current market value at the time of death. In this case, it is $46. In addition, the inherited security will be considered to be held long term regardless of the holding period of the recipient.