SIE Unit 2 Q Bank Quiz 1

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the two previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first? A) $16 B) $24 C) $8 D) $0

$24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the two years missed, in addition to $8 this year, for a total of $24.

MAS Corporation has enjoyed an extremely profitable year. It has been determined that those owning the MAS 4% preferred, participating to 6% preferred shares, will receive the full participating dividend. The participating shareholders will receive an additional dividend of A) 2%. B) 4%. C) 10%. D) 6%.

2% The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.

Under penny stock rules, what is required for a broker-dealer to consider an investor an established customer? A) Open cash account for six months or more B) Signed transaction agreement C) Signed risk disclosure statement D) At least three separate penny stock purchases

At least three separate penny stock purchases Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least one year before the penny stock transaction, or have purchased at least three different penny stocks from the same broker-dealer.

All else being equal, which of the following preferred would pay the highest dividend? A) Straight preferred B) Participating preferred C) Cumulative preferred D) Callable preferred

Callable preferred Callable preferred is a benefit to the issuer—not the investor—so callable has to pay a higher dividend than the others because the other features are neutral or benefit the investor.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Convertible B) Cumulative C) Callable D) Noncumulative

Convertible Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

Which of these would not require shareholder approval? A) Changing the name of the corporation B) Selling the corporation's principal asset C) Bringing on a new board member D) Declaring a dividend

Declaring a dividend Changing the corporation's name and selling the company's principal asset are significant matters that would likely need shareholder approval. Board members are elected by the shareholders. Declaring a dividend and the hiring and firing of senior executives is well within the board's power.

A common stock shareholder's residual right to corporate assets refers to which of the following? A) During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid. B) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after preferred shareholders are paid but before debtholders are paid. C) During the dissolution of corporate assets, common shareholders will be paid if any funds are left after debtholders are paid but before preferred shareholders are paid. D) During the dissolution of corporate assets, common shareholders will be paid first— before debtholders and preferred shareholders are paid.

During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid. For common shareholders, having a residual right to corporate assets means that they will only be paid in the event of a corporate dissolution if there are any funds left after debtholders and preferred shareholders are paid.

Which of the following describes the results of a 1 for 2 reverse stock split? A) Half as many shares at twice the original price B) Half as many shares at the same price C) Twice as many shares at half the original price D) Twice as many shares at the same price

Half as many shares at twice the original price If a stock price has become too low, for example for listing to continue on an exchange, a corporation may carry out a reverse stock split. In a 1:2 reverse split, the price of the stock is doubled, but the number of shares outstanding is halved. Any stock split, forward or reverse, must leave the total value of the outstanding stock unchanged before and after the adjustment.

Which of the following best describes an M&A and spin off? I. M&A is when one company merges with or acquires another company. II. A spin off is when one company divests itself of one of its divisions or subsidiaries. III. M&A is when one company does both the accounting and management for another company. IV. Spin off is when a company's debt spins out of control.

I and II M&A (mergers and acquisitions) occurs when one company buys or combines with another. A spin-off is when a company separates a subsidiary into a separate company.

Harry's Burgers has announced a tender offer for 20 million shares of Jim's Junkfood Corner at $30 a share. If Harry's secures all the shares then they will control Jim's. The shareholders of Jim's, that submit their shares to the tender offer, will realize which of these? I. A capital loss occurs if their cost basis is greater than the tender price. II. There is no effect. III. A capital gain occurs if their cost basis is less than the tender offer. IV. Investment income is received equal to the value increase of the new shares.

I and III Shareholders who tender their shares effectively sell the shares at the tender price ($30) and realize a gain or a loss depending on what their cost was for the shares tendered.

A corporation is issuing a bond with an interest rate below that which is commonly being offered for this type of bond. To improve the bond's marketability without reducing the capital to be obtained, which of the following actions might the corporation take? A) Offer a warrant on the stock with each bond B) Offer a stock dividend to the current shareholders C) Offer the bond at a discount D) Conduct a rights offering for potential bond buyers

Offer a warrant on the stock with each bond Warrants are sometimes offered as sweeteners attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn't be able to raise the needed capital.

An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances? A) The investor has already received the risk disclosure statement. B) The investor is already exempt from the risk disclosure requirements. C) The investor's account is approved for margin purchases. D) The investor is an established customer.

The investor is an established customer. Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.

A shareholders' meeting for ABC Corporation will take place in eight days. A customer whose stock is being held in street name has not returned the proxy statements. Which of the following is true? A) The member firm must ascertain how the investor wishes to vote the shares. B) The member firm may vote the shares as it wishes on minor matters. C) The member firm votes the shares as recommended by the issuer's management. D) The member firm may not vote the shares under any circumstances.

The member firm may vote the shares as it wishes on minor matters. If an owner of shares held in street name has not returned proxy statements earlier than 10 days before a shareholders' meeting, the member firm holding the shares may vote them as it sees fit, provided the matters voted on are minor. If they are major—for example, changing the direction of the business, offering additional stock, effecting a merger—the member firm may not vote the shares at all.

If a stockholder submits a proxy for the annual meeting but then choses to attend the meeting to vote, what becomes of the proxy? A) Only the broker-dealer could rescind the proxy. B) The voting proxy would be revoked. C) Only those with reservations would be able to attend the meeting so the proxy vote would stand. D) The voting proxy would stand.

The voting proxy would be revoked. A proxy is automatically revoked if the stockholder attends the shareholder meeting and votes.

Your customer purchased 100 Foreign Motors, Limited, American depositary receipts (ADRs). The ADRs represent 100 shares of Foreign Motors, Limited, a London-based company. What is regular way settlement for this trade? A) Seven business days following the trade date (due to the international currency transaction) B) On the trade date C) One business day following the trade date D) Two business days following the trade date

Two business days following the trade date ADRs trade in U.S. markets in U.S. dollars and settle T+2.

While preferred shares tend to be less volatile than common shares, one type of preferred is noted as being even more stable in price than the others. This would be A) convertible. B) adjustable rate. C) participating. D) callable.

adjustable rate. Because the dividend payment adjusts to current interest rates, the price of the stock remains relatively stable. In other words, it is the return that fluctuates rather than the price.

Different categories of preferred shares offered by an issuer A) must all be convertible shares. B) all have preference over the issuer's common shares. C) all must have the same fixed dividend rate. D) must all be callable shares.

all have preference over the issuer's common shares. Separate categories of preferred shares may differ in several ways, including dividend rate and profit participation privileges. However, all maintain preference over common stock shares issued.

Transactions where the penny stock rules are applicable would be those that A) are neither solicited nor unsolicited transactions. B) are either solicited or unsolicited. C) are solicited. D) are unsolicited.

are solicited. Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt, and the rules therefore apply.

Preferred shares have A) only the characteristics matching those of debt securities. B) only the characteristics matching those of equity securities. C) characteristics of neither equity nor debt securities. D) characteristics of both equity and debt securities.

characteristics of both equity and debt securities. Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

A preferred shareholder's priority claim on assets is the preferred shareholder's priority standing over A) common shareholders. B) bondholders. C) creditors of the corporation. D) employees of the corporation.

common shareholders. A preferred shareholders priority claim on assets is the preferred shareholders priority standing over common shareholders only. Employees of the corporation, debt (bond) holders and other creditors would all have claims on assets settled before preferred shareholders.

A customer owns 1,000 shares of stock subject to a 1:3 reverse stock split. The position will now consist of A) more shares worth less per share with the same net position value. B) fewer shares worth more per share with the same net position value. C) fewer shares worth less per share with a decreased net position value. D) more shares worth more per share with an increased net position value.

fewer shares worth more per share with the same net position value. With a reverse split, the position will now consist of fewer shares, but each share's value will be adjusted upward. As with all adjustments, the net position value remains unchanged before and after the adjustment.

A convertible feature for preferred shares allows the owner to exchange the shares A) for a fixed number of bonds issued by the corporation. B) for as many bonds as the issuer is willing to issue at that point in time. C) for a fixed number of shares of the issuing corporation's common stock. D) for the preferred shares of another issuer.

for a fixed number of shares of the issuing corporation's common stock. The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell A) under Rule 144 only after a six-month holding period. B) immediately, with no volume restrictions. C) immediately, subject to Rule 144 volume limitations. D) only after leaving (becoming unaffiliated with) the company.

immediately, subject to Rule 144 volume limitations. Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

All of the following could be characterized as benefits to owning common stock except A) capital gains via increases in share price. B) limited liability. C) income potential via the receipt of dividends. D) low dissolution priority.

low dissolution priority. Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). Obviously, this is not a benefit. However, price appreciation and the receipt of dividends are potential benefits and limited liability is guaranteed, only being able to lose what one has invested.

When the board of directors (BOD) declares a dividend, A) owners of preferred shares are paid only after any payment is made to common shareholders. B) owners of preferred shares must be paid at least the same amount as any payment made to common shareholders. C) owners of preferred shares must be paid before any payment is made to common shareholders. D) owners of common shares must be paid at least the same amount as any payment made to preferred shareholders.

owners of preferred shares must be paid before any payment is made to common shareholders. When the BOD declares dividends, owners of preferred shares must be paid before any payment is made to common shareholders. This is known as the dividend preference allotted to preferred shareholders. There is no relationship between the amounts paid to preferred shareholders and common shareholders.

A corporation that has issued cumulative preferred stock A) pays only the current dividends on the preferred, before paying a dividend on the common and then pays any past-due dividends. B) pays the preferred dividend before paying the interest payments due on its outstanding bonds. C) pays past and current preferred dividends before paying dividends on common stock. D) pays only current dividends with no liability for missed or past-due dividends.

pays past and current preferred dividends before paying dividends on common stock. Dividends in arrears (those missed) on cumulative preferred have the highest priority of dividends to be paid. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest, however, is always paid before any dividends, preferred or common.

The decision to pay a dividend rests with A) the board of directors (BOD) but is not guaranteed. B) shareholders but is not guaranteed because they can vote against paying one. C) shareholders, which is why it is guaranteed. D) the board of directors (BOD) and is guaranteed.

the board of directors (BOD) but is not guaranteed. The decision to pay a dividend rests with the BOD but is not guaranteed. The declaration to pay a dividend may or may not occur. When it does occur, the amount can decrease, increase, or remain unchanged from the previous dividend.