Unit 1 - Knowledge Check

Squidco, Inc., is issuing 100 million dollars in 4 ½% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 per share anytime in the next 10 years. Squidco common is currently trading at $29.95 a share. This is an example of A. a warrant. B. a stock right. C. a follow-on offering. D. a call.

A - A warrant - A warrant is normally issued attached to a fixed-income security to attract more interest in the debt issue. Warrants are generally longer term (five or more years) and have an exercise price that is higher than the current stock price.

Another term for stocks and bonds is A. equity and debt B. shares and units C. voting and nonvoting D. taxable and tax free

A - Equity and Debt - Equity is a common term for securities that represent ownership interest, such as stocks. Bonds are the most common type of debt security.

In 2011, RST Corporation had both common stock and $100 par value at 4% noncumulative preferred stock outstanding. The preferred, like the common stock, pay dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of A. $1.00 B. $4.00 C. $17.00 D. $20.00

A - In the case of a noncumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, as is always the case, it must pay the current preferred dividend before paying to the common shares. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00 - an amount that must be paid before the quarterly common dividend can be paid.

All of the following are considered securities except: A. U.S. minted gold coins B. Common stock of XYZ Corporation C. 15 British pound put contracts D. Treasury Bonds

A - U.S. minted gold coins - Stocks, bonds, and options are all examples of securities. Gold and gold coins are a commodity, not a security.

Under Rule 144, which of the following sales are subject to volume limitations on the number of shares sold? I. Control person selling registered stock held for 1 year II. Control person selling restricted stock held for 2 years III. Nonaffiliate selling registered stock held for 1 month IV. Nonaffiliate selling restricted stock held for more than 6 months A. III and IV B. I and II C. I and III D. I and IV

B - I and II - Control persons (insiders) are always subject to volume limitations. Non affiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after six months. Registered shares sold by nonaffiliates have no Form 144 filing requirement.

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A. 900 votes he can divide anyway he wants among the three seats. B. no voting rights. C. 300 votes each for the open seats. D. 300 votes total to spread among the three open seats.

B - No voting rights - Your customer owns preferred stock. Preferred Stock carries no voting rights.

All Big Company, Inc., an NYSE-listed manufacturer of large objects, has declared a 50-cents-a-share dividend payable next month. All Big also has options available for trade. The actual ex-dividend date will be declared by A. the OTC. B. the NYSE. C. FINRA. D. the CBOE.

B - the NYSE - Ex-dates are set by the market center where trades will likely take place. In the case of an NYSE-listed stock, the New York Stock Exchange will determine the ex-date. The fact that All Big has listed options is not relevant to the question.

Which of the following securities would likely provide the greatest potential for capital appreciation? A. A preferred stock B. a U.S. Treasury STRIP C. A common stock D. A convertible bond

C - A common stock - Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservatives investors because each is primarily an income investment and has limited growth prospects.

Which of the following is not a security that an investor would purchase? A. Common shares of ABC Petroleum, Inc. B. Debt issue by ABC Petroleum C. Bitcoins D. Windmill Growth Fund

C - Bitcoins - Bitcoin is considered a commodity, not a security.

American Liquidators Corporation (Ticker LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to accomplish, this they would A. offer warrants to existing shareholders. B. suggest that existing shareholders go to the market and double their existing position. C. offer stock rights to existing shareholders. D. perform a stock split.

C - Offer stock rights to existing shareholders - LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrants are long term and normally attached for a fixed-income offer. Neither the stock split nor investors buying in the market generates capital for the company.

Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of the following are true about the position except A. they will receive dividends in U.S. dollars. B. the security may be traded in U.S. markets. C. they have the same voting rights as an owner of the common stock. D. they have the right to request the underlying common shares be issued to them directly.

C - They have the same voting rights as an owner of the common stock

Which of the following would most likely require shareholder approval? A. Declaring a dividend B. Firing the CEO C. Hiring a new CFO D. Changing the corporation's name

D - Changing the corporation's name - Changing the corporation's name is a significant matter that will likely need shareholder approval. Declaring a dividend and the hiring and firing of senior executives is well within the board's power.