3 Equity Securities Practice Test

If a stock's ex-dividend date is Tuesday, January 13, when is the record date? A) Tuesday, January 20. B) Thursday, January 15. C) Thursday, January 8. D) Wednesday, January 7.

Your answer, Thursday, January 15., was correct!. The record date is two business days after the ex-dividend date (Thursday, January 15). Reference: 1.6.3.2 in the License Exam Manual.

The issuer of an ADR is a: A) foreign branch of a domestic bank. B) domestic branch of a foreign bank. C) foreign branch of a foreign bank. D) domestic branch of a domestic bank.

Your answer, domestic branch of a domestic bank., was incorrect. The correct answer was: foreign branch of a domestic bank. The American Depositary Receipt (ADR) is issued by a foreign branch of a domestic bank. Everything is in English and in U.S. dollars. Reference: 1.8.1.1 in the License Exam Manual.

ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive: A) $10 million. B) $20 million. C) $6.4 million. D) $12.8 million.

Your answer, $6.4 million., was correct!. There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million. Reference: 1.7.2 in the License Exam Manual.

Shareholder approval is required for all of the following corporate events EXCEPT: A) the acceptance of a tender offer from a non-affiliated company. B) the issuance of convertible bonds. C) dividends. D) stock splits.

Your answer, dividends., was correct!. Shareholder approval is not required for the payment of dividends, but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval. Reference: 1.2.3.1 in the License Exam Manual.

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above: A) $125 per share. B) $150 per share. C) $175 per share. D) $200 per share

Your answer, $175 per share., was correct!. In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities. Reference: 1.5.1 in the License Exam Manual.

A corporation authorized to issue 1 million shares of common stock originally issued 600,000 shares and later repurchased 40,000 shares for its treasury. How many shares of common stock will remain outstanding? A) 600,000. B) 560,000. C) 40,000. D) 960,000.

Your answer, 560,000., was correct!. Stock issued minus stock reacquired equals the amount of stock outstanding. Shares repurchased are called treasury stock. Reference: 1.2.1.4 in the License Exam Manual.

ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares? A) 75. B) 60. C) 100. D) 30.

Your answer, 75., was correct!. A 5-4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares × 25% = 75 shares. Reference: 1.2.4.1 in the License Exam Manual.

Which of the following securities is subject to the greatest risk? A) XYZ Inc., common stock. B) BAA-rated ABC convertible bond. C) Series EE bond. D) A-rated municipal bond

Your answer, XYZ Inc., common stock., was correct!. Common stock is a junior security. It is considered less safe than bonds because it has the lowest claim to assets in the event of the issuing firm's liquidation, and is paid dividends after bonds are paid interest. Reference: 1.2.3.6 in the License Exam Manual.

Your customer owns 100 shares of DWQ trading at $50 per share. He hears that DWQ has declared a 25% stock dividend and wants to know how that will affect his holdings after the stock dividend is paid. You should advise the customer that based on the current price he will own: A) 100 shares at $40. B) 125 shares at $50. C) 125 shares at $40. D) 100 shares at $50.

Your answer, 125 shares at $40., was correct!. The number of shares increased by 25%, or 25 shares. Total market value remains the same. To calculate the new market price, divide $5,000 (total market value) by 125 to get the after-dividend price of $40 per share. Reference: 1.4.1.2 in the License Exam Manual.

Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into ½ share of common. The preferred stock is selling at $17.50 and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 3 million. B) 500000. C) 2.5 million. D) 2 million.

Your answer, 2.5 million., was correct!. One million shares of preferred, each converted to ½ share of common, is 500,000 common shares. Five hundred thousand shares after conversion added to 2 million shares of common previously outstanding equals 2.5 million common shares. Reference: 1.3.2.3 in the License Exam Manual.

The common stock of ABC Corporation currently earns $3 per share. If the price-to-earnings ratio for this stock is 14, what is the current market price? A) 21. B) 17. C) 42. D) 37.

Your answer, 42., was correct!. The price-to-earnings ratio equals the market price divided by earnings per share. The PE ratio is 14, and earnings per share is $3. Therefore, the market price is 14 × $3 = $42. Reference: 1.2.2.3 in the License Exam Manual.

If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is A) 1.75%. B) 3%. C) 5%. D) 8.6%.

Your answer, 5%., was correct!. The current yield is calculated by dividing the annual dividend by the current market value ($1.75 / $35 = 5%). Reference: 1.4.1.3 in the License Exam Manual

A change in earnings would affect the price of which of the following securities the most? A) 6% preferred stock. B) 10% debentures maturing in 10 years. C) Treasury stock. D) Common stock.

Your answer, 6% preferred stock., was incorrect. The correct answer was: Common stock. Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm. Reference: 1.2.3 in the License Exam Manual.

Minority stockholders are more likely to be able to elect directors through which form of voting? A) Progressive. B) Regular. C) Statutory. D) Cumulative.

Your answer, Cumulative., was correct!. Minority stockholders are more likely to be able to elect representatives to the board of directors through cumulative voting. Small stockholders may cast all of their votes on 1 position rather than spread them out and thus dilute them over 2 or 3 positions. Reference: 1.2.3.1.1 in the License Exam Manual.

Which of the following taxes does NOT impact the holder of an ADR? A) Foreign income tax. B) Federal income tax. C) State income tax. D) Excise tax.

Your answer, Foreign income tax., was incorrect. The correct answer was: Excise tax. Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return. Reference: 1.8 in the License Exam Manual.

Which of the following are characteristics of a REIT? It is traded on an exchange or over the counter. It is professionally managed. It passes through both gains and losses to investors. It is a type of limited partnership. A) I and II. B) I and IV. C) II and III. D) III and IV.

Your answer, I and II., was correct!. A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses. Reference: 1.9 in the License Exam Manual.

A 2-1 split does which of the following? Increases the number of outstanding shares. Decreases retained earnings. Decreases par value per share. A) I and III. B) II and III. C) I and II. D) I, II and III.

Your answer, I and II., was incorrect. The correct answer was: I and III. After a 2-1 stock split, the number of outstanding shares doubles and the par value per share decreases by half. Retained earnings are not affected. Reference: 1.2.4.1 in the License Exam Manual.

Which of the following statements regarding ADRs are TRUE? They are issued by large domestic commercial banks. They are issued by foreign banks. They facilitate U.S. trading in foreign securities. They facilitate a foreign investor who wants to trade U.S. securities. A) II and IV. B) I and III. C) I and IV. D) II and III.

Your answer, I and III., was correct!. ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities. Reference: 1.8.1 in the License Exam Manual.

Which of the following represent ownership in a corporation? Debentures. Convertible bonds. Preferred stock. Common stock. A) II and IV. B) III and IV. C) I and II. D) I and III.

Your answer, III and IV., was correct!. Common and preferred stocks represent ownership in a company. Convertible debentures may be converted to equity securities, but until they are, they are considered debt. Reference: 1.2 in the License Exam Manual.

If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A) Interest in a real estate limited partnership. B) Direct investment in a shopping center renting retail space to a broad variety of stores. C) Real estate investment trust. D) Privately placed investment.

Your answer, Real estate investment trust., was correct!. Real estate investment trusts (REITs) are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate. Reference: 1.9 in the License Exam Manual.

Which of the following statements regarding the effects of a stock dividend is TRUE? A) Capital surplus is reduced. B) The market value of the stock is decreased. C) New capital is channeled to the company. D) Net current assets are decreased.

Your answer, The market value of the stock is decreased., was correct!. A stock dividend results in an increased number of outstanding shares, each with a lower value per share. The total value of stock outstanding is unchanged. There is no new capital generated from a stock dividend. Current assets are unchanged because there is no increase or decrease to the company's cash as a result of the stock dividend. Reference: 1.4.1.2 in the License Exam Manual.

A company that has issued cumulative preferred stock: A) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. B) pays past and current preferred dividends before paying dividends on common stock. C) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. D) pays the preferred dividend before paying the coupons due on its outstanding bonds.

Your answer, pays past and current preferred dividends before paying dividends on common stock., was correct!. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid. Reference: 1.3.2.2 in the License Exam Manual.

A subscription right or privilege is best defined as: A) the right of shareholders to buy any future issue of the company's preferred stock prior to submitted public orders. B) the right of shareholders to maintain their percentage ownership of a company by selling a proportional number of warrants. C) the right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock. D) the right of shareholders to purchase company shares at a specific price within the next 5 years.

Your answer, the right of shareholders to buy any future issue of the company's preferred stock prior to submitted public orders., was incorrect. The correct answer was: the right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock. Current shareholders may maintain their percentage of ownership of a company by buying a proportional number of shares of any future issue of common stock. Purchasing shares prior to public orders is also known as a "preemptive right" and is often available only if made explicit in a company's corporate charter. Reference: 1.7.1.2 in the License Exam Manual.

ADR owners have all the following rights EXCEPT: A) the right to receive dividends in U.S. dollars. B) the right to receive the underlying foreign security. C) the right to sell in the secondary market. D) the right to sell the ADR in the foreign market.

Your answer, the right to sell the ADR in the foreign market., was correct!. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas. Reference: 1.8.1.2 in the License Exam Manual.

All of the following characteristics are advantages of a REIT EXCEPT: A) diversification. B) liquidity. C) professional management. D) tax deferral.

Your answer, tax deferral., was correct!. A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. Reference: 1.9 in the License Exam Manual.