Chapter 1 exam
Leafy Trees Inc. has the following facts regarding its common shares as of April: Authorized Shares: 10,000,000 Issued and Outstanding: 8,000,000 May: It repurchases 1,000,000 shares. June: It completes a 2 for 1 stock split. How many shares are outstanding after the split?
Answer: 2/1 x 7,000,000 = 14,000,000 EXPLANATION: The company has 8,000,000 shares outstanding before any corporate action is effected. It then repurchases 1,000,000 shares, which is now treasury stockThe outstanding number of shares is reduced to 7,000,000 (issued stocktreasury stock = outstant stock) After this, the company completes a 2 for 1 stock splitSo the new outstanding share figure is 2/1 * 7000000 = 14000000
Investing in a direct participation program would provide investors with a portfolio of: (A) non-correlated assets which are expected to provide regular returns (B) correlated assets which are expected to provide little or no returns (C) non-correlated assets which are expected to provide above market returns (D) correlated assets which are expected to provide well above average returns
Answer: A EXPLANATION DPPs are considered "Alternative Investments" or "Non-Correlated Assets" and are expected to provide regular or steady returns to the investor
Place the following in order, highest to lowest, in terms of asset distribution if a corporation is liquidated : (I.) Preferred stockholders (II.) Owners of secured debt instruments (III.) Common stockholders (IV.) Owners of unsecured debt instruments
II, IV, I, III EXPLANATION: The order of asset distribution is taxes, secured debt, unsecured debt, preferred stockholders and common stockholders. Common stockholders are last on the list and are considered residual owners in the event of a corporate liquidation.
Normally a stock will begin trading ex-dividend on the: (A) business day prior to the record date (B) business day after the declaration date (C) business day prior to the payable date (D) Record date
Answer: A EXPLANATION: Stock will begin trading ex-dividend on the business day prior to the record date
All of the following are correct regarding common stock EXCEPT: (A) Common shares may be held in street name by a broker-dealer (B) Common shares may be called by the issuing corporation after a specified date (C) Common shares may be used as collateral for a loan in a margin account (D) Ownership of common shares may be transferred with proper assignment on the back of the stock certificate
Answer: B EXPLANATION: Common stock is never callable
Which of the following is generally considered to be a defensive stock? (A) Companies whose shares trade on the NYSE only (B) Foreign companies that sell predominantly to U.S. consumers (C) Consumer goods and food production companies (D) Companies with defense contracts with the U.S. Government
Answer: C EXPLANATION: Defensive stock tends to have stable values even in a recession. Defensive stocks include food, tobacco and oil companies as well as public utilities.
An investor owns 800 shares of ABC preferred stock paying a 5% dividend. ABC company announces a 2:1 stock split on its common stock. How many shares of preferred stock will the investor own after the split? (A) 800 shares (B) 840 shares (C) 400 shares (D) 760 shares
Answer: A EXPLANATION: A common stock split will not affect the investor's preferred stock holdings, so it remains at 800 shares
Which of the following is TRUE of warrants? (A) When the warrants are issuedthe market price of the underlying stock would be below the exercise price. (B) They are all issued as perpetual warrants (C) They pay dividends (D) The market price of the stock is considerably above the exercise price when they are issued
Answer: A EXPLANATION: Because warrants are used as an incentive or sweetenerthe exercise price of the warrant will be more than the offering price of the new issue As time passes and the market price of the new issue rises, the warrant will become valuable
Which of the following is FALSE concerning warrants? (A) They are issued as short-term instruments (B) They allow the holder to purchase common stock, usually at a price higher than the market price at the time the warrant is issued (C) They are freely transferable and may be listed on a stock exchange (D) They may be issued with a preferred stock or bond issue
Answer: A EXPLANATION: Warrants are NOT issued as short- term instruments Warrants are issued in conjunction with preferred stock or bond issuesThey allow the investor to purchase common stock for a fixed price which is higher than the market price when the warrants were issuedIt would be expected that the market price of the stock will rise over time, thus making the fixed price on the warrant a good dealSome warrants have a definite expiration date, while others are good until exercised. They can be freely traded on the exchanges
Common stockholders have all of the following rights EXCEPT : (A) attend the issuer's annual meeting (B) vote for the senior management of the company (C) Assign the right to vote for directors to another person (D) receive a pro rata share of the remaining assets upon liquidation of the company
Answer: B EXPLANATION Officers and senior management are selected by the Board of Directors, not the stockholders
A company would most likely include warrants in a new distribution of what type of issue? (A) common (B) stock debentures, to secure a lower interest rate (C) preferred stock (D) convertible bonds to secure a higher interest rate
Answer: B EXPLANATION: Although warrants can be used with any type of new issue, they are most often used with a new issue of debentures.
All of the following are rights of a common stockholder EXCEPT for the right to: (A) vote on important matters such as the Board of Directors (B) receive fixed cash dividends. (C) inspect certain corporate books and records (D) receive a stock certificate.
Answer: B EXPLANATION: Common stockholders have the right to receive dividends once the Board of Directors declares a dividend , but dividends are not a right until declared and are not fixed. Dividends on preferred stock are for a fixed percentage or dollar amount and are expected , but are not mandatory. Common shareholders have the right to vote on important matters, inspect corporate books and records, and receive a stock certificate. Remember that preferred shareholders do not normally have the ability to vote , but do get a higher claim on assets than common shareholders .
Which of the following would NOT be a right of a common stockholder? (A) to receive dividends declared by the company (B) to vote for officers of the company (C) to vote for the board of directors of the company (D) participate in a rights offering presented by the company
Answer: B EXPLANATION: Common stockholders have the right to vote for the Board of Directors but NOT to vote for officers of the company
An investor at the firm insists on buying a stock in order to receive the dividend, despite being advised against this by their registered representative. The stock's record date is Monday October 23rd. Assuming a regular-way settlement, the latest that this investor could buy the stock and still receive the dividend is: (A) Wednesday, October 18th (B) Thursday, October 19th (C) Friday, October 20th (D) SaturdayOctober 21st
Answer: B EXPLANATION: In order to receive the dividend, the investor would have to buy the stock prior to the ex-date in order to receive the dividend. The ex-date in this scenario is Friday, October 20th, which is one business day prior to the record dateTherefore, the investor would need to purchase this stock on or prior to Thursday, October 19th, in order to receive the dividend.
Which of the following is an advantage to investors purchasing a REIT? (A) There are no minimum investment requirements and REITs have a direct correlation to the value of other financial assets (B) There are no minimum investment requirements and REITs have a low correlation to the value of other financial assets (C) Investors must be accredited prior to making an investment and REITS have a direct correlation to the value of other financial assets (D) Investors must be accredited prior to making an investment and REITs have a low correlation to the value of other financial assets
Answer: B EXPLANATION: No minimum investment is required, and REITS have a low correlation to other financial assets (such as stocks and bonds) because the assets of a REIT are real estate.
A corporate stockholder has a "residual claim". This refers to the stockholder's right to: (A) Any additional dividends paid by the corporation out of its paid-in surplus (B) Corporate assets remaining at dissolution after the satisfaction of senior obligations (C) The remainder of a rights offering not taken by the principal investors (D) Any dividends the corporation has not paid in the past
Answer: B EXPLANATION: A residual claim means that the stockholder has a claim on any assets remaining after the satisfaction of the creditors of the corporation that is in bankruptcy
Which of the following is NOT a characteristic of common stock? (A) Common stock represents an equity ownership of the company (B) Common stocks are riskier than Treasury securities (C) Dividends paid on common stock are typically a fixed percentage of the value at the time of issuance (D)Bondholders and preferred stockholders have priority claims over common stockholders in the event of the company's liquidation
Answer: C EXPLANATION Dividends on common stock are not fixed but are set by the Board of Directors and will fluctuate based on how the company is doing financiallyPreferred stock does pay a fixed dividend rate
Bobbie purchased 100 shares of ABC common stock several years ago. Which of the following rights does Bobbie have by owning common stock that preferred stock holders do not have? The right to: (A) sell his shares (B) receive dividends (C) vote on important matters such as stock splits (D) inspect certain books of the corporation
Answer: C EXPLANATION: Both common and preferred stockholders have the right to sell their shares, receive dividends, and inspect certain books of the corporation. Only common stockholders are given the right to vote on important matters such as stock splits and elections for members of the Board of Directors.
When the owner of common stock receives Proxy Material, which of the following do they then have? (A) First choice on new shares being issued by the company (B) their right to vote has been waived (C) the right to vote their shares in the voting matter presented at the shareholders meeting (D) the right to set the amount the next dividend to be paid to the shareholders
Answer: C EXPLANATION: Proxy material is like an absentee vote and allows shareholders to vote their choice when the shareholder is unable to attend the shareholders meeting
Reg T settlement of common stock is trade date plus: (A) 2 calendar days (B) 2 business days (C) 4 business days (D) 4 calendar days
Answer: C EXPLANATION: Regulation T settlement on common stock is trade date plus 4 business daysRegular way settlement date is T + 2 Cash settlement is same day
A single 25-year-old investment banker has income of $300,000 and net worth in excess of a million dollars. Her investment objective is capital appreciation. All of the following would be appropriate for this investor except : (A) equities in emerging markets (B) small cap equity securities (C) high yield preferred stocks (D) aggressive growth funds
Answer: C EXPLANATION: Since her objective is capital appreciation, the high yield preferred stock would be the least appropriate since preferred stocks are generally less volatile than common stocks.
ABC Corporation has 2,000,000 shares of common stock outstanding and decides to issue 500,000 new shares in order to raise capital. The Corporate Charter includes a Preemptive Rights Clause. Assuming that ABC Corporation also has 10,000,000 shares of common stock authorized and 1,000,000 treasury shares, which of the following statements is correct? (A) ABC could choose to offer the new shares directly to the public (B) 10,000,000 rights will be issued by ABC Corporation (C) An investor that owns 200 shares could subscribe to 50 shares of the new issue (D) The 1,000,000 treasury shares would participate in the Rights Offering
Answer: C EXPLANATION: We know we have a rights offering because it says, "the corporate charter included a preemptive rights clause." If you take the 2,000,000 outstanding shares divided by the 500,000 new shares, you determine that this is a 4:1 Rights OfferingIn answer C says we have 200 shares of stock. If you have 200 shares , this means you have 200 rights So you take the number of shares owned or the number or rights and divide it by the ratio 200/4 = 50. Therefore, if you have 200 shares of stock, you will be able to subscribe to 50 additional shares of the new issue.
Which one of the following types of securities over time (long- term) has best provided a hedge against inflation ? (A) callable preferred stock (B) corporate bonds rated A or higher (C) common stock (D) Municipal binds rated AAA
Answer: C Explanation: common stock over the long-term has proven to be the best hedge against inflation. Bonds are usually subject to inflationary risk. The money that purchased the bonds may not buy as much at maturity
When interest rates change which of the following securities would have the greatest reaction? (A) Rights (B) Warrants (C) Preferred Stock (D) Common Stock
Answer: C EXPLANATION Interest rates affect fixed income securities directly because of the inverse relationship that price has to interest rate fluctuation. Bonds and preferred stocks are considered fixed income securities, because they either pay interest (bonds) or dividends (preferred stocks) at a fixed rateSo when interest rates change, this has more of an impact on preferred stock as opposed to common stock, because the going rate of dividends paid out on new issues of preferred stock will either be going up or down. This will affect the market price of existing preferred stocks with established dividend rates
ABC Corporation will be performing a preemptive rights offering. Which of the following is TRUE? (A) The corporation is offering long-term options to buyers of bonds to buy stock at a price that is currently above the current market price (B) The corporation is changing the rights that shareholders have in association with their shares (C) The corporation is attempting to preempt a takeover bid from a competitor (D) The corporation is selling additional shares and must provide existing shareholders with the ability to maintain their proportionate ownership
Answer: D EXPLANATION: A preemptive rights offering occurs when a company wishes to issue new shares of stock. The rights must be offered to existing shareholders to ensure that shareholders can maintain their proportionate share of ownership of the underlying company. Rights are short -term securities which typically allow the investor to buy additional shares of common stock before the public is permitted to participate and at a lower price than what will be offered to the public.
Which of the following is typically considered a unit of trading when dealing in common stock? (A) Lots with a value of $10,000 or more (B) Lots with a value of $100 or less (C) Lots of 10,000 shares (D) Lots of 100 shares
Answer: D EXPLANATION: The most common trading unit for common stock is 100 shares. It is considered a round lot
The primary purpose of a stock split is to: (A) increase the market price of the common stock (B) increase each stockholder's proportionate ownership (C) increase the assets of the corporation (D) decrease the market price of the common stock.
Answer: D EXPLANATION: The primary purpose of a stock split is to reduce the market price of the stock which increases the stock's marketability
Which of the following are reasons for a corporation to repurchase its own stock? (A) To increase "Earnings Per Share (B) fund stock option plans (C) To finance future acquisitions (D) All of the above
Answer: D EXPLANATION All choices offered represent reasons why a corporation would want to buy back some of their own company's stock on the open market
Which of the following would probably be most leveraged? (A) A chemical compat (B) A utility company (C) An automobile company (D) A steel company
Answer: Utility company EXPLANATION Utility companies are usually highly leveragedThey can do this safely because they supply a commodity everyone will always need they are not constrained by a diminishing or volatile market
Customer A owns a common stock that offers cumulative voting, while Customer B owns a common stock that offers statutory votingWhich of the following statements would be TRUE regarding the voting rights of Customer A and Customer B? (A) Customer A must vote for more than one director, whereas, Customer B can cast all votes for one director (B) Minority stockholders of Customer A's company have a better chance of electing a director of their choice, than do the minority stockholders of Customer B's company (C) Customer A's company directors must be elected by a majority, whereas Customer B's company only requires plurality (D) Customer A's company allows uncast votes to be carried forward to the next election whereas, Customer B's company does not
Minority stockholders of customer A's company have a better chnce of electing a director of their choice, than do the minority stockholders of customer Bs company (Explanation: cumualtive voting gives minority shareholders a better chance of electing directors that they prefer)
