Chapter 2 : Equity Securities
Place the stock dividend dates in order of occurrence
Declaration Date Ex-Dividend Date Record Date Payable Date Stock dividend dates are always based on regular way settlement (T+2), therefore the correct order of occurrence is the Declaration date, Ex-Dividend date, Record date, and Payable date.
XYZ Corporation pays a quarterly dividend of $0.50 and has a current market price of $50. What is the dividend yield?
Dividend Yield = Annual Dividend ÷ Current Market Price. In this example XYZ is paying a quarterly dividend of $0.50, which is an annual dividend of $2. $2 ÷ $50 = .04 or 4%
All of the following are true regarding preferred stock, EXCEPT that it:
Has voting rights Preferred stock represents ownership in a corporation. It has liquidation priority over common stock, pays a fixed annual dividend, and trades similarly to a bond. Unlike common stock, preferred stock does not have voting rights.
Bearish
Put Buyer Call Writer
Equity Options
An option contract based on an individual stock
Bullish
Call Buyer Put Writer
A common stock is trading at $100 and recently paid a $1 quarterly dividend. What is the current dividend yield?
$1 x 4 = $4: $4/$100 = 4%. Current dividend yield is the annual cash flow divided by the current market price.
Outstanding Shares
Shares of stock that are in possession of investors
Authorized Shares
The maximum number of shares a corporation's charter states that the issuer is permitted to sell.
If an investor is unable to attend a shareholder meeting and vote in person, what other option does the investor have to cast a vote?
When shareholders are unable to attend a shareholder meeting in person they can vote their shares ahead of the meeting by proxy.
A stock split is used for all the following reasons, except
A corporation will split its stock to make the stock more "marketable in the market" or make the price more attractive to investors trading the stock in the secondary market. Additionally, a stock split is a form of payment from the corporation to the current shareholder. A stock split will not give the investor more money right away, however the investor may see their stock appreciate over time.
The corporation's charter specifies the maximum number of these type of shares they are permitted to sell to raise capital is called:
A corporation's charter will specify the maximum number of shares that the issuer is permitted to sell. This authorized number of shares is usually very high and far more than what needs to be issued to raise capital during the Initial Public Offering (IPO). By initially requesting authorization for a larger number of shares than needed, the corporation saves time and money later by not needing to amend the charter to issue more stock. The unissued shares will be reserved for future use, if the corporation needs to raise additional capital by selling stock through a primary distribution.
Dwayne has two round lots of ABC Industries. The stock has moved up three points from yesterday's close. What is the increase in Dwayne's net worth based on this price change?
A round lot of stock contains 100 shares, so Dwayne owns 200 shares of ABC Industries. A 1-point move in a stock equates to a $1.00 increase in value per share, giving Dwayne a total increase in net worth of $600 ($3 x 200).
All of the following are true statements regarding ADRs except:
ADRs provide an efficient way for investors to purchase shares of foreign corporations. Investors will be paid dividends in U.S. dollars. The depository bank may retain the voting and preemptive rights on the shares, so investors never receive preemptive rights.
Al owns 100 shares of stock of a company that has 1,000 shares that are issued and outstanding. How much of the company does he own?
Al owns 10% of the company 100/1,000.
Index Options
An option contract based on the S&P 500, for example
American Options
An option contract that can be exercised anytime before expiration during the life of the contract
European Options
An option contract that can only be exercised on the expiration or maturity date
An option is said to have "Intrinsic" value if it is:
An option is "in-the-money" when it has intrinsic value. In-the-money has to do with the strike price as it relates to the current market value of the underlying stock. Calls are in-the-money if the market price is higher than the exercise (strike) price. Puts are in-the-money when the market price is less than the strike price. For the put to be "in-the-money", the market price of the stock would need to drop below the strike price of the option.
The record date for a dividend on XYZ stock has been set for Thursday, February 10. What is the last day an investor could purchase the stock and be entitled to receive the dividend?
Assuming regular way settlement, the last day the investor can conduct the trade is on Tuesday, February 8. The settlement date (trade date + 2 business days) is the date the buyer is the official owner, therefore the investor would need the trade to settle at the very latest on the record date, which is February 10. The ex-dividend date falls 1 business day prior to the record date.
Which of the following option contracts would a bearish investor seek?
Bearish investors anticipate that stock prices will fall. Put buyers (long put) are bearish since their options become more valuable as the stock goes down. Call writers (short call) are also bearish but that was not an answer choice. Call buyers (long call) and Put sellers (short put) are both bullish and expect the stock prices will rise.
For which two of the following do common stockholders have the right to vote?
Common stockholders have the right to vote for the board of directors and stock splits. They are not given the opportunity to vote on dividends, which includes cash dividends and stock dividends. Those decisions are made by the board of directors that they elect.
Which type of preferred stock allows the investor the opportunity to increase the overall value in their holdings as the company grows?
Convertible preferred stock allows the preferred shareholder to exchange their preferred shares for common shares to capture the value in their holdings as the company grows.
Which of the following securities is subject to currency risk?
Even though ADRs are dollar denominated, they are subject to currency risk since they represent ownership of a security that is not dollar denominated.
Investors do NOT vote on which of the following?
Investors NEVER vote on dividends; they are payable at the discretion of the board of directors. All other choices require a majority approval of shares.
If the purchase price for a particular stock has risen by 8% and the dividend payout on that stock has increased by 6%, what can be said about the current yield for that stock?
It has decreased The percent increase of the dividend has not kept pace with the percent increase in stock price; therefore, the current yield has declined.
Option Contract Buyer
Long Holder Has right to buy or sell Pays premium
Which stock valuation method is determined by supply and demand?
Market value is the most direct measurement of a stock's worth, since it represents the current liquidation or purchase price of the stock and is determined by supply and demand. Many other measures such as book value or par value are primarily used by accountants and may bear little or no relationship to a security's market value
What determines the number of votes a stockholder has?
Number of shares owned by the stockholder determines how many votes the stockholder has and is the same total number of votes under the statutory and the cumulative methods.
Ex-Dividend Date
On this day, the security begins to trade without the value of the dividend in the stock price. It is 1 business day before the record date (R-1). This date is set by FINRA.
A preferred share of stock was issued with a $100 par value and a fixed dividend rate of 5%. If interest rates increased to 7%, the market value of the 5% preferred stock will:
Preferred stock is interest rate sensitive. There is an inverse relationship between its value and interest rates. If interest rates are higher than the stated dividend, then the value would fall. The amount of the dividend does not change and is based on the stated percentage of par.
Regular way settlement for option contracts is:
Regular way settlement for option contracts occurs one business day after the trade date or T+1. There are two ways that option transactions can settle. The investor can simply take possession of the underlying security or ask for cash settlement. With a cash settlement, the investor takes the difference between the current market value and the strike price in cash. This is the only way that index options can settle. This avoids the need to take physical delivery of the asset. Equity options can settle either way.
An investor would sell an options contract to:
Selling option contracts is an income strategy used by portfolio managers to generate additional income in a flat market. To protect a stock position, an investor would need to buy an option contract as a hedge strategy.
Which of the following is an accurate description of an American Depositary Receipt (ADR)?
Shares of a foreign corporation held in a foreign branch of an American bank ADRs are created when a U.S. financial institution purchases large blocks of shares of a foreign corporation in a foreign country and deposits the securities in an overseas bank branch.
Treasury Shares
Shares that have been previously issued and repurchased by the company
Issued Shares
Shares that have been sold to investors
Option Contract Seller
Short Writer Receives premium payment Has obligation to buy or sell
Morris owns 400 shares of RVL, an exchange traded stock. RVL paid a 20% stock dividend on August 5th. On the day before the ex-dividend date, the stock closed at $20/share. What are the tax consequences of this event?
Stock dividends, like stock splits, do not increase an investor's holdings. They just redistribute holdings into more shares at a lower price per share. Morris owned 400 shares at $20/share before the ex-date, for a total value of $8,000. After the stock dividend, he owns 480 shares (20% more than 400), but the value of the shares was adjusted so that his total value remained at $8,000 (i.e., to $16.667/share). Therefore, stock dividends are not taxable. Morris will need to adjust his cost basis per share down to account for the new shares he has received.
Amanda owns 300 shares of ABC Inc. Recently, ABC issued 10 million shares of common stock and gave Amanda the ability to purchase some of the new shares prior to the public offering. This offering is known as:
Stockholders have the right to maintain their proportionate share of the companies in which they are part owners. This is accomplished through preemptive rights (often just called rights), which are the ability to purchase any newly issued shares before they are offered to the public. These shares are available at the subscription price. The subscription price is below the current market price of the stock to give the stockholders further incentive to exercise their rights. The percentage of the new shares that the stockholder has the right to buy is the same percentage of the company that he currently owns.
All the following regarding options is true except: JAviles
The buyer of an option is obligated to buy or sell the underlying security prior to the option expiration date Holder/Buyer/Long an option - Bought the option contract and has the right to buy or sell the underlying security but not the obligation to do so. Seller/Writer/Short an option - Sold the option contract and has an obligation to buy or sell the underlying security. Call Contract - Provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock, at the agreed (strike) price. Put Contract - Provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock, at the agreed (strike) price. Strike Price - The price the option will be exercised at. It is set at the time the option is written. Expiration Date - The last date the option can be exercised. Most options have a 9-month life. Once this date passes, the option is worthless.
Record Date
The date on which an investor must own the stock to receive the dividend. This date is set by the board of directors. Only "shareholders of record" will receive a dividend.
Declaration Date
The date on which the board of directors announces the company will pay a dividend to shareholders.
Payable Date
The date on which the company actually pays the dividend to the shareholders of record. This date is set by the board of directors and usually is a week or more after the record date so the company has sufficient time to ensure all shareholders entitled to receive the payment are accurately paid.
If the Quasinyx Corporation declares a dividend on August 8 to stockholders of record on Wednesday, August 23, on what date will the stock trade ex-dividend?
The ex-dividend date is the trade date minus 1 business day (T-1), therefore the ex-date is Tuesday, August 22. If the investor purchases the stock on or after the ex-dividend date, the investor is NOT entitled to receive the dividend.
(was wrong as of 1'7'19) Karen owns 200 shares of common stock in the Acme Corporation. Three new members are to be elected to the board of directors. Assuming that Acme uses statutory voting, how many votes may Karen cast for each of the three candidates?
The stockholder may cast one vote per share that she owns for each directorship position under the statutory method. Under the cumulative method, she has the same number of total votes (one vote per share owned times the number of directorship positions being voted on) but she may cast that total number of votes in any manner among the positions being voted on. For example, she could cast all her votes on one position, thereby forfeiting any vote on the remaining positions.
GARTH : A common stock is selling at $14.90 per share. The issuer's new product line has increased profits the last three quarters. As a result, the issuer's board of directors has increased dividends each of the last three quarters even though the stock price has stayed the same. The common stock's yield will:
The yield on common stock is computed by dividing the market price of common stock into the dividend. If the common stock price has not changed, but the dividend continues to increase, the yield will increase. For example, if the stock costs $14.90 and the dividend is $1, the yield is 6.7% ($1 divided by $14.90). If the stock stays at $14.90 and the dividend increases to $1.50, the yield is 10% ($1.50 divided by $14.90).
Which of the following voting methods gives smaller shareholders a better chance of gaining representation on the board of directors?
Under cumulative voting, small (minority) shareholders have a better chance of gaining representation on the board because the maximum number of votes is multiplied by the open seats
If an investor owns 100 shares of XYZ stock and XYZ pays a 10% stock dividend, the investor will:
When the board of directors declare a stock dividend, the investor will receive additional shares based upon how many shares the investor currently owns, and the percentage of dividend. In this case the investor owns 100 shares, a 10% stock dividend will result in an additional 10 shares for this investor. The investor cannot request cash instead of the additional shares.
Which of the following types of preferred stock pays dividends in arrears?
With cumulative preferred stock, any dividends which have been suspended are recorded on the books of the company. They will continue to accumulate over time. The accumulated dividends in arrears and current dividends must be paid before the common stockholders are entitled to receive any dividends.