Chapter 4 Custom Exam

XYZ Corporation has 2,000,000 shares of common stock authorized. The company has issued 1,000,000 common shares of which 200,000 shares are treasury stock. The company has earnings of $2.00 per share. The XYZ Corporation has repurchased: A) 200,000 shares B) 500,000 shares C) 800,000 shares D) 1,000,000 shares

A) 200,000 shares XYZ corporation has repurchased 200,000 shares. This is known as treasury stock. Treasury stock is previously outstanding stock that has been repurchased by a corporation.

A customer has an account with a discount broker-dealer that specializes in online trading. If the customer is being charged a commission, the firm is MOST likely acting in which of the following capacities? A) Agent B) Principal C) Market marker D) Underwriter

A) Agent A broker-dealer who charges customers a commission is acting as an agent or broker. A broker-dealer who charges customers a markup or markdown is acting as a principal or dealer.

Which TWO of the following activities would require special disclosure documents? Penny stock trading Trading in high-yield bonds Day trading Online trading A) I and III B) I and IV C) II and III D) II and IV

A) I and III Regulators have singled out penny stock investing and day trading as presenting significant risks that warrant providing special risk disclosure documents.

All of the following are characteristics of sponsored ADRs, EXCEPT: A) They have no currency risk. B) They're created with cooperation from the foreign issuer. C) They pay dividends in U.S. dollars. D) They're liquid securities.

A) They have no currency risk. Sponsored ADRs are created when a foreign company issues shares and puts them into a trust that's held at a U.S. bank. Shares of the ADR are then registered and listed on an exchange, which makes it easy for U.S. investors to buy and sell shares (i.e., ADRs are liquid). ADRs pay dividends to U.S. investors in U.S. dollars. However, dividends are originally paid in a foreign currency and then exchanged for U.S. dollars by the trust. Although this minimizes exchange rate fees for ADR owners, it doesn't eliminate foreign currency risk.

The federal securities regulation that provides rules for the secondary market is: AThe Securities Exchange Act of 1934 BThe Investment Advisers Act of 1940 CThe Securities Act of 1933 DThe Securities Investor Protection Act of 1970

AThe Securities Exchange Act of 1934 The Securities Exchange Act of 1934 establishes the rules for activities that are conducted in the secondary market. The two most recognized secondary markets are the New York Stock Exchange (NYSE) and Nasdaq. The Act of 1934 created the Securities and Exchange Commission (SEC) and gave it preeminent regulatory authority over domestic securities dealings in both the primary and secondary markets.

A common shareholder is not entitled to: AVote for the board of directors BReceive dividends if voted for by the board of directors CGive or sell shares to anyone she wishes Appoint officers of the corporation

Appoint officers of the corporation Shareholders have the right to vote for the board of directors, but not to appoint officers of the corporation.

A stock's price has risen due to an overall market increase. This increase in price is considered: A) A non-taxable capital gain B) A taxable capital gain C) An unrealized capital gain D) Amortization

C) An unrealized capital gain The increase in the stock's price is considered an unrealized capital gain or appreciation. A capital gain is only realized if an asset has increased in value and it is subsequently sold at that higher price.

A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7 dividend in 2012 and $8 in 2013. If the company wants to pay a common stock dividend in 2014, the cumulative preferred stockholders must first receive a dividend of: A) 0 B) $3 C) $9 D) $12

D) $12 The cumulative preferred stockholder should receive a yearly dividend of $9. Since it is a cumulative issue, any dividend that is not paid must be made up prior to a common dividend being paid. If a common dividend is to be paid in 2014, the cumulative preferred stockholders must first receive $12 ($2 for 2012 plus $1 for 2013 plus $9 for 2014).

Rule 145 applies to a(n): A) Stock split B) Stock dividend C) Adjustment in par value D) Merger or acquisition

D) Merger or acquisition Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

An individual purchased 100 shares of stock at $35 per share. The stock is now trading at $44 per share and the issuer decides to split the stock 2-for-1. After the split, the individual's cost basis per share will be: A) $17.50 B) $22.00 C) $35.00 D) $44.00

A) $17.50 A stock split or dividend results in an adjustment in the number of outstanding shares. As a result, the current market value is adjusted to reflect the increase or decrease in shares. The same change would be made to the cost basis of all positions held by investors. A 2-for-1 stock split results in twice as many shares, with the values being adjusted to 1/2 of what they were before the split. The individual's stock would have an adjusted cost basis of $17.50 = $35 x 1/2.

A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year, but will be paid this year, how much will the preferred stockholder receive? A) $5 B) $10 C) $15 D) $20

A) $5 The preferred stock is noncumulative, which means that if the dividend is not paid, it does not accumulate to the next year. Therefore, the preferred stockholder will receive only $5 for this year.

ABC Corporation's charter authorized the issuance of up to 1,000,000 shares of stock. The company has issued 100,000 shares, but has 5,000 shares of treasury stock. How many shares of ABC's stock are outstanding? A) 95,000 B) 100,000 C) 105,000 D) 900,000

A) 95,000 The number of shares outstanding is equal to the number of shares issued, minus any treasury stock (stock the company has bought back in the open market). 100,000 shares issued minus 5,000 shares of treasury stock equals 95,000 shares outstanding.

Which of the following choices does NOT require a broker-dealer to make a change in the cost basis of stock held in a customer's account? A) A cash dividend B) A stock dividend C) A forward stock split D) A reverse stock split

A) A cash dividend A cash dividend does not require the broker-dealer to make a change in the cost basis of stock held in a customer's account. Stock dividends and stock splits, forward or reverse, result in a change in the number of shares held in the customer's account. As a result, the cost basis per share would change accordingly.

For each penny stock transaction, a broker-dealer must provide the customer with all of the following items, EXCEPT: A) A risk disclosure document on penny stocks B) The current quotation for the security C) The compensation the broker-dealer will receive for the transaction D) The compensation the registered representative will receive for the transaction

A) A risk disclosure document on penny stocks A broker-dealer must provide the customer with a risk disclosure document on penny stocks once, prior to effecting the first transaction for the customer. The other items must be disclosed in connection with each transaction.

Math Industries is seeking to maximize shareholder value by spinning off its Algebra Analytics Division. If this action is undertaken, Math Industries' current shareholders would own stock in: A) Both companies with no immediate tax consequences B) Both companies with capital gains due on the spinoff C) The parent company and would receive a special dividend in the form of the spinoff D) The parent company and would receive a special capital gains distribution from the spinoff

A) Both companies with no immediate tax consequences In a spinoff, each shareholder retains shares in the parent corporation and is also granted shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers with the expectation that the combined valuation of the two entities will be greater than that of the single entity.

ABC Corporation has issued a call notice on its 5% convertible preferred stock. The preferred stock, which is convertible at $20, is being called at $110 and is currently trading at $111. If ABC's common stock is currently trading at $23, what should an RR recommend to an investor who holds the preferred stock? A) Convert the preferred stock into common stock and sell the common stock B) Sell the preferred stock at the current market price C) Allow the preferred stock to be called D) Continue to hold the preferred stock

A) Convert the preferred stock into common stock and sell the common stock To determine the best choice for the investor, let's evaluate each possibility separately. 1. The preferred stock may be converted into five shares of common stock ($100 par value ÷ $20 conversion price). The five common shares may then be sold at the market price of $23, which provides the investor with a total of $115. 2. If the stock is sold, the investor will receive the current market price of $111. 3. If the stock is called, the investor will receive the call price of $110. 4. The investor is not able to continue holding the preferred stock since it is being called. By converting and selling the common stock, the investor will be provided with the greatest amount of proceeds.

Which of the following statements is NOT a characteristic of an electronic communication network (ECN)? A) ECNs act as market makers B) ECNs permit trading electronically C) ECNs permit trading anonymously D) ECNs permit trading after-hours

A) ECNs act as market makers Electronic communication networks allow market participants to display quotes and execute transactions. These participants are referred to as subscribers and pay a fee to the ECN to trade electronically through the system. ECNs allow subscribers to trade after-hours, and to quote and trade without disclosing their names (anonymously). ECNs act in an agency capacity and will not buy or sell for their own account as with a market maker.

Which TWO of the following activities are normally functions of the investment banking department of a broker-dealer? I Working with issuers to raise capital II Selling securities to institutional investors III Assisting companies with mergers and acquisitions IV Making a secondary market for new issues A) I and III B) I and IV C) II and III D) II and IV

A) I and III A corporation that wishes to raise capital will typically employ the services of an investment banker and engage in an underwriting process. Investment bankers provide financing for corporations by bringing an issue, whether debt or equity, to market for the issuer. The investment banking department will also assist companies with mergers and acquisitions. Investment bankers do not make a secondary market for new issues or sell securities to institutional investors.

A corporation intends to raise additional funds from its existing shareholders rather than use the services of an underwriter. The corporation is engaging in a: A) Rights offering B) Secondary distribution C) Special offer D) Private placement

A) Rights offering The corporation is engaging in a rights offering. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities, thereby saving the corporation the costs involved in using an underwriter.

The method of voting which gives stockholders with substantial holdings a greater degree of voting power over those stockholders who own fewer is: A) Statutory voting B) Cumulative voting C) Voting by proxy D) Special majority voting

A) Statutory voting The method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is referred to as statutory voting. With statutory voting, each stockholder has one vote, per share, per voting issue. Cumulative voting allows stockholders to concentrate all of their votes on one director's position, which increases the power of smaller shareholders.

Which of the following transactions are NOT exempt from the penny stock disclosure rules? A) Transactions with established customers B) Transactions that are not recommended by the broker-dealer C) Transactions with institutional accredited investors D) Tranasctions by a broker-dealer whose commissions and markups from penny stocks do not exceed 5% of its total commissions and markups

A) Transactions with established customers Securities sold in the following transactions are NOT subject to the penny stock disclosure rules. Transactions with an institutional accredited investor Private placements Transactions with the issuer, officers, directors, general partners, or 5% owners Transactions that are not recommended by the broker-dealer Transactions by a broker-dealer whose commissions and markups from penny stocks do not exceed 5% of its total commissions and markups While transactions with established customers are exempt from the account approval requirements, they are not exempt from the penny stock disclosure rules.

A convertible preferred stock is convertible at $10, pays a 4% annual dividend, is callable at $110, and is trading at a current market price of $116. Based on these details, what is the parity price of the common stock? A) $10.00 B) $11.60 C) $11.00 D) $12.00

B) $11.60 The first step in determining the parity price for a convertible security is to find the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The conversion ratio is calculated by dividing the par value of the preferred stock ($100) by the conversion price ($10). As a result, the stock is convertible into 10 shares of common stock ($100 ÷ $10). To find the parity price of the common stock, the current market price of the preferred stock ($116) is divided by the conversion ratio (10 shares). Therefore, the parity price is $11.60 per share.

An investor buys 200 shares of TDX at $20 per share. TDX declares a 10% stock dividend. The investor's cost basis per share for tax purposes would be: A) $18.00 B) $18.18 C) $22.00 D) $40.00

B) $18.18 An investor's cost basis must be adjusted downward upon receiving additional shares when a stock dividend is paid. In this example, the investor receives 20 additional shares (10% x 200). The investor's new cost basis per share would be found by dividing the initial cost of $4,000 by the total number of shares now owned (220). This equals a cost basis per share of $18.18.

Harriet purchased 1,000 shares of the Overseas Growth Fund several years ago for $9 per share. The shares are now worth $22.50 each. Harriet gives the shares to her nephew Bob as a college graduation present. What is Bob's cost basis for the shares? A) 0 B) $9 C) $22.50 D) The NAV on the day Bob sells the shares

B) $9 In general, the cost basis of gifted shares is equal to the donor's basis at the time of the gift. In this case, Harriet's basis is $9 per share, so this becomes Bob's basis as well. Note that the rule related to inherited shares is different. The basis of inherited shares is generally the value of the shares at the time of the decedent's death.

On February 13, an investor sold 700 shares of ABC stock for a loss. On the next day, the investor purchased 3 ABC February calls. Which of the following statements is TRUE? A) The entire loss from the sale of stock will be disallowed B) A portion of the loss from the sale of the stock will be disallowed C) The loss from the sale of stock will not be affected D) Any future loss on the options will be disallowed

B) A portion of the loss from the sale of the stock will be disallowed The wash sale rule states that all (or part) of a loss will be disallowed if the same (or substantially the same) security is purchased within 30 days (before and after) of the sale. The purchase of a call option on a security is considered substantially the same as the security, thus causing a wash sale. In this question, the purchase of 3 call options will disallow the loss on 300 of the 700 shares that were sold for a loss on February 13.

The combination of two companies into one company is accomplished with all of the following, EXCEPT: A) A merger B) A spinoff C) A takeover D) An acquisition

B) A spinoff A merger, takeover, or acquisition is the combination of two companies into one. A merger is generally between companies of similar size. In an acquisition or takeover, a larger firm typically purchases a smaller firm. A spinoff is the separation of a division or subsidiary from its parent to create a new corporate entity.

The separation of a division or subsidiary from its parent to create a new corporate entity is considered: A) A merger B) A spinoff C) An acquisition D) A violation of SEC rules

B) A spinoff The separation of a division or subsidiary from its parent to create a new corporate entity is considered a spinoff. On the other hand, a merger or acquisition is the combination of two entities.

An investor owns a $100 convertible preferred stock that is convertible into 2 shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at 105. What should the investor do? A) Sell the preferred stock B) Allow the preferred to be called C) Convert to common and sell the common D) Wait for a more favorable call

B) Allow the preferred to be called The value of the preferred ($104) equals the value of converting to common (2 shares at $52 per share). The investor will receive the greatest amount ($105) by allowing the preferred to be called.

Which of the following statements is NOT TRUE regarding the initial and continued listing requirements of Nasdaq? A) The company is subject to corporate governance rules B) An electronic communication network (ECN) may be included to determine the number of market makers for an issue C) The bid price may not be below a minimum amount D) A financial test of the publicly held shares' market value must be satisfied

B) An electronic communication network (ECN) may be included to determine the number of market makers for an issue Nasdaq has specific requirements that must be satisfied in order to obtain initial listing and maintain continued listing. While different requirements exist for Global Select, Global and Capital Market listings, each tier is subject to corporate governance rules. Additionally, the bid price must not fall below a minimum amount (for a specified period of time) and a financial test of the publicly held shares' market value must be satisfied. Electronic communication networks (ECNs) are not included when determining the number of market makers for the initial or maintenance listing requirements.

Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE? A) Cathy has a short-term gain of $7,000 and Bob has a short-term gain of $15,000 B) Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 C) Cathy has a short-term gain of $36,000 and Bob has a short-term gain of $44,000 D) Cathy has a long-term gain of $36,000 and Bob has a long-term gain of $44,000

B) Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 In the case of inherited securities, the value of the securities is determined at the time of death. The heirs are always considered to have long-term holding periods. The capital gains or losses for Bob and Cathy are found as follows: The securities at the time of death were valued at $82,000. Bob and Cathy were willed equal amounts of $41,000 each, establishing a cost basis for both of $41,000. To determine the gain, compare the cost basis to the sales proceeds. Cathy sold her stock for $48,000, creating a $7,000 gain, while Bob sold his stock for $56,000, creating a $15,000 gain.

An individual is interested in an investment that offers annual income, has the potential of appreciating in value if interest rates decline and, in the event that the issuer fails to make a payment, having the missing amount added to future distributions. For this investor, which of the following securities is the most suitable? A) Callable preferred stock B) Cumulative preferred stock C) Participating preferred stock D) Convertible preferred stock

B) Cumulative preferred stock Individuals generally purchase preferred stock for income. As with any security that pays a fixed rate, there is the potential for appreciation if interest rates decline. There are several types of preferred stock. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Convertible preferred stock allows the owner to convert the stock into a fixed number of common shares. Callable preferred stock allows the issuer to retire (call) the stock in at a predetermined price.

A method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is: A) Statutory voting B) Cumulative voting C) Voting by proxy D) Special majority voting

B) Cumulative voting A method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is statutory voting. Under statutory voting, each stockholder has one vote per share, per election. For example, if a corporation is electing three directors, and a shareholder owns 100 shares, the shareholder could cast 100 votes in each election. Cumulative voting permits shareholders to concentrate their votes for one favored candidate. For example, if a corporation is electing three directors and a shareholder owns 100 shares, that shareholder could cast 300 votes for one director, potentially having a larger influence on that one election.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock? The securities do not have a fixed maturity date The price of these securities is more volatile than common stock The dividend will be paid annually The price will fluctuate based primarily on changes in interest rates A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

How would preferred stock most likely be affected by an increase in interest rates? A) Its market value would increase B) Its market value would decrease C) Its dividend would decrease D) There would be no effect

B) Its market value would decrease Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.

The Pink Marketplace displays: A) All trades involving OTC equities that occurred on the previous day B) The market makers for stocks that are not listed on either the NYSE or Nasdaq C) The designated market maker assigned to each stock that trades on the NYSE D) The market makers for stocks that are listed on Nasdaq

B) The market makers for stocks that are not listed on either the NYSE or Nasdaq The Pink Marketplace lists market makers and their bid and asked quotations for over-the-counter stocks (i.e., OTC equities). These OTC equities are not listed on either the NYSE or Nasdaq.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)? A) They can be used only by retail investors. B) They can be used by investors who want to trade anonymously. C) They can be used only by institutional investors. D) They can be used by clients who don't want to use a broker-dealer.

B) They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

Ralph Generous has a cost basis of $15 per share in the Spartan Growth Fund, which has a current NAV of $27. Mr. Generous gives his fund holdings to his daughter and she sells the fund at $32. The gain upon the sale is: A) $5 B) $15 C) $17 D) Avoided, because gifts are tax-free

C) $17 The daughter has a gain of $17 upon the sale of the Spartan Growth Fund because she assumed her father's basis of $15 when the gift was given.

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25 and has a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, the cost basis per share for the newly acquired common stock is: A) $27.75 B) $27.50 C) $26.50 D) $28.00

C) $26.50 To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50). Any future gains or losses on the sale of the common stock will be calculated by using the basis of $26.50.

A client has inherited stock from a relative. The relative had originally purchased the stock at $11 per share, which had a current market value of $46 per share at the time of the inheritance. If the client sells that stock at some later date for $50 per share, what cost basis will be used to determine the gain or loss? A) $11 B) $35 C) $46 D) $50

C) $46 When securities are inherited, the cost basis is stepped up to the current market value at the time of death. In this case, it is $46. In addition, the inherited security will be considered to be held long term regardless of the holding period of the recipient.

Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability? A) $680,000 B) $686,800 C) $697,000 D) $714,000

C) $697,000 If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).

On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is: A) 24 B) 27 C) 30 D) 31

C) 30 When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.

When trading equity securities, the term dark pool is BEST defined as trading: A) Prior to an exchange's normal market hours B) After an exchange ends its normal market hours C) Between investors, allowing them to buy and sell securities anonymously without quotes being displayed D) Between investors, allowing them to buy and sell securities anonymously with quotes being displayed

C) Between investors, allowing them to buy and sell securities anonymously without quotes being displayed A dark pool is a source of liquidity for large institutional investors and high-frequency traders; however the system doesn't disseminate quotes. The system can be operated by broker-dealers or exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The objective is to allow these investors to trade with the least amount of market impact and with low transaction costs. Some dark pools provide matching systems and can also allow for participants to negotiate prices.

A customer wishes to establish a tax loss and sells 100 shares of XYZ Corporation. The loss would not be allowed if the customer, within 30 days: A) Bought an XYZ Corporation put B) Sold an XYZ Corporation straddle C) Bought an XYZ Corporation call D) Sold an XYZ Corporation call

C) Bought an XYZ Corporation call The IRS will not allow the loss if the same security or any security convertible into the same security is repurchased within 30 days of the sale. The customer must wait until the 31st day to buy back the security or its equivalent. In this example, the only choice given that could be converted into 100 shares of XYZ Corporation would be a call on XYZ Corporation. The loss would not be allowed if the customer, within 30 days, bought an XYZ Corporation call. This is known as a wash sale.

An investor wishes to establish a tax loss but still wants to own the same security. The customer sells the security and repurchases it two weeks later. The tax loss is: A) Established B) Recognized C) Disallowed D) Amortized

C) Disallowed The tax loss is disallowed. The customer must wait more than 30 days before repurchasing the same security or any security convertible into the security (a right, option, warrant, or convertible bond). The customer repurchased the same security two weeks later. This is considered a wash sale for tax purposes by the IRS and the loss is disallowed.

Which TWO of the following securities will MOST likely be subject to a withholding tax? I A bond issued by a U.S. company but sold to U.S. investors II A bond issued by a foreign company but sold to U.S. investors III Stock issued by a foreign company but sold to U.S. investors IV Stock issued by a U.S. company but sold to U.S. investors A) I and III B) I and IV C) II and III D) II and IV

C) II and III Choice (II) is an example of a Yankee bond and choice (III) is an example of an ADR. Dividends and interest paid to a U.S. investor on foreign securities may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends and/or interest that were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.

ABC Corporation has issued a new cumulative, convertible preferred stock. The provisions of the new issue provide for which TWO of the following choices? I Dividends would be paid on the preferred stock after any dividends are allowed to be paid on the common stock II Omitted dividends will accumulate and must be paid before any dividends are allowed to be paid on the common stock III The stock may be converted into common stock at any time by the preferred stockholder IV ABC Corporation may call the stock at its par value before the call protection period has expired A) I and III B) I and IV C) II and III D) II and IV

C) II and III Dividends on preferred stock are paid before, not after, dividends are paid on common stock. Cumulative refers to omitted dividends that will accumulate and must be paid prior to any common stock dividends being paid and these securities may be converted into common stock at any time. Preferred stock that is convertible usually has a call feature, but the preferred stock may not be called until the call protection has expired.

If an investor is anticipating that a company will have very high earnings in the current year, which of the following types of preferred stock is the most suitable? A) Non-cumulative B) Cumulative C) Participating D) Convertible

C) Participating Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these stockholders may receive more than the stated amount based on the profits of the issuing company. In contrast, the benefit of cumulative preferred stock is that, if the issuer intends to pay its common stockholders a cash dividend after having not paid dividends, it allows the owner to add up all of the unpaid dividends to a future payment. Cumulative preferred stock may be beneficial during a period in which the company is unable to pay the full dividend since the owner is able to accrue the missing payments. Convertible preferred can be converted into a fixed number of common shares of the same issuer and tends to perform better when the market price of the common stock is appreciating. Lastly, non-cumulative preferred stock is limited to simply paying its stated dividend.

An investor has made the following purchases of XAM stock: Shares bought at $39 in May 2013 Shares bought at $56 in September 2013 Shares bought at $36 in January 2014 Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability? A) Sell from the shares that were purchased in May 2013 B) Sell from the shares that were purchased in September 2013 C) Sell from the shares that were purchased in January 2014 D) Sell from the shares that were purchased in June 2014

C) Sell from the shares that were purchased in January 2014 When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. Selling from the shares that were purchased in May 2013 results in a 12-point long-term gain. Selling from the shares that were purchased in September 2013 results in a long-term loss, not a gain. Selling from the shares that were purchased in January 2014 results in a 15-point long-term gain. Selling from the shares that were purchased in June 2014 results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2014 will result in the same gain as the sale of shares that were purchased in June 2014, the tax liability will be lower.

All of the following statements are TRUE regarding ADRs, EXCEPT: A) The securities are priced in dollars B) The instrument's price reflects the value of the underlying stock and currency fluctuations of the underlying issuer's host country C) The increased trading volume and enhanced liquidity in the U.S. markets lead to prices that are virtually identical to those of the underlying stock in the issuer's host country D) The securities may be listed on an exchange, and may be sponsored by the company

C) The increased trading volume and enhanced liquidity in the U.S. markets lead to prices that are virtually identical to those of the underlying stock in the issuer's host country. ...................................................................American Depositary Receipts (ADRs) are priced in dollars and are sensitive to the value of the stock and the fluctuations of the currency in the underlying issuer's host country. ADRs may be listed on an exchange and may be sponsored by the company (issuer). The trading volume of ADRs varies considerably among issues. Securities that are not heavily traded may have significant disparities between the price of the ADR and the underlying stock.

John Trask, one of your customers, is long 100 shares of Plantation, Inc. 6% cumulative preferred stock ($100 par). Over the last three years, Plantation, Inc. has had negative net income and Mr. Trask hasn't received any dividends during that time period. How much must Mr. Trask receive in dividend income this year before common stockholders can receive a cash dividend? A) $6 B) $24 C) $600 D) $2,400

D) $2,400 Even though the stated dividend is 6%, the Board of Directors must still declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and therefore no common dividends could be paid. Currently, there is $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to Mr. Trask before a dividend can be paid to common shareholders. Add the $600 that Mr. Trask would need to be paid for this year to the $1,800 from past years and $2,400 must be paid to him before a common dividend can be paid.

An individual received $500 in dividends from the common shares that she owns of an oil company. How much of this dividend income is subject to taxation? A) 0 B) $350 C) $400 D) $500

D) $500 Under current tax law, all cash dividends that individuals receive are fully taxable.

On June 5, 2013, an investor purchased 100 shares of ABC at 20. On November 10, 2013, he purchased an additional 100 shares of ABC at 12. On January 20, 2014, he sold 100 shares of ABC at 15. For tax purposes, he would have reported a: A) $300 capital gain in 2013 B) $300 capital loss in 2014 C) $500 capital gain in 2014 D) $500 capital loss in 2014

D) $500 capital loss in 2014 In this question, the investor has two positions in ABC stock. Each was purchased at different times and at different prices. When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares he is selling, the Internal Revenue Code requires the use of the FIFO method. Since the investor did not identify the shares sold, it is assumed that the first shares purchased (at 20, in June) were the shares sold. Therefore, the investor would have reported a loss of $500 in 2014.

Windsor Corporation has 7,000,000 shares of common stock ($.01 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price is $20. The market capitalization of Windsor Corporation's common stock is: A) $4,500,000 B) $5,000,000 C) $7,000,000 D) $90,000,000

D) $90,000,000 Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, and restricted shares held by insiders, but does not include treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at a $20.00 market price for a total of $90,000,000.

A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. Each existing share receives one right. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would she need to buy 100 new shares of stock? A) 95 B) 100 C) 350 D) 950

D) 950 The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights. (10 rights x 100 shares = 1,000 rights.) The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 950 rights.

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: A) $28 B) $55 C) The same price as before the notice appeared D) A price near $60

D) A price near $60 Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).

Series K preferred stock is suitable for which of the following investors? A) An investor who is seeking a fixed rate dividend for the life of the security B) An investor who is seeking a floating rate dividend for the life of the security C) An investor who is seeking capital appreciation if the value of the common stock increases D) An investor who is seeking a high fixed dividend for a period of time followed by a floating rate dividend

D) An investor who is seeking a high fixed dividend for a period of time followed by a floating rate dividend Series K preferred stock has the following characteristics: It is issued by a financial service company It has no maturity date It pays a fixed rate for a period and then switches to a floating rate (usually based on LIBOR) It's dividend is non-cumulative and it may not carry voting rights It is callable at the option of the issuer Series K preferred stock is suitable for an investor who is seeking a high fixed dividend for a period followed by a floating rate dividend. An investor who is seeking capital appreciation based on the increasing value of the common stock should consider convertible preferred stock, not K shares.

An established customer has purchased penny stocks through a broker-dealer on five occasions. When making future recommendations to the customer regarding these securities, the broker-dealer must: A) Obtain a written statement from the customer for each trade B) Have the customer sign a suitability statement for each trade C) Have the trades preapproved by a principal D) Be sure that the recommendations take into account the customer's investment objectives

D) Be sure that the recommendations take into account the customer's investment objectives The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to existing customers who have maintained an account with a broker-dealer for more than one year or have previously engaged in three or more transactions involving penny stocks. All recommendations to a customer should take into account the customer's investment objectives.

Which of the following shares would be paid a dividend if the common stock were paid a dividend? I Cumulative preferred II Convertible preferred III Participating preferred A) I only B) I and II only C) II and III only D) I, II, and III

D) I, II, and III Dividends on preferred stocks must be paid prior to any common stock dividends. In this question, you are told that dividends were already paid to common stockholders. Therefore, all preferred stockholders must have been paid a dividend. Convertible preferred stock is convertible into common stock at a specified price; participating preferred stock gives the holder the right to participate in any extra dividends that are paid to common stockholders; and the holder of cumulative preferred stock will be entitled to any dividends that have been omitted prior to a current dividend payment.

One of your investment banking clients has a significant amount of cash on hand. The client has sought your firm's advice regarding income-producing equity investments. Which TWO of the following investments pay a dividend but are NOT eligible for the corporate dividend exclusion? Common stock A money-market fund Preferred stock A real estate investment trust A) I and III B) I and IV C) II and III D) II and IV

D) II and IV Corporations are allowed an exclusion on dividends received from investments in common and preferred stock. Real estate investment trusts (REITs) make distributions in pretax dollars. The payout from a REIT normally results from collections of rent or mortgage interest. Money-market fund dividends are distributions of interest earned on short-term debt securities.

Which TWO of the following securities would be MOST suitable if interest rates are expected to rise? Collateralized Mortgage Obligations A bond with short-term maturities Preferred stock with a fixed dividend Adjustable-rate preferred stock A) I and III B) I and IV C) II and III D) II and IV

D) II and IV If interest rates are expected to rise, the most suitable investments would be those that can be reinvested quickly to take advantage of rising rates, or variable or adjustable-rate securities. Bonds with short-term maturities can be reinvested in bonds quickly with higher rates, and the dividend on adjustment-rate preferred stock would increase since the dividend paid is based on LIBOR or another rate that quickly reacts to changing interest rates.

A client owns 3,000 shares of stock in a company headquartered outside the U.S. The client receives a cash dividend and tax is withheld by the country where the company is located. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client? I The dividend received is treated as a return of capital II The taxes paid may be used as a credit III The dividend paid is exempt from taxes IV The taxes paid may be used as a deduction A) I and III B) I and IV C) II and III D) II and IV

D) II and IV U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income or may be applied as a credit against U.S. income tax.

Which of the following is NOT a characteristic of preferred stock? A) It has a fixed dividend B) The board of directors must declare the dividends C) It has a dividend that is not guaranteed D) It carries voting rights

D) It carries voting rights The board of directors must declare dividends for both common and preferred stock. Neither common nor preferred stockholders are guaranteed a dividend. Preferred stock normally has a fixed dividend. Preferred stock does not have voting rights, only common shares may vote.

A special disclosure document may be required for investing in: A) Municipal bonds B) Convertible bonds C) Mutual funds D) Penny stocks

D) Penny stocks A special disclosure document may be required if a broker-dealer will be executing transactions for a customer in penny stocks. Under SEC rules, a penny stock is generally defined as an equity security with a bid price of less than $5.00, which is not listed on an exchange (e.g., the NYSE or Nasdaq).

Ms. Jones reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters If Ms. Jones currently owns 87 shares of the preferred stock of the XYZ Corporation, how many additional shares can she subscribe to and at what cost? A) 8.7 shares plus $91.35 B) 9 shares plus $91.35 C) 9 shares plus $94.50 D) Preferred stockholders are not permitted to participate in a rights offering

D) Preferred stockholders are not permitted to participate in a rights offering Preferred stockholders are not permitted to participate in a rights offering. Pre-emptive rights are only made available to common stockholders. By participating in rights offerings, common stockholders are able to maintain their percentage of ownership.

For which of the following circumstances is there a required tax payment? A) Unrealized gain B) Realized loss C) Return of capital D) Realized gain

D) Realized gain Taxes are paid on realized capital gains; however, unrealized capital gains or losses (paper profits or losses) have no impact on the investor's tax situation. Capital or realized gains are generated when an investment is sold for a greater value than its cost basis. Return of capital occurs when an investor receives a portion of her original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.

An individual purchases 600 shares of BAZ preferred stock. One week later the stock pays a dividend of $1.20 per share and the investor sells the stock the next day. For tax purposes, how will the dividends be taxed? A) 50% of the dividend will be tax-exempt and the remainder will be taxed as ordinary income B) 50% of the dividend will be tax-exempt and the remainder will be taxed as a capital gain C) The dividend will be taxed at long-term capital gains rates D) The dividend will be taxed as ordinary income

D) The dividend will be taxed as ordinary income Currently, dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at a maximum rate of 20%. This is the same maximum tax rate as long-term capital gains. Since the individual held the stock less than the 60-day period, the dividend is taxed as ordinary income. The corporate dividend exclusion allows a corporation to exclude from taxation 50% of the dividends it receives from other corporations.

An investor would have the right to buy the stock of a corporation for the longest period of time by purchasing a: A) Right B) Call option C) Put option D) Warrant

D) Warrant A warrant is the right to purchase a fixed number of shares, at some future time, at a fixed price. This is also true of rights and call options but warrants may be exercised over a longer period of time. A put option is the right to sell securities at a fixed price within a fixed period of time.

A corporation is voting on several new directors. A customer who cannot attend the meeting to vote in person: A) Will receive a proxy to vote, if requested B) Can verbally assign the right to vote to another individual C) Can only vote in person D) Will receive a proxy to vote, or sign over the vote to another person

D) Will receive a proxy to vote, or sign over the vote to another person A corporation must notify its shareholders of upcoming elections by distributing proxies. If shareholders cannot vote in person, they can vote by proxy or they can sign the vote over to another person.