Checkpoint Unit Exams
The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 was a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A) $6 B) $16 C) $12 D) $8
A) $6 Reasoning: Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share.
Ownership in a corporation is evidenced by holding shares of the company's A) common or preferred stock. B) common stock only. C) bonds with a first mortgage on the property. D) warrants.
A) common or preferred stock. Reasoning: If you have equity in a corporation, it means you have an ownership interest. Equity securities (common and preferred stock) represent ownership in a corporation. A mortgage bond is a debt security, and a warrant gives the holder the right to acquire equity but, in itself, is not equity.
In a portfolio containing common stock, straight preferred stock, convertible preferred stock, and adjustable-rate preferred stock, changes in interest rates would be most likely to affect the market price of the A) straight preferred stock. B) convertible preferred stock. C) adjustable-rate preferred stock. D) common stock.
A) straight preferred stock. Reasoning: Fixed-income securities, such as straight preferred stock, are the most sensitive to interest rates among the alternatives listed. Convertible preferred stock is influenced more by the common stock because it is convertible into the underlying security. Because the dividend rate on adjustable-rate preferred stock is usually tied to changes in interest rates, the price of this stock remains stable in the face of rising or falling rates.
A common stockholder's rights include all of the following except A) the right to determine the par value of the stock. B) preemptive rights. C) electing the board of directors. D) the receipt of dividends if declared by the board of directors.
A) the right to determine the par value of the stock. Reasoning: Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation.
Which of the following statements regarding nonqualified stock options (NQSOs) is correct? A) The NQSO is taxable to the recipient at the time of grant to the extent of the difference between the fair market value of the stock and the grant price. B) The NQSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price. C) Unlike incentive stock options, NQSOs are publicly traded. D) The exercise of NQSOs does not create taxable income.
B) The NQSO is taxable to the recipient at the time of exercise to the extent of the difference between the fair market value of the stock and the exercise price. Reasoning: The bargain element of an NQSO is taxed to the recipient as salary income at the time the option is exercised. Neither of the employee stock options is publicly traded.
One difference between common stock and preferred stock is that common stockholders A) own equity in the company. B) have voting rights. C) receive dividends when declared by the board of directors. D) have a priority claim on earnings.
B) have voting rights Reasoning: It is rare to find a preferred stock with voting rights and even rarer to find a common stock without them. Both receive dividends when, and if, declared by the board of directors, and these dividends are usually paid quarterly. Both are equity securities, and preferred has the prior claim.
One characteristic found in equity securities issued by a corporation is A) preemptive rights. B) limited liability. C) a history of keeping pace with inflation. D) cumulative dividends.
B) limited liability. Reasoning: Equity securities include common and preferred stock. Both have the benefit of limited liability; the investor can never be held liable for debts of the corporation. Only common stock has preemptive rights and the potential for growth to keep pace with inflation. It is preferred stock that can have the cumulative feature regarding its dividends.
KAPCO common stock is listed on the New York Stock Exchange, Inc. (NYSE). If an executive vice president of the company buys 400 shares of the company's stock on the NYSE, she A) may not sell until she leaves the company. B) may sell immediately subject to Rule 144 volume limitations. C) may sell under Rule 144 only after a six-month holding period. D) may sell immediately without restriction.
B) may sell immediately subject to Rule 144 volume limitations. Reasoning: If purchased in the open market, such as on the NYSE, the transaction is not a private placement, and the stock does not have a holding period restriction. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations under Rule 144.
For a profitable and rapidly growing firm, holders of preference shares are least likely to benefit from the firm's growth if the preference shares are A) convertible. B) participating. C) cumulative. D) common.
C) cumulative. Reasoning: Preferred stock shares, sometimes called preference shares, are cumulative if any dividends in arrears must be paid before the firm pays any common dividends. A profitable and rapidly growing firm is unlikely to be in arrears on its preferred dividends. Just as important, the return on those shares is fixed, and regardless of the growth in the company's earnings, the dividend will remain the same. Participating preferred shares may receive additional dividends if the firm's profits exceed a stated level. Convertible preferred shares can benefit from the firm's growth because of the ability to convert to common shares. The question is asking about preferred stock; do not make a silly error and choose common stock.
Investing in an emerging market mutual fund subjects the investor to all of the following risks except A) market volatility. B) currency fluctuations. C) liquidity. D) political instability.
C) liquidity. Reasoning: Although direct investment in emerging market securities would have liquidity risk, the benefit of doing so through a mutual fund is that, under federal regulations, the fund must redeem at NAV upon request.
When comparing restricted stock to nonrestricted stock, it is important to note that the restricted stock has a restriction placed upon its A) receipt of dividends. B) priority in liquidation. C) voting rights. D) resale.
D) Resale Reasoning: When a stock is restricted, the restriction applies solely to a time limit within which the stock cannot be sold. That restriction is found in Rule 144 of the Securities Act of 1933 and applies to unregistered or control stock.
The issuer of an ADR is A) a foreign branch of a foreign bank. B) the exchange on which the ADR is traded. C) a domestic branch of a foreign bank. D) a U.S. depositary bank.
D) a U.S. depositary bank. Reasoning: The stocks of most foreign companies that trade in the U.S. markets are traded as American depositary receipts (ADRs). U.S. depositary banks (domestic branches of U.S. banks) issue these stocks. Each ADR represents one or more shares of foreign stock or a fraction of a share. If you own an ADR, you have the right to obtain the foreign stock it represents, but U.S. investors usually find it more convenient to own the ADR.
The residual right of common shareholders refers to their right to A) vote in elections for the board of directors and in other important business decisions, such as changes to the charter. B) examine the corporation's annual reports and other reports, and take legal action if irregularities are found. C) receive all announced dividends in accordance with the number of shares held. D) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid.
D) claim company assets in bankruptcy after wages, taxes, creditors, and preferred shareholders have been paid. Reasoning: The residual right of common shareholders refers to their position in the event of bankruptcy.
An ADR is used to A) facilitate trading in U.S. securities in foreign markets by U.S. citizens living abroad. B) finance foreign trade in which U.S. citizens are engaged. C) reduce currency risk when investing in foreign securities. D) facilitate trading in foreign securities in U.S. markets by U.S. citizens living in the United States.
D) facilitate trading in foreign securities in U.S. markets by U.S. citizens living in the United States. Reasoning: American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors.
