Equities Series 7

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XYZ Company has issued 10%, $100 par cumulative preferred stock. Two years ago, XYZ omitted its preferred dividend. Last year, it paid a preferred dividend of $5 per share. This year, XYZ wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A. $5 B. $15 C. $20 D. $25

The best answer is D. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be paid). The stated dividend rate on the preferred is 10% based on $100 par. Two years ago the entire dividend was omitted, so $10 per share must be paid. Last year, the corporation only paid $5, so there is another $5 that must be paid. Also, this year's dividend of $10 must be paid. The total dividend that must be paid is $25 per preferred share before a common dividend can be paid.

Cumulative voting is considered to be an advantage as it: I allows a proportionate voting weight II allows a disproportionate voting weight III is considered to be an advantage for the smaller investor IV is considered to be an advantage for the larger investor A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Cumulative voting allows a disproportionate voting weight to be placed on selected directors who are up for election. This is considered to be advantageous for the smaller investor, who wishes to have a specific director (or directors) elected.

A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. Once the notice of call has been circulated, it can be expected that: A. the number of common shares outstanding and earnings per share will remain the same B. the number of common shares outstanding will remain the same and earnings per share will decrease C. the number of common shares outstanding will increase and earnings per share will remain the same D. the number of common shares outstanding will increase and earnings per share will decrease

The best answer is D. The economics of the situation are forcing preferred shareholders to convert to common. If the preferred shares are tendered at the call price, the owner receives $100 per share. If the preferred shares are sold at the current market price, the owner receives $102 per share. Since each preferred share is convertible into 1.4 common shares, the short sale of 1.4 common shares will yield 1.4 x $75.50 = $105.70. The preferred can then be converted to common to cover the short position. Thus, conversion is the best option for the preferred shareholders. If the preferred shareholders convert, the number of common shares outstanding will increase causing earnings per common share to become diluted.

A company's common stock is selling in the market at a "multiple" of 15. If the market price of the common stock is currently $15, what is the earnings per share? A. $.10 B. $.15 C. $.30 D. $1.00

The best answer is D. When a stock is selling at a "multiple" of 15, this means that the market price is 15 times the current earnings per share. Since the market price is at $15 and the P/E ratio is 15, earnings per share is $1.00.


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