Equity Securities - Practice Exam

A corporation that issued several types of securities is being liquidated. Investors who own which of the following securities will have the most junior claim to company assets? A) Common stock B) Convertible bonds C) Preferred stock D) Collateral bonds

A) Common stock Common stock has the most junior claim of the choices listed. Common stock has a "residual" claim on company assets during liquidation, meaning that holders of common stock are lowest on the list of those receiving a portion of company assets.

Which would NOT be considered a characteristic of a growth stock? A) Stock price fluctuates within a narrow range B) High price/ earning ratio C) Low dividend payout ratio D) Low dividend yield

A) Stock price fluctuates within a narrow range Growth Stock prices may fluctuate widely and are known for their volatility. Therefore, it is incorrect to state "fluctuates within a narrow range." The other characteristics are true: growth stocks pay little, if any, dividends and their price/earning ratios tend to be very high.

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.

A) They are issued as short-term instruments. Warrants are NOT issued as short-term instruments. Warrants are issued in conjunction with preferred stock or bond issues. They allow the investor to purchase common stock for a fixed price which is higher than the market price when the warrants were issued. It would be expected that the market price of the stock will rise over time, thus making the fixed price on the warrant a good deal. Some warrants have a definite expiration date, while others are good until exercised. They can be freely traded on the exchanges.

Mortgage Real Estate Investment Trusts generally invest in which of the following? A) properties handled by developer or builders B) income producing properties C) residential mortgage loans D) oil and gas properties

A) properties handled by developer or builders Mortgage Real Estate Investment Trusts lend money to builders and developers and then pass the income on to shareholders.

Which of the following is NOT a characteristic of treasury stock? A) Does not have voting rights B) Considered authorized, issued, and outstanding stock C) Does not receive dividends D) Appears on the balance sheet as a deduction from issued stock

B) Considered authorized, issued, and outstanding stock Treasure stock is not classified as outstanding stock. The other choices are characteristics of treasure stock.

Under Federal Tax Laws, a corporation can pay dividends in all of the following EXCEPT: A) Cash B) Tax Credits C) Products D) Stock

B) Tax Credits Cash and stock dividends are the most common types of dividends. Products, although not common, can also be used as a dividend. Tax credits are not allowed.

Equity Real Estate Investment Trusts will usually invest in which of the following? A) Properties in oil and gas B) income producing properties C) residential mortgage loans D) public municipal facilities

B) income producing properties Equity Real Estate Investment Trusts will generally invest in income producing properties such as apartment buildings.

A change in interest rates would most drastically affect the market values of A) utility stocks and blue chip stocks B) utility stocks and preferred stocks C) blue chip stocks and preferred stocks D) blue chip stocks and growth stocks.

B) utility stocks and preferred stocks. The two types of stock that would be most affected by interest rate changes are utility and preferred stocks. utilities are highly leveraged, meaning the company takes on a high amount of debt. This means that a change in rates can dramatically securities, so the fixed dividend percentage tied to a preferred stock is directly going to be affected by a change in interest rates (it functions in a very similar manner to the coupon rate of a bond). Blue chip stocks and growth stocks can be affected by rate changes, but less so in comparison to the utilities and preferred stocks.

Compared with owning corporate stock, a person investing in a limited partnership would normally receive which of the following? A) A much greater management role in the business B) Much greater investment security C) A more direct share in profits and losses D) Much greater liquidity

C) A more direct share in profits and losses Investing in a limited partnership, normally you would receive a more direct share in profits and losses, because the income and expenses flow through to the Limited Partners.

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 bonds rated AAA.

C) Common stock. 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.

Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)? A) Risks associated with changes in inflation B) Risks associated with changes to legislators and political climate C) Risks associated with the call of such securities by the issuers D) Risks associated with fluctuations in currency exchange rates

C) Risks associated with the call of such securities by the issuers ADRs are not normally issued in callable form, so the risk of call by the issuer would NOT normally be a major factor when analyzing ADRs. Each of the other items listed would be a consideration when considering investing in ADRs.

Which would be a counter-cyclical industry? A) The computer software industry B) The pharmaceutical industry C) The gold mining industry D) The automobile industry

C) The gold mining industry Counter-cyclical industries are industries that either perform equal or better during down times in the economy. Gold mining and silver mining companies are companies that would likely remain stable or perform better during a down economy.

Which of the following happens when a company declares a stock split? A) There is a reduction in the company's earned surplus account and an increase in its capital account. B) The company's assets are frozen. C) The proportionate share of ownership in the company by each stockholder does not change. D) There is no effect on the par or stated value of the stock.

C) The proportionate share of ownership in the company by each stockholder does not change. Since a stock split affects only the existing shareholders, the proportionate ownership of each shareholder would not change.

On the ex-date for a 20% stock dividend, a customer with a short position of 300 shares of common stock would: A) receive an additional 60 shares of common stock. B) not be affected by the distribution. C) owe an additional 60 shares of common stock. D) Their account would be debited for the dollar value of the 60 shares of common stock.

C) owe an additional 60 shares of common stock. Investors with "short" positions always owe any dividends and distributions that occur while they are short, whereas "long" positions receive any dividends and distributions. Since this investor was short 300 shares of stock they would "owe" 60 shares of common stock (300 shares X .20 = 60 shares)

Which of the following is most likely to fluctuate in value during a period of stable interest rates? A) Cumulative preferred stock. B) Participating preferred. C) Senior preferred. D) Convertible preferred.

D) Convertible preferred. Because convertible securities try to maintain parity with the Common Stock - Convertibles would fluctuate more than non-convertibles even when interest rates are stable.

Of the following assets, which are most likely be included in the investment portfolio of a real estate investment trusts: A) Farmland and parks B) Airports and stadiums C) Single family housing and raw land D) New apartment houses and shopping centers

D) New apartment houses and shopping centers Shareholders in a REIT look for income from rents received from apartment buildings and shopping centers as well as capital gains as buildings are sold at a profit. Funding for airports and stadiums would generally come from the issuance of municipal bonds, not reits.

Which of the following is NOT a benefit of owning preferred stock rather than common stock? A) Preferred could be convertible, allowing the investor a choice of conversion. B) Preferred shares receive earning prior to common shares. C) Preferred shareholders have prior claims to the assets of the corporation if liquidation occurs. D) Preferred shareholders have preemptive rights ahead of common shareholders.

D) Preferred shareholders have preemptive rights ahead of common shareholders. Preemptive rights are rights given to common shareholders only not preferred stockholders.