Equity Securities- Quiz Questions

ABC Corporation declares a 5-4 stock split. On the ex-date, the price of ABC common will be reduced by: A) 0.2. B) 0.25. C) 0.5. D) 0.8.

A) 0.2. As a result of a stock split, an investor will have more shares at less value per share, but overall value of the investment will remain the same. Generally, the percent decrease in price will always be less than the percent increase in the number of shares. The percent increase in shares in a 5-4 split is 25%. *Always create an example here with simple numbers- 100 shares @ 10 becomes 125 shares at 8

Cash dividends from REITs are: A) taxed as ordinary income. B) taxed at a maximum rate for qualified dividends. C) taxed as long-term capital gains. D) not taxed.

A) taxed as ordinary income. Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs.

New Offering: 800,000 units at $6 per unit. Each unit has 2 shares of common stock and 1 warrant. Each warrant is to purchase ½ share of common stock. Based on the information above, how many shares of stock will be sold, and how many warrants will be sold? A) 800,000 shares and 400,000 warrants. B) 800,000 shares and 200,000 warrants. C) 1.6 million shares and 800,000 warrants. D) 1.6 million shares and 400,000 warrants.

C) 1.6 million shares and 800,000 warrants. Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains 2 shares, 1.6 million shares are being distributed. As each unit also includes 1 warrant, 800,000 warrants are being distributed.

The ex-date for NYSE-listed issues is set by: A) the issuer. B) the SEC. C) the NYSE. D) FINRA.

C) the NYSE. The ex-date is set by the market where the security principally trades.

All of the following are true of REITs EXCEPT: A) they must to qualify under Subchapter M, distribute at least 90% of their net investment income. B) shares are publicly traded. C) they must pass along losses to shareholders. D) they must invest at least 75% of their assets in real estate-related activities.

C) they must pass along losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs.

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above: A) $125 per share. B) $150 per share. C) $200 per share. D) $175 per share.

D) $175 per share. In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.

ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued with a $1,000 PAR value has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive: A) $10 million. B) $12.8 million. C) $20 million. D) $6.4 million.

D) $6.4 million. There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million.

If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to: A) 0.32. B) 0.3. C) 0.4. D) 0.48.

A) 0.32. 100 shares @.40 = 40 total and becomes 125 shares @.32, because 40/125=.32

Which of the following are characteristics of a REIT? It is traded on an exchange or over the counter. It is professionally managed. It passes through both gains and losses to investors. It is a type of limited partnership. A) I and II. B) I and IV. C) II and III. D) III and IV.

A) I and II. A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses.

A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats on the board, the stockholder could cast the votes in which of the following ways? A) 100 votes for each of 6 directors. B) 200 votes for each of 3 directors. C) 600 votes for any 1 director. D) 300 votes for each of 2 directors.

B) 200 votes for each of 3 directors. 200 votes per seat on the board, statutory voting means the votes must be allocated equally.

Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue? A) SEC. B) Registrar. C) FINRA. D) Transfer agent.

B) Registrar. The registrar is responsible for keeping careful account of the number of shares a company is authorized to issue and ensuring that the number outstanding does not exceed this number.

Minority stockholders are more likely to be able to elect directors through which form of voting? A) Statutory. B) Progressive. C) Cumulative. D) Regular.

C) Cumulative. Minority stockholders are more likely to be able to elect representatives to the board of directors through cumulative voting. Small stockholders may cast all of their votes on 1 position rather than spread them out and thus dilute them over 2 or 3 positions.

Which of the following securities CANNOT pay a dividend? A) ADR. B) Convertible preferred stock. C) Class B common stock. D) Warrant.

D) Warrant. Warrants represent long-term options to buy stock at a fixed price, and, like options, cannot pay dividends.

A new bond issue will include warrants to: A) increase the spread to the underwriter. B) increase the capital raised by the issuer through the bond offering. C) increase the price of the issue to the public. D) increase the attractiveness of the issue to the public.

D) increase the attractiveness of the issue to the public.

All of the following are characteristics of a rights offering EXCEPT: A) the subscription price is below the CMV. B) it is issued to current stockholders. C) the rights are marketable. D) the subscription period is up to 2 years.

D) the subscription period is up to 2 years. Rights offerings are usually very short-lived (30 to 45 days).

Smith and Co., Inc. has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares? A) 200 rights, 5 per share. B) 100 rights, 5 per share. C) 100 rights, 20 per share. D) 200 rights, 20 per share.

A) 200 rights, 5 per share. Stockholders receive one right per share owned. Hence, Joe receives 200 rights. The purpose is to maintain shareholders' proportionate interest in the company. Since the number of shares outstanding will increase by 20%, Joe needs to purchase 40 new shares (200 / 40 = 5 rights per share).

GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right? A) 3. B) 2.5. C) 5. D) 15.

A) 3. Since the stock is selling ex (after ex-rights), the formula is ($70 − $55) / 5. ($70 − $55 = $15) ($15 / 5 = $3). Ex rights formula doesn't add one to the num of rights to buy new shares (5) Cum rights does add 1

A corporation authorized to issue 1 million shares of common stock originally issued 600,000 shares and later repurchased 40,000 shares for its treasury. How many shares of common stock will remain outstanding? A) 560,000. B) 40,000. C) 600,000. D) 960,000.

A) 560,000. Stock issued minus stock reacquired equals the amount of stock outstanding. Shares repurchased are called treasury stock.

If ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares? A) 75. B) 30. C) 60. D) 100.

A) 75. A 5-4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares × 25% = 75 shares.

Which of the following is a function of a registrar? A) Accounting for the number of shares outstanding. B) Recording the names of stockholders on the corporation's books. C) Canceling old shares. D) Transferring shares into the name of a new owner.

A) Accounting for the number of shares outstanding. The registrar's function is to ensure that the number of shares outstanding does not exceed the number accounted for on the corporation's books. The transfer agent records the names of stockholders on the corporation's books, cancels old shares, and transfers shares into a new owner's name.

Which of the following is TRUE concerning a 5:4 stock split? A) Each shareholder's proportionate equity will be unchanged. B) The par value will be unchanged. C) The net worth of the company will be reduced. D) Retained earnings will be increased.

A) Each shareholder's proportionate equity will be unchanged. Since each shareholder will receive additional stock, the proportional equity will remain the same.

Investors should always be aware of taxes applicable to investments they own. Which of the following taxes might be associated with income derived from ADRs but not income from other investments? A) Foreign income tax. B) Federal income tax. C) State income tax. D) Excise tax.

A) Foreign income tax. In most countries, a withholding tax on dividends is taken at the source. To the holder of an ADR, this would be a foreign income tax. The foreign income tax paid may be taken as a credit against U.S. income taxes owed.

If a stock undergoes a 1-5 reverse split, which of the following increases? Market price per share. Number of shares outstanding. Earnings per share. Market capitalization of the company. A) I and III. B) I and II. C) II and III. D) III and IV.

A) I and III. After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, the market capitalization of the company will not change.

A member of the investment banking department of ABC securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer. A) I, II, III and IV. B) I only. C) I and II. D) I, II and III.

A) I, II, III and IV. All are true statements. The exercise prices of stock rights are usually below CMV of the underlying security at time of issue. The exercise prices of warrants are usually above CMV of the underlying security at time of issue. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer.

Common stockholders have all of the following rights and privileges EXCEPT: I. Voting on the composition of the board of directors. II. Voting on routine decisions in the company's operations. III. Receiving par value at liquidation. IV. Receiving a dividend when declared. A) II and III. B) I and III. C) I and IV. D) II and IV.

A) II and III. *Ownership of common stock allows shareholders the right to vote on the important affairs in the life of the company, not routine operational decisions. No promise is offered with regard to the stockholder's initial investment, which might be lost, or dividends, which might not be declared.

Which of the following statements regarding warrants are TRUE? They pay dividends. They are debt securities. They allow for the purchase of common stock at a fixed price. They are equity-equivalent securities. A) III and IV B) I and II C) II and III D) II and IV

A) III and IV Holders of warrants have the right to buy stock from the issuer at a stated price for a specific time period. Warrants are considered equity-equivalent securities. They do not pay dividends which are only paid to stockholders, and the owner of the warrant does not own the stock until the warrant is exercised.

A tombstone for a new bond issue announces that 5-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. For what reason were the warrants attached to the bonds by the issuer? A) To improve the marketability of the bond issue. B) To increase the dilution of the current shareholders. C) To decrease the dilution of the current shareholders. D) To make the bonds convertible into the issuer's common stock.

A) To improve the marketability of the bond issue. Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock

The board of directors is responsible for setting all of the following EXCEPT: A) ex-dividend date. B) declaration date. C) payable date. D) record date.

A) ex-dividend date. The ex-date for a distribution is set by the appropriate self-regulatory organization. The issuer determines the other dates listed.

An ADR is used to: A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. B) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. C) finance foreign trade in which U.S. citizens are engaged. D) sweeten a bond offering.

A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors.

The issuer of an ADR is a: A) foreign branch of a domestic bank. B) domestic branch of a domestic bank. C) domestic branch of a foreign bank. D) foreign branch of a foreign bank.

A) foreign branch of a domestic bank. The American Depositary Receipt (ADR) is issued by a foreign branch of a domestic bank. Everything is in English and in U.S. dollars.

In a 3-for-2 stock split, an investor will: A) have 50% more shares at two-thirds the price. B) have 50% more shares at half the price. C) have 50% fewer shares at twice the price. D) have two-thirds fewer shares at a 50% higher price.

A) have 50% more shares at two-thirds the price. 100 shares @ 10 becomes 150 shares at 6.67, 50% increase at 2/3 price.

The record date: A) is set by the issuing corporation to determine which stockholders will receive a declared dividend. B) is fixed by the SEC to determine which investors own stock. C) indicates when the public offering of new issues can be made legally. D) is set by the issuing corporation as the mailing date for distribution of cash dividends.

A) is set by the issuing corporation to determine which stockholders will receive a declared dividend. The record date is set by the corporation, at which time a list of stockholders who will receive a dividend is compiled.

Stockholders' preemptive rights include the right to: A) maintain proportionate ownership interest in the corporation. B) serve as an officer on the board of directors. C) purchase treasury stock. D) sell stock back to the issuing corporation.

A) maintain proportionate ownership interest in the corporation. Preemptive rights allow stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. For example, if a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase 5% of the new shares.

If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT: A) the issuer must redeem certificates on shareholder request. B) a mortgage REIT represents pooled capital for real estate financing. C) investors receive dividends periodically. D) the certificates are publicly traded.

A) the issuer must redeem certificates on shareholder request. REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.

An informal network of market makers that offers to trade securities NOT listed on an exchange is called: A) the over-the-counter market. B) Archipelago Exchange (ArcaEx). C) National Daily Quotation Service. D) National Association of Securities Dealers Automated Quotations.

A) the over-the-counter market. This best describes the over-the-counter market which is an interdealer market linked by computer terminals to Financial Industry Regulatory Authority (FINRA) member firms across the country.

A subscription right or privilege is best defined as: A) the right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock. B) the right of shareholders to buy any future issue of the company's preferred stock prior to submitted public orders. C) the right of shareholders to maintain their percentage ownership of a company by selling a proportional number of warrants. D) the right of shareholders to purchase company shares at a specific price within the next 5 years.

A) the right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock. Current shareholders may maintain their percentage of ownership of a company by buying a proportional number of shares of any future issue of common stock. Purchasing shares prior to public orders is also known as a "preemptive right" and is often available only if made explicit in a company's corporate charter.

All of the following statements describe stock rights EXCEPT: A) they are most commonly offered with debentures to make the offering more attractive. B) they are short-term instruments that become worthless after the expiration date. C) they are issued by a corporation. D) they are traded in the secondary market.

A) they are most commonly offered with debentures to make the offering more attractive. A corporation issues rights to existing shareholders to allow them to purchase enough stock, within a short period and at less than current market price, to maintain their proportionate interest in the company. Rights need not be exercised but may be traded in the secondary market. Warrants, not rights, are often issued with debentures to sweeten the offering.

Holders of common shares may generally vote on: A) whether the company should issue additional preferred stock. B) whether a cash dividend is to be declared. C) which member of the board of directors should be chairman. D) whether an administrative assistant should be promoted to management.

A) whether the company should issue additional preferred stock. Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilutes the common shares' residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation.

ABC, a publicly held Corporation, decides to issue shares in an additional public offering. If the APO is for an additional 1 million shares and 60% of the shares are subscribed to in the preemptive rights offering, how many shares will the standby underwriter for this offering have available to sell to the public? A) 600,000. B) 400,000. C) 100,000. D) 110,000.

B) 400,000. If 60% of the additional shares are subscribed to by existing shareholders, then 40% of the additional shares will be available to be sold to the public through a standby (firm commitment) underwriting (1,000,000 × 40% = 400,000).

The following chart shows the capital transactions of ABC Corporation. Date Event Amount 10-19-96 Initial Offerings 6 million shares 4-1-2000 Treasury Purchase 500,000 shares ABC wants to raise additional capital by selling 2 million shares through a rights offering and engages an underwriter on a standby basis. By the expiration date, ABC was only able to sell 1 million shares to existing shareholders. After expiration, how many shares does ABC have outstanding? A) 8 million. B) 7.5 million. C) 6.5 million. D) 7 million.

B) 7.5 million. Before the rights offering, the company had 5.5 million shares outstanding (6 million issued minus 500,000 Treasury shares). In connection with the offering, ABC engages a standby underwriter that commits to purchase any unsold shares. Therefore, regardless of the number of shares initially subscribed to, all 2 million shares will be sold.

Which of the following statements regarding ADRs are TRUE? They are issued by large domestic commercial banks. They are issued by foreign banks. They facilitate U.S. trading in foreign securities. They facilitate a foreign investor who wants to trade U.S. securities. A) II and IV. B) I and III. C) I and IV. D) II and III.

B) I and III. ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.

Which of the following statements regarding real estate investment trusts are TRUE? I. Hybrid REITs invest in both commercial property and residential property. II. Some REITs hold no real property but hold mortgages on commercial property instead. III. All dividend disbursements made by REITs will be recognized as qualified dividends by the IRS. IV. Dividends are taxed at the investor's ordinary income tax rate. A) I and III B) II and IV C) II and III D) I and IV

B) II and IV Equity REITs can hold residential and commercial property, mortgage REITs hold mortgages on property, and hybrid REITs do both. Dividend disbursements made by the trusts are not recognized as qualified dividends and, therefore, will be taxable to the investor at their ordinary income tax rate.

Which of the following statements regarding the Committee on Uniform Securities Identification Procedures (CUSIP) number is CORRECT? A) It is used in place of the registered owner's signature. B) It facilitates tracking and identification of a security. C) It is evidence of ownership in a corporation. D) It ensures that the security is negotiable.

B) It facilitates tracking and identification of a security.

Which of the following terms or phrases does NOT apply to REITs? A) Dividends taxed at full ordinary income rates. B) Redeemable. C) Managed. D) Secondary market.

B) Redeemable. REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends and are, therefore, taxed as ordinary income.

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A) Increase in earnings per share. B) Reduction of the debt securities' interest rate. C) Dilution of shareholders' equity. D) Reduction of the number of shares outstanding.

B) Reduction of the debt securities' interest rate. Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest.

If a stock's ex-dividend date is Tuesday, January 13, when is the record date? A) Tuesday, January 20. B) Thursday, January 15. C) Wednesday, January 7. D) Thursday, January 8.

B) Thursday, January 15. The record date is two business days after the ex-dividend date (Thursday, January 15).

A company set up to invest in real estate, mortgages, construction, and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called: A) a trust indenture. B) a real estate investment trust. C) a unit investment trust. D) an open-end investment company.

B) a real estate investment trust. A real estate investment trust, in order to avoid tax on its income, must distribute 90% of its net investment income to investors.

A company has reverse-split its common stock. The effect on the earnings per share will be: A) none of these. B) an increase. C) a decrease. D) no effect.

B) an increase. When a reverse split takes place, the number of outstanding shares is reduced. Since the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.

REITs can distribute all of the following to their shareholders EXCEPT: A) stock dividends. B) capital losses. C) capital gains. D) cash dividends.

B) capital losses. REITs can distribute their income to shareholders but not their losses. Under subchapter M of the Internal Revenue Code, they must distribute at least 90% of their income to shareholders in the form of cash dividends.

Shareholder approval is required for all of the following corporate events EXCEPT: A) the issuance of convertible bonds. B) dividends. C) stock splits. D) the acceptance of a tender offer from a non-affiliated company.

B) dividends. Shareholder approval is not required for the payment of dividends, but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.

When compared to statutory voting, cumulative voting gives an advantage to: A) management rather than the board of directors. B) minority stockholders. C) majority stockholders. D) participating preferred stockholders.

B) minority stockholders. Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.

For U.S. investors holding American Depositary Receipts (ADRs), dividends received are: A) taxed as a capital gain in the U.S. B) subject to a foreign withholding tax. C) tax-free in the country of origin. D) tax-free in both the country of origin and in the U.S.

B) subject to a foreign withholding tax. Any tax taken on dividends received from ADRs is taken in the country of origin. This is a foreign withholding tax for U.S. investors. The foreign withholding tax may later be taken as a credit against any U.S. income taxes owed by the U.S. investor.

The last day that stocks can be bought for cash and still receive the dividend is: A) the business day prior to the regular way ex-date. B) the record date. C) on the ex-date. D) the day after the record date.

B) the record date. A cash trade settles the same day. Stocks bought for cash on the record date will be entitled to the dividend under an exception to the 2-business day rule for regular way transactions.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 5 B) 15 C) 10 D) 3

C) 10 The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10.

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 1 odd lot. B) 25 odd lots. C) 25 round lots. D) 1 round lot.

C) 25 round lots. *For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.

Dividends may be paid to holders of: A) warrants. B) treasury stock. C) American depositary receipts. D) rights.

C) American depositary receipts. American depositary receipt (ADR) owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation and treasury stock is stock that has been issued by the corporation and then bought back. Neither rights, warrants or treasury stock holders have the right to receive dividends.

A 2-1 split does which of the following? Increases the number of outstanding shares Decreases the number of outstanding shares Decreases par value per share Decreases retained earnings A) II and III B) II and IV C) I and III D) I and IV

C) I and III After a 2-1 stock split, the number of outstanding shares doubles and the par value per share decreases by half. Retained earnings are not affected.

If a stock is sold on November 30 when the record date for a dividend distribution is December 1, the seller is: I. entitled to the dividend if the trade is done regular way. II. not entitled to the dividend if the trade is done regular way. III. entitled to the dividend if the trade is done with cash settlement. IV. not entitled to the dividend if the trade is done with cash settlement. A) II and III. B) II and IV. C) I and IV. D) I and III.

C) I and IV. Anyone who owns the stock on the record date will receive the dividend. In a regular way trade, the seller will still be owner of record on record date, as the trade will settle after the record date. In a cash settlement transaction, the buyer will be owner of record on record date.

Which of the following statements regarding a 2-for-1 stock split are TRUE? I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles. A) II and III. B) II and IV. C) I and IV. D) I and III.

C) I and IV. In a 2-for-1 stock split, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.

Which of the following statements regarding holders of common stock are TRUE? I. They must approve the payment of dividends. II. They are entitled to declared dividend distributions in proportion to their ownership. III. They have residual rights to corporate assets on dissolution. IV. They have unlimited liability. A) I and IV. B) II and IV. C) II and III. D) I and II.

C) II and III. Common stockholders are entitled to dividend distributions in proportion to their ownership and to residual rights to corporate assets on dissolution. They do not vote on the payment of dividends, and they have only limited liability.

The ex-dividend date is the: date on and after which the buyer is entitled to the dividend. date on and after which the seller is entitled to the dividend. second business day before the record date. second business day after the record date. A) I and IV. B) II and IV. C) II and III. D) I and II.

C) II and III. Stock sold on the ex-dividend date entitles the seller to the dividend; ex-date is two business days before the record date.

Mr. Brown has several stock rights. Which of the following is NOT an alternative regarding these stock rights? A) Selling at the market. B) Exercising. C) Redeeming them from the issuer for cash. D) Giving the rights to his son.

C) Redeeming them from the issuer for cash. Rights are not redeemable by the issuer. They may be sold in the secondary market or be given to someone else to exercise. If exercised, rights are exchanged for an appropriate number of shares of the underlying common stock.

Which of the following securities is subject to the greatest risk? A) Series EE bond. B) A-rated municipal bond. C) XYZ Inc., common stock. D) BAA-rated ABC convertible bond.

C) XYZ Inc., common stock. Only answer for a stock, common stock is considered a junior security. It has the lowest claim to assets in the event of an issuing firms liquidation and is paid dividends after bonds are paid interest.

The residual right of common stockholders refers to their right to: A) examine the corporation's annual reports and other reports, and take legal action if irregularities are found. B) receive all announced dividends in accordance with the number of shares held. C) claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid. D) vote in elections for the board of directors and in other important business decisions, such as changes to the charter.

C) claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid. The residual right of common shareholders refers to their position in the event of bankruptcy.

All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT: A) dividends are received in U.S. currency. B) transactions are done in U.S. currency. C) currency risk is virtually eliminated. D) ADRs fall under the oversight of the SEC.

C) currency risk is virtually eliminated. ADRs carry currency risk because distributions on ADRs must be converted from foreign currency to U.S. dollars on the date of distribution. In addition, the trading price of the ADR is affected by foreign currency fluctuation.

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has: A) a proportionately increased interest in the company. B) greater exposure. C) no effective change in the value of the position. D) a proportionately decreased interest in the company.

C) no effective change in the value of the position. When a stock splits, the number of shares each stockholder has either increases or decreases (in the case of a reverse split). The customer experiences no effective change in position because the proportionate interest in the company remains the same.

Treasury stock is: A) preferred stock. B) issued by the U.S. Treasury Department. C) stock repurchased by the issuer. D) authorized but unissued stock owned by the company.

C) stock repurchased by the issuer. A company may, from time to time, go into the market and buy some of its own outstanding stock, which is then placed in the treasury and called treasury stock. Treasury stock has no voting rights and does not receive dividends. Treasury stock is not included when calculating shareholders' equity, or net worth.

All of the following characteristics are advantages of a REIT EXCEPT: A) diversification. B) professional management. C) tax deferral. D) liquidity.

C) tax deferral. A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments.

ADR owners have all the following rights EXCEPT: A) the right to receive dividends in U.S. dollars. B) the right to receive the underlying foreign security. C) the right to sell the ADR in the foreign market. D) the right to sell in the secondary market.

C) the right to sell the ADR in the foreign market. The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas.

A company is offering investors the opportunity to purchase shares for the next 5 years at a fixed price slightly above today's market price. The company is issuing: A) a letter of intent. B) call options. C) warrants. D) futures.

C) warrants. A warrant is a security that allows the holder to purchase shares of the underlying issue at a fixed price (above the current market price when issued) for an extended period (typically 2 years or longer). Call options are similar, except they are short-term securities (9 months at issue).

A change in EARNINGS would affect the price of which of the following securities the most? A) 6% preferred stock. B) Treasury stock. C) Common stock. D) 10% debentures maturing in 10 years.

Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm.

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by A) 0.1. B) 0.25. C) 0.3. D) 0.2.

D) 0.2. 100 shares @ 10 becomes, 125 shares @ 8 decrease in val by .2

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 300 B) 400 C) 500 D) 100

D) 100 The investor will receive an additional 100 shares from a 3 for 2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares. How many ADDITIONAL Shares, not total shares after the split.

The regular way ex-dividend date for cash dividends is the: A) 2nd business day following the record date. B) 2nd business day preceding the settlement date . C) 3rd business day preceding the record date. D) 2nd business day preceding the record date.

D) 2nd business day preceding the record date. The regular way ex-dividend date is 2 business days before the record date.

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of: A) 15. B) 60. C) 150. D) 600.

D) 600. The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.

ABC, Inc. will issue new stock through a rights offering. Terms of the offering are 10 rights plus $10 to purchase one new share of stock, with any fractional shares to be considered whole shares. ABC is currently trading at $13. If your customer owns 85 shares of ABC and wishes to subscribe to the new offering, how many shares can she purchase at the subscription price and how much money will be required? A) 8 shares; $80. B) 8 shares; $90. C) 9 shares; $80. D) 9 shares; $90.

D) 9 shares; $90. Owning 85 shares, the customer would receive 85 rights allowing the purchase of 8.5 shares. Because fractional shares are rounded up, a total of 9 shares could be purchased. Each share requires an additional $10 to purchase, therefore if the customer wants to buy the 9 shares the customer must pay a total of $90.

A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as "plusses" or advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is NOT an advantage of investing in REITs? A) Being able to divest of the shares easily B) Using real estate as a potential hedge against the movement of other equity securities the customer owns C) Having a professionally managed portfolio of commercial real estate assets D) Dividend treatment

D) Dividend treatment Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are, therefore, taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or OTC and considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.

Which of the following characteristics are applicable to real estate investment trusts (REITs)? A) REITs have guaranteed minimum dividends. B) Any losses from the real estate portfolio flow through to the REIT shareholders. C) REIT shares cannot be bought or sold in the secondary market and are, therefore, considered illiquid. D) Dividends from REITS are taxed as ordinary income.

D) Dividends from REITS are taxed as ordinary income. While income flows through to REIT shareholders in the form of dividends, losses do not flow through. When a REIT pays a dividend, it will be taxed as ordinary income, but there are no guaranteed minimum dividend payouts. They trade both on exchanges and OTC and are, therefore, considered to be liquid investments.

Which of the following taxes does NOT impact the holder of an ADR? A) Federal income tax. B) State income tax. C) Foreign income tax. D) Excise tax.

D) Excise tax. Dividends on ADRs are subject to both federal and state income tax. In addition, the country of origin will frequently levy a tax which may be used as a credit on the investor's federal income tax return.

Which of the following have equity positions in a corporation? Common stockholders. Preferred stockholders. Convertible bondholders. Mortgage bondholders. A) I and III. B) II and IV. C) III and IV. D) I and II.

D) I and II. Common and preferred stockholders have equity, or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners.

Common stockholders of a publicly traded corporation have which of the following rights and privileges? Residual claim to assets at dissolution. Right to a vote for stock dividends to be paid. Right to receive an audited financial report on an annual basis. Claim against dividends in default. A) I and IV. B) II and III. C) II and IV. D) I and III.

D) I and III. Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends.

Which of the following statements regarding ADRs are TRUE? Dividends are payable in the underlying foreign currency. Dividends are payable in U.S. dollars. Holders have voting rights. Holders do not have voting rights. A) I and III. B) I and IV. C) II and III. D) II and IV.

D) II and IV. The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well.

Which of the following represent ownership in a corporation? Debentures. Convertible bonds. Preferred stock. Common stock. A) I and II. B) I and III. C) II and IV. D) III and IV.

D) III and IV. Common and preferred stocks represent ownership in a company. Convertible debentures may be converted to equity securities, but until they are, they are considered debt.

Which of the following activities are NOT a registrar's function(s)? Audit the transfer agent. Accounting for the number of shares outstanding. Canceling old shares. Transferring shares into the new owners' names. A) I and II. B) I and IV. C) II and III. D) III and IV.

D) III and IV. The registrar accounts for the number of shares and audits the transfer agent.

Which of the following are TRUE of treasury stock? I. Treasury stock is authorized but not yet issued. II. Treasury stock may pay a reduced dividend. III. Treasury stock is issued but has no voting or dividend rights. IV. Treasury stock is previously issued stock that has been repurchased by the issuing company. A) I and II. B) I and III. C) II and IV. D) III and IV.

D) III and IV. Treasury stock is a company's stock that has been issued, sold through an offering, and then bought back by the company. When a company repurchases its own stock, that stock has no voting rights or dividend rights and is held in the issuer's treasury.

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend? A) Tuesday, May 15. B) Wednesday, May 16. C) Thursday, May 17. D) Monday, May 14.

D) Monday, May 14. In order to receive a cash dividend, an investor must be owner of record as of the close of business on record date. Because regular way settlement is 3 business days, the customer must purchase the stock no later than Monday, May 14.

A customer owns 200 shares of GHI common stock at $10 per share and 300 shares of GHI preferred Class A stock at par. If GHI declares a 2:1 split for its common shares, how will the customer's preferred Class A shares be adjusted? A) 600 shares at $50 per share B) 300 shares at $200 per share C) 1,000 shares at $30 per share D) No adjustment is made

D) No adjustment is made Splits or adjustments to the common stock do not impact the preferred share classes, just as adjustments to any preferred class shares would not impact the common shares.

Which of the following is an equity security? A) Mortgage-secured bond. B) Collateralized mortgage obligation. C) Government National Mortgage Association pass-through certificate. D) Real estate investment trust share.

D) Real estate investment trust share. A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities.

If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A) Interest in a real estate limited partnership. B) Direct investment in a shopping center renting retail space to a broad variety of stores. C) Privately placed investment. D) Real estate investment trust.

D) Real estate investment trust. Real estate investment trusts (REITs) are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate.

Which of the following is an advantage of owning American depositary receipts? A) The investor has the right to vote at stockholders' meetings. B) The investor receives preemptive rights should the issuer make an additional stock offering. C) The investor avoids the currency risk that characterizes many foreign investments. D) The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency.

D) The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency. ADRs permit an American investor to purchase, not stock, but a certificate of deposit for stock in a foreign company. The advantage is that the transactions are done in dollars, but the ADR itself does not carry a vote or stock rights, and subjects the owner to currency risk.

ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split? A) The retained earnings would be decreased by $10 million. B) The number of shares outstanding would decrease by 50%. C) The market price of the stock would double. D) The par value would decrease to $5 per share.

D) The par value would decrease to $5 per share. A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split.

Which of the following statements regarding warrants is TRUE? A) Warrants give the holder a perpetual interest in the issuer's stock. B) Warrants' terms are generally shorter than rights' terms. C) Warrants are safer than corporate bonds. D) Warrants are often issued with other securities to make the offering more attractive.

D) Warrants are often issued with other securities to make the offering more attractive.

Which of the following statements about warrants is NOT true? A) Warrants have longer lifetimes than rights. B) Warrants may be attached to another of the issuer's securities. C) Warrants have an exercise price above the current market price of the common stock when issued. D) Warrants may not be traded in the secondary market.

D) Warrants may not be traded in the secondary market. Warrants usually have lifetimes of 2-10 years; rights expire in 30-45 days. A corporation may attach warrants to other securities, such as bonds, to make the bonds more marketable. Warrants have no intrinsic value when issued and may expire without ever having intrinsic value. Before expiration, they may be, and often are, traded in the secondary market.

After a company splits its stock 2 for 1, an investor who owns 100 shares receives: A) another certificate for 200 shares. B) notice that the investor's 100-share certificate now represents 200 shares. C) notice to send in the current certificate to be replaced by a new certificate for 200 shares. D) another certificate for 100 shares.

D) another certificate for 100 shares. After a 2 for 1 split, the transfer agent will send the investor another certificate for 100 shares. The investor is not required to return the existing stock certificate.

ADRs are used to facilitate the: A) foreign trading of domestic securities. B) foreign trading of U.S. government securities. C) domestic trading of U.S. government securities. D) domestic trading of foreign securities.

D) domestic trading of foreign securities. An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

An ADR represents a: A) U.S. security trading in a foreign market. B) U.S. security trading in both the U.S. and a foreign market. C) foreign security trading in both the U.S. and a foreign market. D) foreign security trading in the U.S. market.

D) foreign security trading in the U.S. market. ADRs are receipts issued by U.S. banks that represent ownership of a foreign security and are traded in U.S. securities markets.

A corporation must have stockholder approval to: A) repurchase 100,000 shares of stock for its treasury. B) declare a 15% stock dividend. C) declare a cash dividend. D) issue convertible bonds.

D) issue convertible bonds. Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholder's proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend.

A holder of an ADR assumes all of the following risks EXCEPT: A) market risk. B) political risk. C) liquidity risk. D) foreign currency risk.

D) liquidity risk. An American Depository Share (ADR) represents an ownership interest in a foreign domiciled company. The shares trade on the New York Stock Exchange or in the OTC. The risk of lack of liquidity is absorbed by the presence of trading on U.S. exchanges or in the OTC market. The shares are subject to market risk, political risk, and foreign currency risk.

All of the following statements describe warrants EXCEPT: A) most commonly offered in connection with debentures to sweeten the offering. B) issued by a corporation. C) traded in the secondary market. D) short-term instruments that become worthless after the expiration date.

D) short-term instruments that become worthless after the expiration date. Warrants are commonly used to make debenture offerings more attractive and have long lives (generally 2 to 10 years). Warrants need not be exercised, but may be traded in the secondary market.

The common stock of ABC Corporation currently earns $3 per share. If the price-to-earnings ratio for this stock is 14, what is the current market price? A) 17. B) 21. C) 37. D) 42.

The price-to-earnings ratio equals the market price divided by earnings per share. The PE ratio is 14, and earnings per share is $3. PRICE/EARNINGS = PE RATIO PRICE/3=14 3*14 = PRICE = 42