Series 65 Study Questions: CH1

Which of the following statements regarding preemptive rights is true?

Preferred stockholders do not have the right to subscribe to a right offering.

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934?

1. Unregistered securities held by a noncontrol person 2. Unregistered securities held by a control person

An investor may expect to receive dividends from

An ADR

Which of the following is a risk faced by investors in foreign stocks that is not found when investing in domestic issues?

Exchange rate risk

All of the following represent ownership in a corporation except

Mortgage bonds

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from non-qualified options in all of the following respects except

the recipient of the grant of the ISO has no income tax consequences at the time of the grant.

Which of the following statements about equity securities is not true?

Preferred stock is an equity security while common stock is a hybrid.

Rule 144 applies to the sale of all of the following except

registered securities by a minority shareholder of the issuer.

All of the following statements regarding incentive stock options (ISOs) are correct except

the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of grant or 2 years from the date of exercise.

If a customer owns 7% of a publicly traded company's stock and his spouse owns 6% and wants to sell her shares, which of the following statements is true?

The spouse is an affiliate and Rule 144 applies.

An investor holding which of the following equity securities would not expect to have preemptive rights?

Preferred stock

A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?

They are not subject to exchange rate, or currency, risk.

A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle?

They are not subject to exchange rate, or currency, risk.

Which of the following statements regarding ADRs are true?

1. The securities are vehicles used to facilitate U.S trading of foreign securities 2. Holders have foreign currency risk

Which of the following have equity positions in a corporation?

1. Common stockholders 2. Preferred stockholders

A corporation would like to offer their employees an opportunity to participate in the future growth of the company. Among the methods you might suggest are

Employee stock options.

Investing in emerging market stocks is least likely to expose your client to which of the following risks?

Interest rate

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders this year, each preferred share must be paid a dividend of

$10 10%*$100 = $10

ADRs are used to facilitate

the domestic trading of foreign securities.

One of the features of convertible preferred stock is that

the owner has the opportunity to participate in the growth of the company.

Corporations have found that one way to increase employee motivation is to grant options to purchase stock in the company. Incentive (qualified) options differ from nonqualified options in all of the following respects except

the recipient of the grant of the ISO has no income tax consequences at the time of the grant.

One of the rights of being a common stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to vote is

the record date.

An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer

incentive stock options.

One way in which incentive stock options (ISOs) differ from nonqualified stock options (NQSOs) is that

the bargain element of the ISO is an AMT preference item.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders?

$24 $16 in previous dividends $8 in this years dividend $16+$8 = $24

An investor in an equity security

acquires an ownership interest in the company.

A company's dividend on its common stock is

determined by its board of directors.

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own?

1. 125 shares 2. Cost basis of $20 Julie had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500.

Which of the following has the least exposure to inflation risk?

Common Stock

An American depositary receipt (ADR) is

a certificate representing ownership of a foreign security that is on deposit at a U.S. bank.

Reasons why a corporation might issue a convertible preferred stock would include

giving those shareholders an opportunity to participate in the future success of the company.

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee

is taxed on $10 per share as if it were salary.

The primary defining characteristic of an equity security is

it represents ownership in a corporation.

One of the rights of those owning common stock is the opportunity to vote on issues brought up at the corporation's annual meeting. To be eligible to cast a vote,

ownership must be established by the record date.

A company that has issued cumulative preferred stock

pays past and current preferred dividends before paying dividends on common stock.

The board of directors of DDC omitted dividends in 2020 on their $100 par 6% noncumulative preferred stock. In 2021, a $2 preferred dividend was paid. For DDC, 2022 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2022 in order to pay a common dividend?

$6 6% Dividend on a $100 par

Investments in which of the following offer the best long-term protection against inflation?

Common stocks

Which of the following statements about dividends on common stock is not true?

Corporations are contractually obligated to pay dividends to their shareholders each year.

Which of the following is not a characteristic of American depositary receipts (ADRs)?

Dividends are declared in the foreign currency, so exchange rate, or currency, risk is completely eliminated.

Which of these is among the advantages of including preferred stock in an investor's portfolio?

Dividends must be paid before any distribution to common stockholders.

Which of the following statements concerning equity securities is not correct?

Equity securities represent a lending interest in a corporation.

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has

No effective change in the value of the position.

Which of the following statements best describes cumulative preferred stock?

Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.

Which of the following statements concerning international investing is correct?

Information is not as readily available on foreign investments as on domestic ones.

Which of the following statements regarding a 100% stock dividend are true?

1. The share price is reduced by half 2. The number of shares doubles.

An investor wishing to add some diversification to his portfolio wants to purchase 200 shares of an ADR for a Japanese electronics manufacturer. The ADR is listed on the NYSE. Which of the following risks should be of most concern to this investor?

1. Business 2. Currency

Under Rule 144, which of the following sales are subject to volume limitations?

1. Control person selling registered stock held for one year. 2. Control person selling restricted stock held for two years.

If a woman owns 9% of the common shares of XYZ and her spouse owns 2% and wishes to sell his shares, which of these is true?

1. He is considered an affiliate. 2. He must file a Form 144 to sell.

Which of the following statements regarding foreign investing is (are) true?

1. Most foreign investment entails foreign exchange or currency risk.

Which of the following statements regarding international investing is not correct?

An emerging market is a market in a highly developed foreign economy with stable political and social institutions.