Series 7 Top-off - Chapter 1 **copy**

ABC Corporation will be performing a preemptive rights offering. Which of the following is TRUE? [A] The corporation is offering long-term options to buyers of bonds to buy stock at a price that is currently above the current market price. [B] The corporation is changing the rights that shareholders have in association with their shares. [C] The corporation is attempting to preempt a takeover bid from a competitor. [D] The corporation is selling additional shares and must provide existing shareholders with the ability to maintain their proportionate ownership.

[D] The corporation is selling additional shares and must provide existing shareholders with the ability to maintain their proportionate ownership.

All of the following are characteristics of REITs EXCEPT: [A] They are publicly-traded securities and can be traded on an exchange or OTC. [B] They generally own income-producing properties like apartment buildings. [C] They distribute 90% of their income to shareholders. [D] They must be registered under the Investment Company Act of 1940.

[D] They must be registered under the Investment Company Act of 1940. REITs are not investment companies and do not have to be registered under the Investment Company Act of 1940.

Which of the following describes Regular-way settlement for common stock transactions? [A] T+1 [B] T+2 [C] T+3 [D] T+4

[B] T+2

A common stockholder in a corporate liquidation has a [A] priority claim on the assets. [B] claim on the assets prior to preferred stockholders. [C] residual claim on the assets. [D] claim on the assets prior to subordinated lenders but after secured creditors.

[C] residual claim on the assets.

Blake currently owns 200 shares of ABC common stock. ABC announces a 3 for 1 stock split. After the split, how many shares of ABC will Blake own? [A] 200 shares [B] 300 shares [C] 400 shares [D] 600 shares

[D] 600 shares

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.

As inflation increases over time, the best hedge against it has historically been provided by which of the following types of securities? [A] Common stocks [B] Preferred stocks [C] Government Securities (T-Bonds, etc.) [D] Convertible bonds

[A] Common stocks

An investor holds an equity REIT. Of the following, which TWO would have the most detrimental effect on the value of this investor's product? I. Builders have flooded the market with new structures. II. The prime rate has seen a notable increase. III. Property values have increased over 10%. IV. Retail and rental properties are almost entirely occupied. [A] I and II [B] I and III [C] II and III [D] II and IV

[A] I and II

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.

Preferred stock has which of the following characteristics? I. One can typically expect a dividend at a specific rate. II. Voting rights typically do not accompany preferred stock. III. Historically, preferred stock exhibits more appreciation potential than common stock. IV. Dividends are paid only after dividends have already been paid on common stock from the same issuer. [A] I and II [B] II and III [C] I and IV [D] III and IV

[A] I and II Preferred stock typically comes with a specific or fixed dividend rate. Preferred also does not come with voting privileges, though it is possible. Common has more potential for appreciation, since the market price of preferred is normally more tied to the preferred stock's dividend rate. Preferred receives dividends ahead of common, which is one of the reasons that it is "preferred."

A corporation increases the dividend payments to common stockholders. Assume that the price of the common remains unchanged. How does this affect the dividend yield of the stock? [A] Increases [B] Decreases [C] Remains constant [D] Cannot be determined with information provided.

[A] Increases Because the dividend has increased and the market value of the stock has stayed the same, the yield would increase. The formula for current yield is: Annual Dividend / Market price = Current Yield

All of the following comments would NOT apply to holders of preferred stock EXCEPT: [A] Preferred shareholders typically see lower levels of price volatility than common shareholders. [B] Dividends that are in arrears are always paid to preferred stockholders, even when the preferred stock does not have cumulative features. [C] Dividend payments on preferred stock are guaranteed. [D] In the event of the dissolution of a corporation, bondholders and preferred stockholders have equal claim over corporate assets.

[A] Preferred shareholders typically see lower levels of price volatility than common shareholders. Preferred stock normally does not experience as much volatility as common stock, due to their fixed dividend rate.

One of your clients currently owns 100 common shares of XYZ at $100 per share. XYZ declares a 15% stock dividend for common shareholders. Which best describes this investor's holdings AFTER the stock dividend is paid? [A] The investor will own 115 common shares valued at $86.96 per share. [B] The investor will own 115 common shares valued at $100 per share. [C] The investor will own 100 common shares valued at $86.96 per share. [D] The investor will own 100 common shares valued at $115 per share.

[A] The investor will own 115 common shares valued at $86.96 per share.

A warrant that is issued with a debenture [A] allows the holder a long-term ability to exercise and buy a specific number of shares of common stock. [B] allows the holder a short-term ability to exercise and buy a specified number of shares of common stock. [C] pays interest in relation to the debenture until the warrant is exercised. [D] pays dividends in relation to the stock to which it converts prior to exercise.

[A] allows the holder a long-term ability to exercise and buy a specific number of shares of common stock.

An investor buys 100 shares of ABC common stock at $85.50 per share. The stock pays a quarterly dividend of $1.00. If the common stock is currently trading at $95.50 per share, what is the current annual dividend yield? [A] 1.08% [B] 4.19% [C] 4.51% [D] 4.68%

[B] 4.19% The current annual dividend yield is equal to the current annual dividend ($1.00 x 4 = $4.00) divided by the current market value of the stock ($95.50). Therefore, $4.00 / $95.50 = 4.19%.

The stock of a corporation is selling at $55 per share and the corporation pays a quarterly dividend of $1.30. The yield is? [A] 2.4% [B] 9.5% [C] 4.2% [D] 4.7%

[B] 9.5% ( 5.20 Annual Div / 55 Mkt px) = .0945 = 9.5% Remember: To calculate the current yield, you must multiply the QUARTERLY dividend by 4. The yield is based on the annual dividend.

Which of the following would be considered advantages to investors investing in REITs? I. There are no minimum investment requirements II. Investors must be accredited prior to making an investment III. REITs have a direct correlation to the value of other financial assets IV. REITs have a low correlation to the value of other financial assets [A] I and III [B] I and IV [C] II and III [D] II and IV

[B] I and IV No minimum investment is required, and REITs have a low correlation to other financial assets since the assets of a REIT are real estate.

ABC Corp. has issued 50,000 Units, priced at $1,000 each. The units are made up of subordinated notes and warrants that may be used to purchase shares of ABC's common stock. Based on this information, which two of the following are probably true? I. Because the notes have warrants attached, the interest rate of the notes is lower. II. Because the notes have warrants attached, the interest rate of the notes is higher. III. Inclusion of the warrants as part of the unit would cause the units to be less marketable. IV. Inclusion of the warrants as part of the unit would cause the units to be more marketable. [A] I and III [B] I and IV [C] II and III [D] II and IV

[B] I and IV Numeral "I" is correct because the corporation could pay a lower interest rate on the notes due to the added benefit of the warrants. Numeral "IV" is correct because warrants tend to make issues more marketable.

Of the choices listed below, which represent an equity interest in a corporation? I. Corporate Bonds II. Common Stock III. Debentures IV. Preferred Stock [A] I and III [B] II and IV [C] II, III and IV [D] I, II, III, and IV

[B] II and IV "Stocks" represent ownership equity in a corporation. "Bonds" are evidence of a loan to the corporation and do not represent ownership.

Which of the following is true of cumulative voting? [A] It is advantageous to majority shareholders. [B] Minority shareholders have a better chance of electing a director of their choice. [C] Majority shareholders can always elect the entire board of directors. [D] A stockholder of 400 shares with 5 persons to be elected to the board could only vote 400 shares for each director of his choice.

[B] Minority shareholders have a better chance of electing a director of their choice. Because shareholders can "block" their votes and cast them for the director of their choice, minority stockholders benefit most from cumulative voting.

A client is interested in investing in the real estate sector, but shows great concern about the possibility of depreciation within the sector and more specifically within certain geographic areas. What recommendation should an RR handling this client's account make in relation to achieving the HIGHEST amount of diversification in real estate-related investments? [A] The client should invest in securities issued by the Federal National Mortgage Association (FNMA). [B] The client should invest in ETFs that are issued on a REIT index. [C] The client should focus investments in one REIT. [D] The client should invest in securities issued by the Government National Mortgage Association (GNMA).

[B] The client should invest in ETFs that are issued on a REIT index. ETFs (Exchange Traded Funds) on an index of REITs (Real Estate Investment Trusts) provide the maximum level of diversification of the investment options. Securities issued by FNMA or GNMA are related to real estate, but are focused on the mortgage industry and pools of new and existing mortgages. Focusing investments in one specific REIT would not provide the diversification desired.

Which of the following types of industries would be affected most by changes in interest rates? [A] Automotive [B] Utilities [C] Steel companies [D] Transportation

[B] Utilities Since utilities are highly leveraged, they are greatly affected by changes in interest rates.

A corporation's stock that has been issued and later repurchased by the corporation: [A] Will be cancelled and no longer available [B] Will be considered as "issued" and "treasury" shares [C] Will appear on the corporation's income statement as an administrative expense [D] Will appear on the corporation's balance sheet as an asset under "other investments"

[B] Will be considered as "issued" and "treasury" shares A corporation's stock that has been issued and later repurchased by the corporation is called "Treasury" stock. It is not cancelled and can be issued again in the future. It appears in the balance sheet in the Shareholder's Equity section as a deduction from issued shares.

ABC Inc. announced a 2-for-1 stock split. An investor owns 100 shares with a current market price of $50 per share. After the split, the investor will own: [A] 50 shares at $200 per share [B] 50 shares at $100 per share [C] 200 share at $25 per share [D] 200 shares at $100 per share

[C] 200 share at $25 per share

A company has authorized 10,000,000 shares of common stock. 8,000,000 shares have been issued. 4,000,000 shares are treasury. This means: [A] 8,000,000 shares are outstanding [B] 10,000,000 shares are outstanding [C] 4,000,000 shares are outstanding [D] 14,000,000 shares are outstanding

[C] 4,000,000 shares are outstanding

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.

When a registered representative is trying to determine if a stock is a growth stock, public utility, or blue chip, they would most likely look at the: [A] Earnings per share [B] Current Ratio [C] Dividend Payout ratio [D] Advance/Decline ratio

[C] Dividend Payout ratio The dividend payout ratio would help the RR determine what type of company they were looking at since most Blue Chip stocks maintain a dividend payout ratio of approximately 50%, growth stocks 25%, and public utilities 75%.

Which of the following are characteristics of a growth stock? High price/earnings ratio Low dividend payout ratio Stock price fluctuates within a narrow range Low dividend yield [A] I and II [B] III and IV [C] I, II, and IV [D] I, II, III, IV

[C] I, II, and IV Growth Stock prices may fluctuate widely and are known for their volatility. Therefore, number III is incorrect because it says, "fluctuates within a narrow range" and that is not true.

REITs (Real Estate Investment Trusts) have which of the following features? I. Much like limited partnerships, REITs pass profits and losses on to their shareholders. II. 90% of all investment income must be passed on to shareholders in order to ensure special tax treatment. III. Any profits passed on to shareholders of a REIT are not taxable until the REIT shares are sold. IV. Investment in other REITs is acceptable as a real-estate-related activity. [A] I and II [B] I and III [C] II and IV [D] III and IV

[C] II and IV In order to qualify for special tax treatment where profits may be passed on to shareholders and avoid taxation as a corporation, REITs must distribute 90% of income to shareholders and must invest a minimum of 75% of their assets in real-estate related activities. These activities can include investment in other REITs.

Of the securities listed below which would be classified as a Fixed Income security? [A] Warrants [B] Rights [C] Preferred Stock [D] Common Stock

[C] Preferred Stock

All of the following are defensive stocks EXCEPT a: [A] Tobacco company. [B] Food chain. [C] Steel company. [D] Natural gas company.

[C] Steel company. Defensive stock (not defense) - means the company is theoretically not subject to normal business cycles.

A client has a stock that is currently valued at $40 per share. The quarterly dividend of this stock is $0.10 per share. What is the current yield of this stock? [A] The current yield cannot be determined with the information provided. [B] The current yield is 0.25%. [C] The current yield is 1%. [D] The current yield is 10%.

[C] The current yield is 1%. Current yield is computed by dividing the annual return of the investment by the investment's current market value. Here, the stock has a quarterly return of $0.10 per share. This equates to $0.40 annually. $0.40 / $40 per share = 0.01 or 1% current yield.

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 would likely remain stable or perform better during a down economy.

Which of the following securities receives no dividends and has no voting rights? [A] American Depository Receipts. [B] Preferred stock. [C] Treasury stock. [D] Common stock.

[C] Treasury stock.

Which of the following are true concerning warrants? I. Some are perpetual, others have a definite life span. II. They may be issued with a preferred stock or bond issue. III. They are freely transferable and may be listed on a stock exchange. IV. They allow the holder to purchase common stock, usually higher than the market price at the time of issuance. [A] I and II [B] III and IV [C] I, III and IV [D] All

[D] All 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.

Which of the following are reasons for a corporation to repurchase its own stock? [A] To increase "Earnings Per Share" [B] To fund stock option plans [C] To finance future acquisitions [D] All of the above

[D] All of the above All choices offered represent reasons why a corporation would want to buy back some of their own company's stock on the open market.

Prior to repurchasing its own shares in the open market, a corporation would usually be required to: [A] Amend its initial Registration Statement. [B] Get approval of the holders of common stock. [C] Get approval from the Securities Exchange Commission. [D] Get approval of the Board of Directors.

[D] Get approval of the Board of Directors. A corporation would usually be required to get the approval of the Board of Directors of the company.

Each of the following can be passed through to an investor who has purchased REIT shares EXCEPT: [A] Dividend received [B] Interest received [C] Rents from property [D] Losses incurred on a sale

[D] Losses incurred on a sale

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 earnings 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.

Which of the following is a defensive stock? [A] Aerospace company [B] Food company debenture. [C] Blue chip [D] Public utility

[D] Public utility Defensive stocks (not defense) are stocks that remain stable during good and bad times. A Debenture is a type of bond, and is not a stock.