SIE chapter 1 equity securities
ABC Company raised its cash dividend from 18 cents to 19 1/2 cents and also declared a 5% stock dividend. The record date of the cash dividend is Thursday, May 20 and the record date of the stock dividend is Wednesday, May 12. An investor buys 1,000 shares of ABC regular way on Wednesday, May 12. The customer will receive a cash dividend of?
$195.00 exp:The cash dividend is 19.5 cents per share, and we have 1000 shares: we take $0.195 X 1000 = $195. (The reason we can ignore the stock dividend is because it does not affect this investor. The ex-date of the stock dividend is prior to the purchase date, so the investor is not entitled to the stock dividend).
A round lot unit of trading in common stock is
100 shares
When a common stock has had a long record of growth, quality management, and services, and consistently pays a moderate dividend, it would generally be referred to as a:
Blue Chip stock Blue Chip common stocks generally have a long record of growth, quality management, and service that maintains a consistent dividend payout ratio of about 50%.
All of the following are TRUE about the types or kinds of preferred stock EXCEPT:
Callable where shares may be redeemed by the company at a stated discount from par on certain dates Callable shares are redeemed at a premium above par, not a discount from par.
Which of the following is NOT a characteristic of common stock?
Dividends paid on common stock are typically a fixed percentage of the value at the time of issuance. Dividends on common stock are not fixed but are set by the Board of Directors and will fluctuate based on how the company is doing financially. Preferred stock does pay a fixed dividend rate.
Risks or disadvantages that may arise from participation as a limited partner in a limited partnership generally include all of the following EXCEPT:
Full participation in all liabilities incurred by the general partner(s). Limited partnerships are illiquid investments that have come under close scrutiny from the IRS because of abuse of the tax-shelter advantage. Limited partners are only subject to limited liability, which differs from full participation in all liabilities incurred by the general partner(s). Only general partners are subject to unlimited liability.
Prior to repurchasing its own shares in the open market, a corporation would usually be required to:
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.
In regard to recourse loans in a DPP
I and III only I correct - principal repayment reduces a limited partner's basisII incorrectIII correct - investors are liable for the repayment of a recourse loanIV incorrect
Which of the following are true concerning a Real Estate Investment Trust (REIT)?
I and IV In order to qualify as an REIT, it must pay out 90% to shareholders. The REIT makes its profit on the difference between the interest expenses and the interest it receives. It can make short-term real estate construction and development loans, and anyone considered a suitable investor can invest in an REIT.
Treasury stock has which of the following features?
I and IV Treasury stock is stock that has been issued by a corporation and then repurchased by that corporation. Because it is held by the corporation, it does not participate in voting matters and does not receive dividends.
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?
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
Crystal Keep is a publicly traded company. It declares a dividend on May 9th for shareholders of record as of May 17th. The dividend is paid on June 5th. On which date does the investor incur a tax liability for this dividend?
June 5th The payable date is the date that the dividend is actually paid. This date also creates the taxable event for the investor.
Mortgage Real Estate Investment Trusts generally invest in which of the following
Properties handled by developer or builders exp: Mortgage Real Estate Investment Trusts lend money to builders and developers and then pass the income on to shareholders.
In a limited partnership, which one of the following would represent the least potential for a conflict of interest?
The general partner has a substantial amount of funds at risk in the limited partnership. EXPLANATION If the general partner has a substantial amount invested in the partnership that would not be a conflict of interest, it would help assure that the general partner will work toward the success of the partnership.
Which would be a counter-cyclical industry?
The gold mining industry exp: 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?
The proportionate share of ownership in the company by each stockholder does not change. exp: Since a stock split affects only the existing shareholders, the proportionate ownership of each shareholder would not change.
Which of the following statements regarding warrants is not true?
They are an obligation which must be issued by the corporation. exp: Warrants are always "want to" by a corporation, not a "have to."
All of the following are rights of common stockholders EXCEPT:
To vote for the amount of stock dividends they will receive Common stockholders are not allowed to vote for their own dividend distributions. Dividend distributions are determined by the Board of Directors of the corporation.
Which of the following would NOT be considered an advantage when investing in Real Estate Investment Trusts (REITs)?
Weakening demand for real estate If property demand was slowing down, that would reduce interest in investments in REITs.
Which of the following risks is NOT normally a major factor when analyzing ADRs (American Depositary Receipts)?
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.
ABC Corp. plans to issue subordinated notes that include warrants. The warrants allow investors to purchase ABC common stock. Based on this information, which is most likely true of the notes?
The notes will become more marketable at issuance. With the inclusion of warrants in the sale of the subordinated notes, the corporation could pay a lower interest rate because of this added and attractive feature. Also, the notes will likely be more marketable (investors would be more willing to buy these notes when they are issued). The warrants do not make it more difficult to sell the security in the secondary market.
All of the following are benefits of investing in a REIT EXCEPT:
depreciation write-offs A Real Estate Investment Trust (REITs) manages a portfolio of real estate to earn profits for its investors. They are like investment companies in that they provide professional management and diversification. Because REITs must distribute at least 90% of its net earnings to avoid taxation, they tend to pay high yields of 5% to 10% or more. Unlike real estate limited partnerships depreciation write offs do not pass through to the investors.
When a cash dividend is paid on a stock, an investor with a short position in the stock would:
owe the dividend to the lender Since short stock is borrowed, the investor with the position would owe the dividend to the lender.
all of the following are characteristic of REITs except
they must be registered under the investment company act of 1940 exp: REITs are not investment companies and do not have to be registered under the Investment Company Act of 1940.
Leafy Trees Inc. has the following facts regarding its common shares as of April: Authorized shares: 10,000,000 Issued and outstanding: 8,000,000 May: It repurchases 1,000,000 shares. June: It completes a 2 for 1 stock split. How many shares are outstanding after the split?
14,000,000 The company has 8,000,000 shares outstanding before any corporate action is effected. It then repurchases 1,000,000 shares, which is now treasury stock. The outstanding number of shares is reduced to 7,000,000 (issued stock - treasury stock = outstanding stock). After this, the company completes a 2 for 1 stock split. So the new outstanding share figure is: 2/1 x 7,000,000 = 14,000,000.
A corporation with cumulative voting has two spots open on the Board of Directors. A customer who owns 250 shares could vote in all of the following ways EXCEPT:
500 votes for each director. et's discuss the concept: Cumulative voting occurs when a shareholder has the ability to cast one vote per share owned multiplied by the number of directors up for election. We have 250 shares multiplied by 2 directors for a total of 500 votes. 500 is the total number of votes that we can cast. We can break up the 500 votes anyway we please, but we cannot go over the 500. Answer A: We can vote 250 for each director (250 X 2 directors = 500 votes). Answer B: So we can vote 500 for one director Answer C: We can vote 400 for one director and 100 for the other = 500 total. Answer D: We CANNOT vote 500 for each director (500X 2 directors = 1000). Too many votes.
in terms of common stock and the securities industry, which of the following BEST describes the term "proxy"?
An authorization related to voting privileges allowing absentee voting for shareholders or voting on behalf of shareholders by a broker-dealer firm Exp: The term "proxy" in relation to common stock and the securities industry is typically used in reference to voting privileges. When a shareholder does not attend an annual shareholders meeting, the shareholder can typically vote by proxy, a form of absentee voting. Proxy is also used to describe a power of attorney that shareholders can give to their broker-dealer firm in relation to voting on behalf of the shareholders when it comes to important matters such as the board of directors of a corporation, stock splits, etc. A discretionary authorization would be what allows discretionary trading in a customer's account. Proxy is not used in relation to introducing and clearing firms. Quotes that are not firm are not labelled as "proxy" but would be referred to as "subject" quotes.
When a company does a Rights Offering, the rights are
only given to existing shareholders, proportionately to shares held. Rights are a short-term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a price that is lower than the public offering price before the public is allowed to purchase the new shares. Rights are distributed to the existing shareholders at no cost.
Mr. Smith is short 100 shares of ABC common stock when ABC pays a 10% stock dividend. On the morning of the ex-date Mr. Smith would
owe 10 additional shares of ABC common stock When a customer is SHORT stock and a stock dividend is paid, the investor would OWE the additional shares to the firm that they borrowed the stock from, therefore Mr.Smith would owe 10 additional shares of ABC common stock.
A warrant that is issued with a debenture
pays interest in relation to the debenture until the warrant is exercised. Exp: A warrant is a long-term derivative security that allows the holder the ability to buy a specific number of shares at a specific price. Warrants differ from rights in that warrants are normally good for years or in perpetuity (until the company no longer exists). Rights are short-term and generally expire after 90 days. Warrants are derivative securities that will not pay dividends or interest, however once converted, the stock that is purchased as a result of the warrant may pay dividends.
