U2 Test

ABC Corporation cumulative preferred stock would pay dividends in what order? A) The in arrears dividends, current preferred dividends, then common dividends B) The preferred dividends before paying the interest due on its outstanding bonds C) The current preferred dividend only D) The common dividend, then the current preferred dividend, then any in arrears dividends

A) The in arrears dividends, current preferred dividends, then common dividends Unpaid past (in arrears) preferred dividends on cumulative preferred stock and then any current preferred dividend must be paid before common stockholders can receive a dividend. Bond interest is always paid before dividends

Jones bought an American depositary receipt (ADR) in a South Korean company at $22.00 and recently sold the shares for $36.88. What are the tax consequences of this transaction? A) The profit is taxed as a capital gain of $14.88 in the United States. B) The profit is not taxed because ADRs are tax-exempt securities. C) The profit is taxed as income in the United States. D) The profit is taxed as income of $14.88 by the government of South Korea.

A) The profit is taxed as a capital gain of $14.88 in the United States. Any trading profits (capital gains) from an ADR would only be taxable here in the United States. A capital gain is the profit realized when buying and then selling the shares. Remember, dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability.

RJN common stock is currently listed on the New York Stock Exchange. Poor operating results over the past several years have led to a sharp decline in RJN's stock price, putting the company at risk for failing to meet the minimum price requirements to remain listed on the NYSE. The corporate action most likely to be taken to preserve the listing would be A) a reverse split. B) a forward split. C) increasing earnings. D) a stock dividend.

A) a reverse split. Reverse splits are a favored way of increasing a company's share price. If, for example, the stock price had fallen to $2 per share, a 1 for 10 reverse split would immediately increase the stock's price to approximately $20 per share, a much more respectable amount. Of course, there would be no real change in total value to the shareholders because now they would own one-tenths as many shares with a value 10 times per share greater.

A company's board of directors has voted to divest itself of all shares of a subsidiary to create a new company. This is a type of corporate action best characterized as A) a spinoff. B) an acquisition. C) a tender offer. D) a buyback.

A) a spinoff. A type of divestiture where a parent company sells all of the shares of a subsidiary, or distributes new shares of a company or division it owns, to create a new company is known as a spinoff.

Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of these are true about the position except A) they have the same voting rights as an owner of the common stock. B) they will receive dividends in U.S. dollars. C) they have the right to request the underlying common shares be issued to them directly. D) the security may be traded in U.S. markets.

A) they have the same voting rights as an owner of the common stock. It is important to remember that American Depositary Receipts (ADR) are issued by a depositary bank and the bank is the registered owners of the shares. Depository banks are not required to pass voting proxies through to the ADR holders.

Squidco, Inc., is issuing $100 million in 4 ½% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 per share, any time in the next 10 years. Squidco common is currently trading at $29.95 per share. This is an example of a A) warrant. B) follow-on offering. C) stock right. D) call.

A) warrant. A warrant is normally issued attached to a fixed-income security to attract more interest in the debt issue. Warrants are generally longer term (five or more years) and have an exercise price that is higher than the current stock price.

Under Rule 144, which of these sales are subject to volume limitations on the number of shares sold? I. Control person selling registered stock held for 1 year II. Control person selling restricted stock held for 2 years III. Nonaffiliate selling registered stock held for 1 month IV. Nonaffiliate selling restricted stock held for more than 6 months A) III and IV B) I and II C) II and III D) I and IV

B) I and II Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after 6 months. Registered shares have no Form 144 filing requirement.

Snowflake Resorts, Inc., has announced their intention to repurchase 5 million of the company's outstanding shares from the secondary markets. This is called a A) primary offering. B) buy back. C) tender offer. D) repurchase agreement.

B) buy back. This is an example of a buy back. If the company were buying the shares directly from shareholders at a preset price, it would be a tender offer. A repurchase agreement is a type of money market instrument. If Snowflake Resorts were selling, it would be a primary offering.

Rule 144 covers all of the following transactions except A) trades by an affiliate on an exchange. B) non-affiliate trades on an exchange. C) trades of a newly issued nonregistered security. D) trades on an affiliate in the over-the-counter market.

B) non-affiliate trades on an exchange. Rule 144 imposes volume restrictions on trades by affiliates of a corporation. The rule also restricts the sale of a nonregistered security for the six months following issue.

Included under the term equity security would be A) collateral trust certificates. B) participating preferred. C) equipment trust certificates. D) debentures.

B) participating preferred. Regardless of the adjective used (e.g., participating, cumulative, convertible), if a term is modifying a preferred stock, it is still an equity security. Each of the other choices is a debt instrument.

Big Company, Inc., an NYSE-listed manufacturer of large objects, has declared a 50-cent-per-share dividend payable next month. Big Company also has options available for trade. The actual ex-dividend date will be declared by A) FINRA. B) the NYSE. C) the OTC. D) the CBOE.

B) the NYSE. Ex-dividend dates are set by the market center where trades will likely take place. In the case of an NYSE-listed stock, the New York Stock Exchange will determine the ex-date. The fact that Big Company, Inc., has listed options is not relevant to the question.

All of these dates are declared by the board of directors of a corporation except A) the payable date. B) the ex-dividend date. C) the declaration date. D) the record date.

B) the ex-dividend date. The ex-dividend date is declared by the regulator that controls the trading location (exchange or OTC).

Which of these securities would likely provide the greatest potential for capital appreciation? A) A U.S. Treasury STRIP B) A preferred stock C) A common stock D) A convertible bond

C) A common stock Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservative investors since each is primarily an income investment and has limited growth prospects.

Your customer, MJ, has a strong preference for investing in equity securities; however, she is hoping to increase the amount of current income her portfolio generates. Which of these is the least suitable for her? A) Generic Motors, Inc., 4 ¾% preferred stock B) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments C) Duratech common stock, an exciting new tech manufacturer D) Long Beach Electric, a utility

C) Duratech common stock, an exciting new tech manufacturer New, rapidly growing companies tend to pay little or no dividends. The others all sound like decent sources of dividend payments

BigCo separates a division (KNDA Big Company) and issues stock for the new division to holders of BigCo stock. What are the tax consequences of this corporate spinoff? A) A long- or short-term capital gain depending on how long the shares were held B) A long-term capital gain C) There is no taxable consequence. D) Income based on the value of the new shares received

C) There is no taxable consequence. This spinoff is not a taxable event. Each new share will have a new cost basis based on a percentage of the original cost basis. There is no taxable event until shares are sold.

An investor interested in quarterly income should invest in A) a variable annuity. B) a corporate bond. C) a common stock paying a high dividend. D) Treasury notes.

C) a common stock paying a high dividend. Common stocks generally pay quarterly dividends, whereas corporate and Treasury bonds pay interest semiannually. STRIPS pay at maturity.

An American depositary receipt is a A) foreign security representing a domestic security in foreign markets. B) foreign security trading in U.S. markets. C) domestic security representing a foreign security in U.S. markets. D) domestic security trading in foreign markets.

C) domestic security representing a foreign security in U.S. markets. An ADR is a domestic security issued under U.S. law and registered with the SEC. It represents ownership in a non-U.S. security. It is used to ease ownership and trading of foreign securities in U.S. markets and for U.S. customers

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A) 300 votes total to spread among the three open seats. B) 300 votes each for the open seats. C) no voting rights. D) 900 votes he can divide any way he wants among the three seats.

C) no voting rights Your customer owns preferred stock. Preferred stock carries no voting rights.

Your customer owns 2,200 shares of LMN common stock. LMN Corporation issues stock rights related to an additional offer of shares that will increase the company's common shares by 20%. How many rights will your customer receive? A) 220 rights B) The number cannot be determined. C) 440 rights D) 2,200 rights

D) 2,200 rights Shareholders receive one right per share owned.

Investor buys 100 shares of MJS on June 19, 2015 at a price of $40 per share. On June 1, 2016, MJS declared a 25% stock dividend. On July 1, 2016, the investor sold 50 shares of the MJS at $50 per share. Which of these statements is correct? I. Adjusted cost basis of the shares is $30. II. Adjusted cost basis of the shares is $32. III. Short-term gain on 25 shares and LT gain on 25 shares. IV. There is a LT gain on all of the shares sold. A) I and III B) I and IV C) II and III D) II and IV

D) II and IV When a company declares a stock dividend, the cost basis per share is always reduced. The computation is the original total cost ($4,000) divided by the new number of shares. 100 × .25 = 25 additional shares for a total of 125. $4000 / 125 shares equals a new cost basis per share of $32. When any of the shares are sold, including those received in the stock dividend, the holding period for capital gain or loss, is always the original purchase date. In this case, that was more than 12 months ago so any gains are long term.

Jon owns 100 shares of the Bayside Fishing Company. Bayside has 1 million shares outstanding and us the statutory voting system. There are two open board seats. All of these are true except A) Jon has control of 200 votes, and he can cast up to 100 of those votes for each open seat. B) Jon owns 1/10,000 of the Bayside Fishing Company. C) Jon has a right to transfer his shares freely. D) Jon has control of 200 votes, which he can cast any way he likes among the two open seats.

D) Jon has control of 200 votes, which he can cast any way he likes among the two open seats. Owners of common stock have a right to vote on several issues (including who sits on the board of directors) and the right to transfer their ownership to another person. Jon's 100 shares is 1/10,000 (100/1,000,000) of the company. In a statutory voting system, an owner may vote once per share per open seat. In a cumulative voting system, the owner has a number of votes equal to the shares they own multiplied by the number of open seats, and may cast them any way they choose among the open seats.

On October 15 of last year, ABC Company declared a 3-for-1 reverse split. What are the tax consequences for this corporate action? A) Owners will report a long-term gain. B) Owners will report a short-term gain. C) Owners will report a capital loss. D) There is none.

D) There is none. There are no tax consequences for a split, reverse or otherwise.

Another term for stocks and bonds is A) taxable and tax-free. B) shares and units. C) voting and nonvoting. D) equity and debt.

D) equity and debt. Equity is a common term for securities that represent ownership interest like stocks. Bonds are the most common type of debt security.

Mary owns 8% of Doyle Inc., a publically traded publishing company. She has recently married John, a doctor who owns 3% of Doyle. John wants to sell some of his shares to pay off the debt from the wedding and honeymoon. When he does so he will need to A) file Form 144 because he is a doctor. B) not file Form 144 because only owns 3% and is not a control person. C) not file Form 144 due to the spousal exception. D) file Form 144 because he is a control person.

D) file Form 144 because he is a control person. Because married couples aggregate their position, and collectively the Mary and John own 11% of the company, John is a control person and will need to file Form 144 to sell his shares of Doyle. There is no exception for spouses nor special requirements just for doctors.

LQDT has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to accomplish this they would A) offer warrants to existing shareholders. B) perform a stock split. C) suggest that existing shareholders go to the market and double their existing position. D) offer stock rights to existing shareholders.

D) offer stock rights to existing shareholders. LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrants are long term and normally attached to a fixed-income offer. Neither the stock split nor investors buying in the market generates capital for the company.

All of the following statements regarding penny stocks are true except A) if an account holds penny stocks, broker-dealers must provide a monthly account statement to the customer. B) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document. C) established customers of the firm need not sign a suitability statement. D) penny stock rules apply to both solicited and unsolicited transactions.

D) penny stock rules apply to both solicited and unsolicited transactions. The special penny stock rules only apply to solicited transactions. Because of the greater perceived risk of investing in penny stocks, it is required that the penny stock disclosure document fully describing the risks associated with penny stock investments be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.

Equity is to debt as A) stock is to mutual fund. B) hedge fund is to mutual fund. C) stock is to preferred stock. D) stock is to bond.

D) stock is to bond. Stocks are the most common example of equities while bonds are the most common example of debt securities.