Unit 2: Session 1: Types & Characteristics of Equity Securities Including Methods Used to Determine Their Value

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? - As an inducement to make the bonds more marketable. - To lower their interest cost on the issue. - To increase the marketability of their common stock. - To increase the number of common shares outstanding.

1 & 2

Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A)support and resistance. B)moving averages. C)consolidation. D)trend lines.

B

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor the: A)betas of the S&P 500 stocks. B)advance/decline line. C)Value Line Index. D)DJIA.

B - The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's: A)resistance level. B)200-day moving average. C)support level. D)previous high.

C

A corporation with a 7% $100 par cumulative preferred paid $5 to preferred stockholders last year. Before the company can pay common dividends, how much must it pay each preferred share outstanding?

$9 - A cumulative preferred must pay all unpaid cumulative preferred dividend amounts prior to payment to common stockholders. The company had only paid $5 of the $7 due last year, so the $2 in arrears must be paid. The preferred shareholders will receive $9 ($7 + $2 = $9).

All of the following statements regarding incentive stock options (ISOs) are correct EXCEPT: A)the favorable tax treatment associated with ISOs is lost if the shares acquired through the ISO exercise are sold before one year from the date of grant or two years from the date of exercise. B)upon the exercise of an ISO, income for AMT purposes is created. C)if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain. D)the exercise of ISOs does not create taxable income.

A - The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before one year from the date of exercise or two years from the date of grant. You are not taxed upon exercise, only upon sale, but the incentive portion of the option could be considered a preference item for purposes of AMT.

The Board of Directors of DDC omitted dividends in 2010 on their $100 par 6% noncumulative preferred stock. In 2011, a $2 preferred dividend was paid. For DDC, 2012 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 2012 in order to pay a common dividend?

$6 - It's Noncumulative Preferred Stock

Which of the following statements regarding nonqualified (nonstatutory) stock options (NSOs) are CORRECT? - There is one specified manner in which NSO stock option plans may be designed. - There are no nondiscrimination rules to apply when establishing one of these plans. - This is one type of stock option in which participating employees can actually suffer a loss. - When the employee purchases shares, the employer must withhold and pay federal income taxes with respect to the "bargain element" of the shares purchased.

2 & 4

Your customer owns $100 par 5-½% callable convertible preferred stock convertible into 4 shares of common stock at $25. What should she be advised to do if the board of directors were to call all the preferred at 106 when the common stock is trading at $25.50? A)Hold the preferred stock to continue the 5-½% yield. B)Place irrevocable instructions to convert the preferred stock into common stock and sell short the common stock immediately. C)Present the preferred stock for the call because the call price is $4 above the parity price. D)Convert her preferred stock into common stock because it is selling above parity.

C - If the preferred stock is called, the client will receive $106. Tendering the preferred stock will provide the highest value. The value of converting the preferred stock into 4 shares of common is worth $102 (4 × $25.50 = $102), which is less than the call value of $106. The dividends will cease on the call date if the preferred stock is held beyond the call date.

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

C - Rights offerings are usually very short-lived (30 to 45 days).