Ch1 Quiz

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above:

$175 per share

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is:

25 round lots For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.

If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is

5%

Which of the following securities carries the greatest amount of risk?

Common stock

A change in earnings would affect the price of which of the following securities the most?

Common stock. Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm.

A similarity between common and preferred stock is:

Dividend must be declared by board

A customer is considering adding a real estate investment trust (REIT) to their portfolio. They list all of the following as "plusses" or advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is NOT an advantage of investing in REITs?

Dividend treatment Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are, therefore, taxable to the investor at their full ordinary income tax rate

Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue?

Registrar

Which of the following securities CANNOT pay a dividend?

warrant

New Offering: 800,000 units at $6 per unit. Each unit has 2 shares of common stock and 1 warrant. Each warrant is to purchase ½ share of common stock. Based on the information above, how many shares of stock will be sold, and how many warrants will be sold?

1.6 million shares and 800,000 warrants.

Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?

10 The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10.

The following chart shows the capital transactions of ABC Corporation. Date: 10/19/96 Event: Initial Offerings Amount: 6 million shares Date: 4-1-2000 Event: Treasury Purchase Amount: 500,000 shares ABC wants to raise additional capital by selling 2 million shares through a rights offering and engages an underwriter on a standby basis. By the expiration date, ABC was only able to sell 1 million shares to existing shareholders. After expiration, how many shares does ABC have outstanding?

7.5 million Before the rights offering, the company had 5.5 million shares outstanding (6 million issued minus 500,000 Treasury shares). In connection with the offering, ABC engages a standby underwriter that commits to purchase any unsold shares. Therefore, regardless of the number of shares initially subscribed to, all 2 million shares will be sold.

ADRs

Dividends are payable in US currency & owners do not have voting rights

Which of the following statements regarding ADRs are TRUE? I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities.

I & III

Which of the following must be paid before a corporation may pay its cumulative preferred stock arrearages? I. This year's preferred dividends. II. Bond interest. III. Corporate taxes. IV. Common stock dividends.

II & III

U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are:

II.stripped bonds. III.subject to annual taxation on the per year accreted amount.

If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT:

REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.

Which of the following would have the least market risk?

Revenue anticipation notes.. Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).

Which of the following is an advantage of owning American depositary receipts?

The investor can buy, sell, and receive dividends in U.S. dollars rather than a foreign currency.

ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued with a $1,000 PAR value has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive:

There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million.

If a stock's ex-dividend date is Tuesday, January 13, when is the record date?

Thursday, January 15.

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate?

callable

All of the following are advantages of investing in American Depositary Receipts (ADRs) EXCEPT:

currency risk is virtually eliminated.

ADRs are used to facilitate the:

domestic trading of foreign securities.

In a 3-for-2 stock split, an investor will:

have 50% more shares at two-thirds the price. If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by one-third, but the total value of the position will stay the same. For example, if a shareholder owns 100 shares before the 3 for 2 split, the shareholder will have 150 shares after the split (3 / 2 × 100 = 150).

Callable preferred

highest dividend yield

Dividends can be paid

in stock or in cash

Stockholders' preemptive rights include the right to:

maintain proportionate ownership interest in the corporation.

A company that has issued cumulative preferred stock:

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

The rate on an adjustable preferred stock may be indexed to the:

treasury bill rate The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark.