Chapter 1

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Income from all of the following securities is partially tax exempt to a corporate investor EXCEPT: A Preferred Stock Mutual Funds B Convertible Bonds C Preferred Stock D Common Stock

B Convertible Bonds

Which of the following statements are TRUE regarding warrants? I Warrants are typically issued with an exercise price that is higher than the stock's current market price II Warrants are typically issued with an exercise price that is lower than the stock's current market price III Warrants would be exercised when the stock's market price is below the warrant strike price IV Warrants would be exercised when the stock's market price is above the warrant strike price

B I and IV

Which statement is TRUE regarding the effect of a repurchase of Treasury Stock? A Outstanding shares are reduced and Earnings Per Share are reduced B Outstanding shares are reduced and Earnings Per Share are increased C Outstanding shares are increased and Earnings Per Share are reduced D Outstanding shares are increased and Earnings Per Share are increased

B Outstanding shares are reduced and Earnings Per Share are increased

A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. Which statement is TRUE? A This is known as a proxy and once given, it cannot be revoked B This is known as a proxy which may be revoked prior to the annual meeting C This is known as a voting trust and once given, it cannot be revoked D This is known as a voting trust which may be revoked prior to the annual meeting

B This is known as a proxy which may be revoked prior to the annual meeting

Which statement is FALSE regarding Treasury Stock? A Treasury Stock is not entitled to dividends B Treasury Stock has voting rights C Treasury Stock buybacks decreases the number of shares outstanding D Treasury Stock purchases are used to increase reported Earnings Per Share

B Treasury Stock has voting rights

All of the following statements about warrants are true EXCEPT: A At issuance, warrants have intrinsic value B Warrant valuation is directly influenced by the valuation of the company's common stock C Warrant valuation reflects the life of the instrument D Warrant valuation reflects market expectations for future earnings of the company

A At issuance, warrants have intrinsic value

Which term describes common stock? A negotiable B redeemable C non-negotiable D callable

A negotiable

All of the following actions will dilute shareholders' equity EXCEPT: A payment of a stock dividend B conversion of convertible preferred stock C exercise of stock options granted to officers D issuance of additional common shares

A payment of a stock dividend

common dividends are usually declared: A quarterly by the Board of Directors of the company B semi-annually by the Board of Directors of the company C quarterly by the Chief Executive Officer of the company D semi-annually by the Chief Executive Officer of the company

A quarterly by the Board of Directors of the company

All of the following are terms associated with preferred stock EXCEPT: A renewable B cumulative C negotiable D convertible

A renewable

Of the following choices, the only method that will raise new funds for a corporation is to: A sell additional common shares through a rights offering B force conversion of outstanding convertible preferred C split its common shares 2 for 1 D call its outstanding preferred

A sell additional common shares through a rights offering

The transfer agent is typically responsible for all of the following functions EXCEPT: A maintaining the integrity of the record of all shareholder names and addresses B acting as disbursement agent for the corporation C issuing new stock certificates D canceling old stock certificates

A maintaining the integrity of the record of all shareholder names and addresses

Which statement is TRUE regarding preferred stock payments? A Preferred dividends are usually higher than those paid to common B Preferred dividends tend to grow over time C Preferred dividends are paid quarterly D Preferred interest is paid semi-annually

A. Preferred dividends are typically fixed and are generally higher than those paid to common stockholders. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have: A 100,000 preferred shares and 25,000 common shares B 100,000 preferred shares and 50,000 common shares C 200,000 preferred shares and 100,000 common shares D 20,000 preferred shares and 200,000 common shares

A. Since each unit consists of 1 preferred issue, 100,000 units X 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units X 1/4 = 25,000 common shares issued if the warrants are exercised.

POP Company has issued 11%, $100 par cumulative preferred stock. Two years ago, POP paid a preferred dividend of $9. Last year, it paid a preferred dividend of $11 per share. This year, POP wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A $13 B $15 C $20 D $22

A. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be made). The stated dividend rate on the preferred is 11% based on $100 par. Two years ago, 9% was paid, so there is a 2% dividend due. Last year, the corporation paid 11%, so there is nothing additional due. Also, this year's dividend of 11% must be paid. The total dividend that must be paid is 13% or $13 per preferred share before a common dividend can be paid.

Dividends are paid to the holders of which of the following? A ADRs B Rights C Treasury Stock D Warrants

A. ADRs - American Depositary Receipts - receive dividends. The bank that issues the receipts against foreign securities "passes through" dividends paid on the stock to the receipt holders. Warrants and rights do not receive dividends nor are there dividends paid on Treasury shares which have been repurchased by the issuer.

The definition of Treasury stock is: A authorized shares minus issued shares B issued shares minus outstanding shares C authorized shares minus outstanding shares D capital in excess of par value minus par value

B issued shares minus outstanding shares

A corporation has been in financial difficulty and its stock price has fallen to an extremely low level. To avoid delisting, it wishes to raise its stock and it wants to conserve its cash. To do this, it should declare a: A stock split B reverse stock split C stock buy-back program D cash dividend on outstanding shares

B reverse stock split

In a rights offering, shareholders who subscribe make payment to the: A stand-by underwriter B rights agent for the issuer C brokerage firm D trustee

B rights agent for the issuer

Which of the following influences the market price of common stock? A The par value of the shares B Investor expectations about the future of the company C Stated value of the shares D Book value of the shares

B Investor expectations about the future of the company

A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. The corporation is making a(n): A tender offer B forced conversion C advance refunding D simultaneous transaction Review

B. If a preferred stockholder converts and sells the stock in the market, he realizes the equivalent of 1.4 (conversion ratio) x $75.50 current market price = $105.70 per share. If he or she tenders the preferred on the call, he or she receives $100 per share. He or she will not continue to hold the preferred since dividend payments will cease. The best choice for the preferred shareholder is to convert. In effect, the corporation is forcing the shareholders to convert to common.

Preferred stocks are most often suitable investments for the: A individual B corporate investor C partnership investor D fiduciary investor

B. Corporations that receive dividends from investments held generally are allowed to exclude 50% of the dividends received from taxation. This exclusion does not apply to individual investors (however, individual investors get the benefit of taxation of cash dividends received at a substantially lower rate - 15% (or 20% for those in the highest tax bracket) - than do corporate investors). Thus, a corporation that receives dividends from common stock holdings, preferred stock holdings, or mutual fund holdings where the fund's income is from common and/or preferred stock investments, is allowed to exclude 50% of that income from taxation.

A customer owns 210 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 20 rights tendered, a shareholder may purchase one additional share at $20 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 10 shares by paying $20 B The shareholder can buy a maximum of 11 shares by paying $220 C The shareholder can buy a maximum of 11 shares by paying $420 D The shareholder can buy a maximum of 110 shares by paying $2,200

B. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 210 shares and thus, will receive 210 rights. 210 rights / 20 rights per share = 10.5 shares, which is rounded up to 11 shares @ $20 each = $220 necessary to subscribe.

Income from which of the following securities is partially tax exempt to a corporate investor? I Common Stock II Preferred Stock III Preferred Stock Mutual Fund IV Convertible Bonds A I only B II and III only C I, II, III D I, II, III, IV

C I, II, III

PDQ Corporation has declared a rights offering to stockholders of record. The company has 5,000,000 shares outstanding and is selling an additional 1,000,000 shares via the rights offer. Which statements are TRUE regarding a customer who owns 500 shares of PDQ stock? I The customer will receive 100 rights II The customer will receive 500 rights III The customer may buy 100 shares IV The customer may buy 500 shares A I and III B I and IV C II and III D II and IV

C II and III

All of the following are functions of the transfer agent EXCEPT: A Mailing dividend payments to shareholders B Preparing and mailing proxies C Setting the Declaration Date D Canceling old shares and issuing new shares

C Setting the Declaration Date

Which source could be consulted to find the trading symbol of a stock? A New York Times B Business Week C Stock Exchange web site D Fortune magazine

C Stock Exchange web site

X Corporation stock has been trading at $1,200 per share recently and trading volume has fallen to record lows. To increase trading volume, the X Corporation may: A perform a reverse split to reduce the number of shares outstanding B suspend trading for a month period to create a market for its stock C split the stock three-for-one to make its price more attractive D reverse split the stock one-for-three to increase its price

C split the stock three-for-one to make its price more attractive

An ADR has been issued where each ADR equals 10 ordinary shares of the foreign issuer. If a client wished to buy enough ADRs to cover 1,000 ordinary shares, how many ADRs must be purchased? A 1 B 10 C 100 D 1,000

C. Since each ADR equals 10 ordinary shares, the purchase of 100 ADRs would cover 1,000 ordinary shares.

Which statement is TRUE regarding participating preferred stock? Participating preferred: A participates in any bond interest payments B participates in a portion of the price appreciation of the issuer's common stock C has a dividend rate that is fixed as to a minimum but not as to a maximum D has a dividend rate that is fixed as to a maximum but not as to a minimum Review

C. Participating preferred pays a fixed dividend rate but also participates with common in "extra" dividends declared by the Board of Directors. Therefore, the dividend is fixed as to the minimum amount but not as to the maximum amount.

Which of the following does NOT receive dividends? A Preferred Stock B Sponsored ADRs C Non-Sponsored ADRs D Treasury Stock

D Treasury Stock

Voting of the common stockholder is required for all of the following EXCEPT: A When a corporation wishes to issue convertible securities B When a shareholder decides to accept a tender offer for the company's shares C When a corporation declares a stock split D When a corporation declares a cash dividend

D When a corporation declares a cash dividend

A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. To realize the largest profit, a customer that purchased 100 shares of this preferred stock at par should: A tender the preferred shares at the call price B sell the preferred shares at the current market price C sell short the common stock and convert the preferred for delivery to cover the short D continue to hold the preferred shares Review

C. If the preferred shares are tendered at the call price, the owner receives $100 per share. Since par ($100) was paid for each share, there is no profit. If the preferred shares are sold at the current market price of $102, the owner has a profit of $2 per share. Since each preferred share is convertible into 1.4 common shares, the short sale (sale of borrowed shares) of 1.4 common shares will yield 1.4 x $75.50 = $105.70. The preferred can then be converted to common to cover the borrowed short position. This results in a $5.70 profit per share. Thus, selling short the common is the best choice. Continuing to hold the preferred does not make sense since dividend payments will cease. For this reason, buying additional preferred shares does not make sense either.

A company's common stock is selling in the market at a "multiple of 15". If the market price of the common stock is currently $10, what is the earnings per share? A $.15 B $.16 C $.67 D $1.50

C. $.67 When a stock is selling at a "multiple" of 15, this means that the market price is 15 times the current earnings per share. Since the market price is at $10 and the P/E ratio is 15, earnings per share is $.67.

To determine if a stock appears to be overpriced, what would be examined? A The company's Earnings Per Share B The company's Dividend Payout Ratio C The company's Price to Earnings Ratio D The company's Debt to Equity Ratio Review

C. The company's Price to Earnings Ratio The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued. Review

Question:All of the following statements are true regarding the trading of ADRs EXCEPT: A ADRs are traded on the New York Stock Exchange B ADRs are traded on the NASDAQ Stock Market C ADRs are traded on the American Stock Exchange D ADRs are traded on the Chicago Board Options Exchange

D ADRs are traded on the Chicago Board Options Exchange

Which statement is TRUE regarding ADRs? A Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in U.S. dollars B Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in the foreign currency C Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in the foreign currency D Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in U.S. dollars

D Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in U.S. dollars

What term would apply to Treasury Stock? A Negotiable B Outstanding C Voting D Par Value

D Par Value

hat term would apply to Authorized Stock? A Issued B Outstanding C Voting D Par Value

D Par Value

All of the following are terms associated with preferred stock EXCEPT? A Convertible B Callable C Cumulative D Redeemable

D Redeemable

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT: A the number of outstanding shares is reduced B the earnings per share is increased C the market price of the stock will increase D the number of authorized shares will be reduced

D the number of authorized shares will be reduced

in a corporate liquidation, the last to get paid is: A Unpaid wages and taxes B Bondholders C Preferred stockholders D Common stockholders

D Common stockholders

Which statement is BEST regarding participating preferred stock? A The dividend rate is fixed B The dividend rate varies depending on the decision of the Board of Directors C The dividend rate is fixed as to maximum but not as to minimum D The dividend rate is fixed as to minimum but not as to maximum

D. Participating preferred pays a fixed dividend rate but also participates with common in "extra" dividends declared by the Board of Directors. Therefore, the dividend rate is fixed as to minimum but not as to maximum.

Which security of the same issuer is likely to give the highest current yield? A warrant B common stock C convertible preferred stock D non-convertible preferred stock

D. Warrants give no yield. Common stocks give the lowest yields since there is direct growth potential in the price of the stock as reported earnings increase. Convertible preferred yields are higher than common yields but not as high as non-convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common's price rises, so growth potential is included. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

A middle-aged widowed customer has an investment objective of stable income and wants minimal market and liquidity risk. What type of preferred stock would be the BEST recommendation? A Participating preferred B Convertible preferred C Straight preferred D Variable rate preferred

D. Variable rate preferred Variable rate preferred has a dividend rate that is tied to a market rate of interest, and the dividend rate varies as that rate varies. When market interest rates rise, the dividend rate rises; when market interest rates fall, the dividend rate falls. Because the dividend rate varies, the price of the security stays right at par value and has minimal market risk. In contrast, any fixed income security, which includes the other types of preferred stock, is subject to market risk. When market interest rates rise, the value of any fixed rate security must fall, making its yield competitive with current market rates. Finally, all preferred stock has minimal liquidity risk. Preferred shares are listed and trade, so the shares can be sold readily at low cost.

All of the following statements are true regarding warrants EXCEPT: A warrants allow the holder to buy the stock of that issuer at a fixed price B warrants give the holder a long term option to buy the stock C warrants are attractive to speculators because of the leverage that they offer D warrant holders have pre-emptive rights

D. warrant holders have pre-emptive rights Warrants are an equity-related security that give the holder the right to buy the stock of that issuer at a fixed price, typically with a 5-year life from issuance. Warrant holders do not receive dividends, nor do they have other shareholder rights such as the right to vote or the pre-emptive right. Warrants are much cheaper than the actual stock, because they only have value if the underlying stock rises. Thus, they give the holder greater leverage if the common stock does appreciate in value.

A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be: A $200 B $400 C $600 D $800

The best answer is A . The annual rate is 8% X $50 par value = $4 per share X 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200. Review

A client owns 100 shares of COSMO Company common stock. The client receives a notice that COSMO has declared a 10% stock dividend. What does this mean? A The client will receive 10 additional shares of COSMO stock B The client's aggregate stock holding will increase in value by 10% C The client must return 10 shares of stock to COSMO D The client's aggregate stock holding will decrease in value because of the additional shares

The best answer is A. A stock dividend means that the company will issue additional shares to current shareholders instead of paying a cash dividend.

Which function would be performed by the registrar? A verifying the record of all shareholder names and addresses B acting as disbursement agent for the corporation C issuing new stock certificates D canceling old stock certificates

The best answer is A. The transfer agent cancels old shares and issues new shares.It is the responsibility of the registrar to maintain the integrity of the shareholder list, and to ensure that the number of shares transferred from one shareholder to another always matches.

A corporation issues $100 par convertible preferred stock, convertible at $10 per share, when the market price of the common is currently $5. Which statement is TRUE? A The conversion ratio is 10:1 B The conversion ratio is 5:1 C The conversion ratio is 2:1 D The conversion ratio cannot be determined Review

The best answer is A. The conversion ratio is Par Value / Conversion Price. $100 Par / $10 Conversion Price = 10:1 Conversion Ratio.

A corporation has issued $100 par, 6 1/2% cumulative convertible preferred stock, callable at par. The preferred is convertible into 2 shares of common stock. Currently, the preferred stock is trading at $100 while the common stock is trading at $50. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions): A $0 B $1,000 loss C $5,000 gain D $10,400 gain

The best answer is A. If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $100 per share = $10,000. Since each share of preferred is convertible into 2 common shares, the 100 preferred shares will be converted into 2 x 100 = 200 common shares. The sale of 200 common shares at the current market price of $50 will yield $10,000. The net profit is: $10,000 - $10,000 = $0. Here, there is a wash, as both the common and preferred are trading at parity.

A corporation issues $100 par convertible preferred stock, convertible at $50 per share when the market price of the common is $30. The preferred is issued under an "anti-dilutive covenant." If the company declares a 25% stock dividend, which statements are TRUE? I The conversion price is adjusted to $40 II The conversion price is adjusted to $62.50 III The conversion ratio is adjusted to 2.5:1 IV The conversion ratio is adjusted to 1.6:1 A I and III B I and IV C II and III D II and IV

The best answer is A. Under an "anti-dilutive" covenant, if there is a stock split or stock dividend resulting in the issuance of additional common shares, the conversion price and hence the conversion ratio are adjusted to reflect the fact that the market price of each common share will drop on the ex date. Prior to the stock dividend, the conversion price was $50 per share. If there is a 25% stock dividend, the new conversion price will be adjusted to $50/1.25 = $40 per share. Since each preferred share is $100 par, the new conversion ratio will be $100/$40 = 2.5:1.

ABC 8% $100 par preferred is trading at $105 in the market. The current yield is: A 6.6% B 7.6% C 8.6% D 10.6%

The best answer is B. The formula for current yield is: $8/$105= 7.6%

Which of the following are equity security holders of a company? A Common shareholders only B Both Common and Preferred shareholders C Convertible Bondholders only D All convertible security owners

The best answer is B. "Owners" have an equity position - and the only owners of a company are shareholders - both common and preferred.

A company that has been growing rapidly announces that it is splitting its stock 3:2 and increasing its cash dividend by 10%. Prior to the announcement, the stock was trading at $60 and the dividend yield was 8%. What will be the next dividend paid per share? A $.80 B $.88 C $1.20 D $1.32

The best answer is B. Another question that is more annoying than difficult. When the stock was trading at $60, it was paying an annual cash dividend of 8% of $60 = $4.80 per share. After the 3:2 split, for every 2 shares held, there will now be 3 shares. This is the same as 1.5:1. The new share price will be $60 / 1.5 = $40. The new annual dividend amount per share before the increase will be $4.80 / 1.5 = $3.20. If this dividend is increased by 10%, the new annual rate will be $3.52, and the new quarterly dividend payment per share will be $3.52 / 4 = $.88.

A customer owns 1,000 common shares of ABC Corporation. Which of the following actions will dilute the shareholders' equity? A ABC declares a 5% stock dividend B ABC declares that it will call its convertible preferred stock, which is currently trading at a premium C ABC declares that it will issue an additional $100,000,000 in bonds D ABC declares a 4:1 stock split

The best answer is B. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. However, in total, the shareholder has the same percentage interest in the corporation.

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of Wednesday, December 1st, the stock is trading at $24.50. The value of the right is: A $.45 B $.50 C $.55 D $1.00

The best answer is B. Since the record date is Friday, December 10th, a customer buying on Wednesday, December 1st would settle on Friday, December 3rd (2 business days later) and would be on the record books for the distribution. Therefore, the stock is trading cum rights. The value of a right "cum rights" is: $24.5 - $19 / 10 + 1 =$5.50 / 11=$.50 Value "Cum Rights"

The essential difference between a sponsored and an unsponsored ADR is: A SEC registration B Issuer sponsorship C Bank sponsorship D Broker-dealer market making

The best answer is B. Sponsored ADRs are sponsored by the issuing foreign corporation.

A customer owns 107 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 10 rights tendered, a shareholder may purchase one additional share at $22 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 10 shares by paying $220 B The shareholder can buy a maximum of 11 shares by paying $242 C The shareholder can buy a maximum of 107 shares by paying $2,354 D The shareholder can buy a maximum of 110 shares by paying $2,420

The best answer is B. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 107 shares and thus, will receive 107 rights. 107 rights / 10 rights per share = 10.7 shares, which is rounded up to 11 shares @ $22 each = $242 necessary to subscribe.

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of the ex date, the stock is trading at $29. The value of the right is: A $.90 B $1.00 C $1.10 D $1.25

The best answer is B. The value of a right "ex rights" is:$29 - $19/10=$10/10 =$1 Value "Ex Rights" Notice that the market price of $29 was already adjusted on the ex date by the exchange where the stock trades. Do not try and reduce the price again!

Which statements are TRUE about the time value and intrinsic value of rights and warrants when issued? I Warrants have time value but not intrinsic value II Warrants have intrinsic value but not time value III Rights have time value but not intrinsic value IV Rights have intrinsic value but not time value A I and III B I and IV C II and III D II and IV

The best answer is B. Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value."

Callable preferred stock is likely to be redeemed by the issuer if: A interest rates rise B interest rates fall C the common stock price rises D the common stock price falls Review

The best answer is B. If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

A corporation has issued $100 par, 6 1/2% cumulative convertible preferred stock, callable at par. The preferred is convertible into 2 shares of common stock. Currently, the preferred stock is trading at $98 while the common stock is trading at $52. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions): A $200 gain B $600 gain C $4,600 gain D $5,200 gain Review

The best answer is B. If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $98 per share = $9,800. Since each share of preferred is convertible into 2 common shares, the 100 preferred shares will be converted into 2 x 100 = 200 common shares. The sale of 200 common shares at the current market price of $52 will yield $10,400. The net profit is: $10,400 - $9,800 = $600.

A customer buys 100 shares of preferred at $80 per share. The par value is $100. The dividend rate is 10%. The customer will receive how much in each dividend payment? A $400 B $500 C $800 D $1,000

The best answer is B. Preferred dividends are based on a stated percentage of par value. The stated rate is 10% of $100 par = $10 annual dividend per preferred share. Since there are 100 shares, the annual dividend is $1,000. Remember, though, that preferred dividends are paid twice a year, so each payment will be for $500.

Dividends on preferred stock may only be paid in: A Common shares of another issuer B Common shares of the same issuer C Cash D Preferred stock of the same issuer

The best answer is C. Dividends on preferred stock are paid solely in cash. Common stock dividends may be paid in cash, stock, stock of another company (i.e. subsidiary), or products of that company.

A corporation has issued 50,000,000 shares of common stock at $2 par. The corporation has 10,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A$20,000,000 B$40,000,000 C$80,000,000 D$100,000,000

The best answer is C. Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000) = 40,000,000 shares outstanding at $2 par = $80,000,000.

ABC Corporation has declared a cash dividend to stockholders of record on Thursday, October 24th. The last day to buy ABC shares BEFORE they go ex dividend is? A Friday, October 18th B Monday, October 21st C Tuesday, October 22nd D Wednesday, October 23rd

The best answer is C. The regular way ex date is 1 business day prior to the record date. The record date is Thursday, October 24th, therefore the ex date is Wednesday, October 23rd. To buy the shares before they go ex dividend, the shares must be purchased before Wednesday, October 23rd, meaning they must be purchased on Tuesday, October 22nd.

A company declares a cash dividend that is 10% higher than the previous dividend rate. Prior to the announcement, the annual dividend yield was 8% and the stock was trading at $25 per share. What is the new dividend payment amount per share? A $.45 B $.50 C $.55 D $.60

The best answer is C. This question is more annoying than hard! The current annual dividend yield is 8% x $25 current share price = $2.00 per year. The dividend is now increasing by 10%, so the new annual dividend rate will be 1.10 x $2.00 = $2.20. Since common dividends are paid quarterly, the quarterly dividend will be $2.20 / 4 = $.55.

PDQ Company $1 par common stock currently trading at $55. PDQ is currently paying a quarterly common dividend of $1.10 per share. The current yield of PDQ stock is: A 2.0% B 4.4% C 8.0% D 44.0%

The best answer is C. Yields are based on annual return. The formula for current yield is: $4.40/$55 = 8%

All of the following terms describe rights EXCEPT? A Exercisable B Negotiable C Redeemable D Giftable

The best answer is C. Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.

]At issuance, the exercise price of a warrant is set at: A a discount to the current market price of that issuer's common stock B the current market price of that issuer's common stock C a premium to the current market price of that issuer's common stock D any of the above, depending on market conditions

The best answer is C. At issuance, the exercise price of a warrant is set higher than the current market price of the stock. The stock's price must appreciate for the warrant to have any intrinsic value. Stock warrants can be attached to preferred stock and bond offerings to make them more attractive to potential purchasers. Review

Which statement is TRUE about American Depositary Receipts? A ADR dividends are paid in foreign currency B Each ADR represents one underlying foreign share C ADR market prices are subject to foreign currency exchange fluctuations D ADRs are issued by U.S. companies and trade overseas

The best answer is C. Dividends from ADRs are declared by the underlying issuer in the foreign currency, but are converted by the depositary bank and paid in U.S. dollars.

As interest rates rise, preferred stock prices will: A remain unaffected B rise C fall D fluctuate Review

The best answer is C. Preferred stock is a fixed income security whose prices move inversely with interest rates. As interest rates rise, preferred stock prices fall, so that the preferred will give a yield that is competitive with the current market.

XYZ Corporation wants to raise additional capital without using an underwriter by issuing rights to its existing shareholders. The company needs to raise $40,000,000 to build a new manufacturing plant. Its common stock is currently trading at $43 and the subscription price for a rights holder is set at $40. The company has 2,000,000 shares outstanding. Which statement is TRUE for the owner of 100,000 XYZ common shares? A 50,000 rights are received allowing the holder to buy 50,000 shares B 100,000 rights are received allowing the holder to buy 100,000 shares C 50,000 rights are received allowing the holder to buy 100,000 shares D 100,000 rights are received allowing the holder to buy 50,000 shares

The best answer is D. Because the company has 2,000,000 shares outstanding, it will issue 2,000,000 rights. The company wants to raise $40,000,000 / $40 received per share = 1,000,000 new shares to be issued. Because there are 2,000,000 rights issued covering 1,000,000 additional shares, the terms of the offering will be that 2 rights are needed to buy 1 new share. The holder of 100,000 shares will receive 100,000 rights. Because 2 rights are needed to subscribe to 1 new share, the holder will be able to subscribe to 50,000 new shares.

Which statement is TRUE regarding rights? A Rights give the holder the long term option to buy stock B Rights typically give the holder a 6-9 month option to buy stock C The exercise price of a right is set at a premium to the stock's current market price D The exercise price of a right is set at a discount to the stock's current market price

The best answer is D. Rights are very short term options (about 1 or 2 months) that give existing shareholders the right to subscribe to new shares at a discount to the stock's current market price. Warrants give the holder the long term option to buy stock - they usually have a life of 5 years or so.They are attached by the issuer to preferred stock or bond offerings to make the deal more attractive to investors. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. Thus, for a warrant to have real value, the price of the common stock must subsequently rise in the market.

The regular way ex date for a dividend payable to stockholders of record on Monday, June 11th, is: A Tuesday, June 5th B Wednesday, June 6th C Thursday, June 7th D Friday, June 8th

The best answer is D. The regular way ex date is set at 1 business day prior to record date. The ex date is the very first date the stock trades without the value of the dividend. If the record date is Monday, June 11th, 1 business day prior is Friday, June 8th.

A company declares a cash dividend that is 8% higher than the previous dividend rate. Prior to the announcement, the annual dividend yield was 6% and the stock was trading at $25 per share. What is the new dividend payment amount per share? A $.375 B $.380 C $.400 D $.405

The best answer is D. This question is more annoying than hard! The current annual dividend yield is 6% x $25 current share price = $1.50 per year. The dividend is now increasing by 8%, so the new annual dividend rate will be 1.08 x $1.50 = $1.62. Since common dividends are paid quarterly, the quarterly dividend will be $1.62 / 4 = $.405.

A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 15 shares by paying $360 B The shareholder can buy a maximum of 16 shares by paying $384 C The shareholder can buy a maximum of 17 shares by paying $408 D The shareholder can buy a maximum of 18 shares by paying $432

The best answer is D. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.


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