Chapter 3 - Custom Exam v.2

Preferred dividends:

Must be satisfied before common dividends - Preferred shares receive dividends before the common stock dividends can be paid. However, a company doesn't guarantee preferred dividends will be paid each year.

Common and preferred stock are similar in that:

The dividends for both must be declared by the board of directors - Dividends for both common and preferred stock must be declared by the board of directors. While preferred stock normally has a fixed dividend, neither common nor preferred stockholders are guaranteed a dividend.

A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7 dividend in 2012 and $8 in 2013. If the company wants to pay a common stock dividend in 2014, the cumulative preferred stockholders must first receive a dividend of:

12 - The cumulative preferred stockholder should receive a yearly dividend of $9. Since it is a cumulative issue, any dividend that is not paid must be made up prior to a common dividend being paid. If a common dividend is to be paid in 2014, the cumulative preferred stockholders must first receive $12 ($2 for 2012 plus $1 for 2013 plus $9 for 2014).

Foreign stocks trade in U.S. markets as: a) foreign capital units (FCU's) b) overseas monetary stocks (OMS's) c) american depositary receipts (ADR's) d) Foreign Dividend Stocks (FDS's)

American Depositary Receipts (ADRs) - American Depositary Receipts are used to facilitate the trading of foreign stocks in the United States. Unregistered securities are securities sold to investors that do not require registration with the SEC (for example, a private securities offering). An exchange-traded fund (ETF) is a type of investment company that represents a basket of securities and is traded on an exchange. The basket of securities usually represents an index such as the Nasdaq 100 or the S&P 500. A closed-end mutual fund is also a type of investment company that issues a fixed number of shares.

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This would most likely be accomplished through the issuance of:

American Depositary Receipts - American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

If a corporation believes that its stock is undervalued, which of the following actions will cause the share price to rise?

Buying back some of the shares - One reason that a company will buy back its own shares is that it believes that the stock is undervalued. Once the buy-back is done, there are fewer shares (i.e. lower supply) and the price of the shares will typically rise. Issuing new shares will increase the number of shares outstanding, which could decrease the price of the shares. Creating new rights and warrants could also increase the shares outstanding, which is likely to cause the stock's price to decrease.

Preferred shares:

Don't have the right to vote - Preferred shares receive dividends before the common shares. In addition, preferred shares will be paid before common shares if the company declares bankruptcy (i.e., if the firm is liquidated). However, the bondholders are paid before the preferred shares in bankruptcy. Typically, only common shareholders of a company receive the right to vote in corporate elections.

When warrants are issued, the exercise price is:

Higher than the current market price of the stock - Warrants are typically issued with a strike price that's higher than the current market price of the stock (i.e., at a premium).

A company in which your client owns stock is about to make a rights offering. The client informs you that he does not plan on subscribing to the offer. You would tell the client that his proportionate ownership interest in the company would:

If an individual does not subscribe to additional stock in a rights offering, his proportionate ownership interest in the company will decrease.

Treasury stock:

Was previously issued stock that has been subsequently repurchased by the corporation - Treasury stock is stock that has been reacquired by the issuing corporation. Treasury shares don't receive dividends and don't carry voting rights.