Equity Securities Review

A company's dividend on its common stock is: A) determined by its board of directors. B) voted on by shareholders. C) mandatory if the company is profitable. D) specified in the company charter.

A

Which of the following securities CANNOT pay a dividend? A) Warrant. B) ADR. C) Convertible preferred stock. D) Class B common stock.

A

Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will he own? I. 125 shares. II. 100 shares. III. Cost of $25. IV. Cost of $20. A) I and IV. B) I and II. C) II and III. D) II and IV.

A

A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 5%. B) 1%. C) 10%. D) 15%.

A (The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield).)

A customer purchases stock for $40 per share, holds it for 10 months, and then sells it for $50 per share. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 17.5%. B) 10%. C) 12.5%. D) 24%.

A - (The customer's return on the stock is the $10-per-share short-term capital gain ($50 − $40). The after-tax rate of return is found by computing the after-tax earnings ($10 [100% - 30%] or $10 [.70] = $7) and dividing this amount by the amount originally invested ($7 / $40 = .175 or 17.5%). Short-term gains are taxed at the same rate as ordinary income.)

A change in earnings would affect the price of which of the following securities the most? A) Treasury stock. B) Common stock. C) 10% debentures maturing in 10 years. D) 6% preferred stock.

B

A corporation authorized to issue 1 million shares of common stock originally issued 600,000 shares and later repurchased 40,000 shares for its treasury. How many shares of common stock will remain outstanding? A) 960,000. B) 560,000. C) 40,000. D) 600,000.

B

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) 16. B) 24. C) 0. D) 8.

B

A new bond issue will include warrants to: A) increase the price of the issue to the public. B) increase the attractiveness of the issue to the public. C) increase the spread to the underwriter. D) compensate the underwriter for handling the issue.

B

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 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: A) $20 million. B) $6.4 million. C) $10 million. D) $12.8 million.

B

The last day that stocks can be bought for cash and still receive the dividend is: A) the business day prior to the regular way ex-date. B) the record date. C) on the ex-date. D) the day after the record date.

B

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. A) II and IV. B) II and III. C) I and III. D) I and IV.

B

If a common stock is currently selling for $75 per share with a quarterly dividend of $.75, the current yield for the stock is: A) 10%. B) 4%. C) 1%. D) 3%.

B (The current yield formula is annual dividend divided by current price. In this case, $3 ($.75 × 4) / $75 = 4%.)

ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders, each preferred share must be paid a dividend of: A) 5. B) 15. C) 25. D) 10.

D

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 A) 1.75%. B) 3%. C) 8.6%. D) 5%.

D - (The current yield is calculated by dividing the annual dividend by the current market value ($1.75 / $35 = 5%).)

A similarity between common and preferred stock is: A) the dividend must be declared by the board of directors. B) the dividend is fixed. C) they have an equal vote. D) both are evidence of corporate indebtedness.

A

If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to: A) 0.32. B) 0.3. C) 0.4. D) 0.48.

A

corporation must have stockholder approval to: A) issue convertible bonds. B) repurchase 100,000 shares of stock for its treasury. C) declare a 15% stock dividend. D) declare a cash dividend.

A

GC, Inc., is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the market price of GCI is $70 after the ex-rights date passes, what is the value of 1 right? A) 15. B) 3. C) 2.5. D) 5.

B

In general, a corporation assumes the least risk when it obtains funds from: A) sale of income bonds. B) sale of preferred stock. C) a commercial bank. D) sale of debentures.

B

The board of directors is responsible for setting all of the following EXCEPT: A) payable date. B) record date. C) ex-dividend date. D) declaration date.

C

A 2-1 split does which of the following? I. Increases the number of outstanding shares. II. Decreases retained earnings. III. Decreases par value per share. A) I and III. B) I and II. C) II and III. D) I, II and III.

A

A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has: A) no effective change in the value of the position. B) a proportionately decreased interest in the company. C) a proportionately increased interest in the company. D) greater exposure.

A

A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that: A) current dividend yield has increased. B) current dividend yield has decreased. C) current dividend yield has remained the same. D) dividend yield to maturity has decreased.

A

A company may pay dividends in which of the following forms? I. Preemptive rights. II. Cash. III. Its own stock. IV. Its own bonds. A) II and III. B) I and III. C) I and IV. D) II and IV.

A

In a portfolio containing common stock, preferred stock, convertible preferred stock, and ADRs, changes in interest rates would most likely affect the market price of the: A) preferred stock. B) common stock. C) convertible preferred stock. D) ADRs.

A

The common stock of ABC Corporation currently earns $3 per share. If the price-to-earnings ratio for this stock is 14, what is the current market price? A) 42. B) 17. C) 21. D) 37.

A

A subscription right or privilege is best defined as: A) the right of shareholders to purchase company shares at a specific price within the next 5 years. B) the right of current shareholders to maintain their fractional ownership of a company by buying a proportional number of shares of any future issue of common stock. C) the right of shareholders to buy any future issue of the company's preferred stock prior to submitted public orders. D) the right of shareholders to maintain their percentage ownership of a company by selling a proportional number of warrants.

B

The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by A) 0.3. B) 0.2. C) 0.1. D) 0.25.

B

A company has reverse-split its common stock. The effect on the earnings per share will be: A) no effect. B) none of these.. C) an increase. D) a decrease.

C

ABC Corporation has declared a record date of Thursday, May 17, for its next quarterly cash dividend. When is the last day the investor may purchase the stock regular way and receive the dividend? A) Wednesday, May 16. B) Thursday, May 17. C) Monday, May 14. D) Tuesday, May 15.

C

GHI stock is at $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield is: A) 1.7%. B) 10%. C) 6.7%. D) 1%.

C

Which of the following securities is subject to the greatest risk? A) Series EE bond. B) A-rated municipal bond. C) XYZ Inc., common stock. D) BAA-rated ABC convertible bond.

C

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of: A) 60. B) 150. C) 600. D) 15.

C

After a company splits its stock 2 for 1, an investor who owns 100 shares receives: A) another certificate for 200 shares. B) notice that the investor's 100-share certificate now represents 200 shares. C) notice to send in the current certificate to be replaced by a new certificate for 200 shares. D) another certificate for 100 shares.

D

Which of the following securities carries the greatest amount of risk? A) Debentures. B) Preferred stock. C) Corporate bonds. D) Common stock.

D

ABC's stock has paid a regular dividend every quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's: A) yield to maturity has gone up. B) current yield per share has increased. C) current yield per share has decreased. D) current yield per share has been unaffected

B

Which of the following features of preferred stock allows the holder to reduce the risk of inflation? A) Callable. B) Convertible. C) Cumulative. D) Noncumulative.

B

GHI currently has earnings of $4 and pays a $.50 quarterly dividend. If GHI's market price is $40, the current yield is: A) 10%. B) 15%. C) 5%. D) 1.25%.

C

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares? A) 400 B) 500 C) 100 D) 300

C

A customer owns 200 shares of GHI common stock at $10 per share and 300 shares of GHI preferred Class A stock at par. If GHI declares a 2:1 split for its common shares, how will the customer's preferred Class A shares be adjusted? A) 600 shares at $50 per share B) 300 shares at $200 per share C) 1,000 shares at $30 per share D) No adjustment is made

D

A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats on the board, the stockholder could cast the votes in which of the following ways? A) 600 votes for any 1 director. B) 300 votes for each of 2 directors. C) 100 votes for each of 6 directors. D) 200 votes for each of 3 directors.

D

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into 5 shares of common stock. The conversion price of the common stock is: A) 20. B) 25. C) 100. D) 1200.

A

A customer owns 1,000 shares of ABC corporation. Which of the following actions on the part of ABC would dilute her equity? A) Registered primary offering of shares. B) Registered secondary offering of shares. C) Payment of a 10% stock dividend. D) 2-1 stock split.

A

ABC Corporation declares a 5-4 stock split. On the ex-date, the price of ABC common will be reduced by: A) 0.2. B) 0.25. C) 0.5. D) 0.8.

A

The ex-date for NYSE-listed issues is set by: A) the NYSE. B) FINRA. C) the issuer. D) the SEC.

A

Which of the following have equity positions in a corporation? I. Common stockholders. II. Preferred stockholders. III. Convertible bondholders. IV. Mortgage bondholders. A) I and II. B) I and III. C) II and IV. D) III and IV.

A

The regular way ex-dividend date for cash dividends is the: A) 3rd business day preceding the record date. B) 2nd business day preceding the record date. C) 2nd business day following the record date. D) 2nd business day preceding the settlement date .

B

A company that has issued cumulative preferred stock: A) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. B) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. C) pays past and current preferred dividends before paying dividends on common stock. D) pays the preferred dividend before paying the coupons due on its outstanding bonds.

C

An informal network of market makers that offers to trade securities NOT listed on an exchange is called: A) National Daily Quotation Service. B) National Association of Securities Dealers Automated Quotations. C) the over-the-counter market. D) Archipelago Exchange (ArcaEx).

C

Callable preferred stock is advantageous to the issuer because it allows the company to: A) take advantage of high interest rates. B) issue fixed-rate securities at a yield lower than usual. C) replace a high, fixed-rate issue with a lower issue after the call date. D) call in the stock at less than par value and capture the difference as income.

C

Which of the following activities are NOT a registrar's function(s)? I. Audit the transfer agent. II. Accounting for the number of shares outstanding. III. Canceling old shares. IV. Transferring shares into the new owners' names. A) I and IV. B) II and III. C) III and IV. D) I and II.

C

Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into ½ share of common. The preferred stock is selling at $17.50 and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 500000. B) 2 million. C) 3 million. D) 2.5 million.

D

For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is: A) 1 round lot. B) 1 odd lot. C) 25 odd lots. D) 25 round lots.

D

Which of the following securities typically carries the highest dividend rate? A) Straight preferred. B) Convertible preferred. C) Participating preferred. D) Callable preferred.

D

As interest rates fall, prices of straight preferred stock will: A) rise. B) fall. C) remain unaffected. D) become volatile.

A

Smith and Co., Inc. has 1 million shares of common stock outstanding and plans to sell 200,000 new shares via a rights offering. Joe Wilson, a common stockholder, owns 200 shares of the company. How many rights will he receive in the mail, and how many rights will it take to purchase one of the new shares? A) 200 rights, 5 per share. B) 100 rights, 5 per share. C) 100 rights, 20 per share. D) 200 rights, 20 per share.

A

Stockholders' preemptive rights include the right to: A) maintain proportionate ownership interest in the corporation. B) serve as an officer on the board of directors. C) purchase treasury stock. D) sell stock back to the issuing corporation.

A

ABC, Inc. will issue new stock through a rights offering. Terms of the offering are 10 rights plus $10 to purchase one new share of stock, with any fractional shares to be considered whole shares. ABC is currently trading at $13. If your customer owns 85 shares of ABC and wishes to subscribe to the new offering, how many shares can she purchase at the subscription price and how much money will be required? A) 9 shares; $80. B) 9 shares; $90. C) 8 shares; $80. D) 8 shares; $90.

B

If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Cumulative. B) Convertible. C) Callable. D) Straight.

C

Shareholder approval is required for all of the following corporate events EXCEPT: A) the acceptance of a tender offer from a non-affiliated company. B) the issuance of convertible bonds. C) dividends. D) stock splits.

C

The residual right of common stockholders refers to their right to: A) examine the corporation's annual reports and other reports, and take legal action if irregularities are found. B) receive all announced dividends in accordance with the number of shares held. C) claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid. D) vote in elections for the board of directors and in other important business decisions, such as changes to the charter.

C

Treasury stock is: A) preferred stock. B) issued by the U.S. Treasury Department. C) stock repurchased by the issuer. D) authorized but unissued stock owned by the company.

C

A company is offering investors the opportunity to purchase shares for the next 5 years at a fixed price slightly above today's market price. The company is issuing: A) warrants. B) futures. C) a letter of intent. D) call options.

A

If ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares? A) 75. B) 30. C) 60. D) 100.

A

Which of the following statements regarding warrants are TRUE? I. They pay dividends. II. They are attractive to speculators because of the leverage. III. They allow for the purchase of common stock at a fixed price. IV. They are equity-equivalent securities. A) II, III and IV. B) I and III. C) I and IV. D) III and IV.

A

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A) Reduction of the number of shares outstanding. B) Increase in earnings per share. C) Reduction of the debt securities' interest rate. D) Dilution of shareholders' equity.

C

ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split? A) The par value would decrease to $5 per share. . B) The retained earnings would be decreased by $10 million. C) The number of shares outstanding would decrease by 50%. D) The market price of the stock would double.

A

All of the following securities are eligible for inclusion on the OTCBB EXCEPT: A) foreign securities that are not SEC registered. B) direct participation programs. C) securities in the process of being delisted by Nasdaq. D) an equity security on a regional exchange that does not qualify for Consolidated Tape reporting.

A

The ex-dividend date is the: I. date on and after which the buyer is entitled to the dividend. II. date on and after which the seller is entitled to the dividend. III. second business day before the record date. IV. second business day after the record date. A) II and IV. B) II and III. C) I and II. D) I and IV.

B

If a stock is sold on November 30 when the record date for a dividend distribution is December 1, the seller is: I. entitled to the dividend if the trade is done regular way. II. not entitled to the dividend if the trade is done regular way. III. entitled to the dividend if the trade is done with cash settlement. IV. not entitled to the dividend if the trade is done with cash settlement. A) I and III. B) II and III. C) II and IV. D) I and IV.

D

The following chart shows the capital transactions of ABC Corporation. Date Event Amount 10-19-96 Initial Offerings 6 million shares 4-1-2000 Treasury Purchase 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? A) 6.5 million. B) 7 million. C) 8 million. D) 7.5 million.

D

Who is responsible for ensuring that a corporation does not have more shares of stock outstanding than it has been authorized to issue? A) FINRA. B) Transfer agent. C) SEC. D) Registrar.

D

All of the following statements describe warrants EXCEPT: A) short-term instruments that become worthless after the expiration date. B) most commonly offered in connection with debentures to sweeten the offering. C) issued by a corporation. D) traded in the secondary market

A

ABC, a publicly held Corporation, decides to issue shares in an additional public offering. If the APO is for an additional 1 million shares and 60% of the shares are subscribed to in the preemptive rights offering, how many shares will the standby underwriter for this offering have available to sell to the public? A) 600,000. B) 400,000. C) 100,000. D) 110,000.

B

All of the following statements describe stock rights EXCEPT: A) they are traded in the secondary market. B) they are most commonly offered with debentures to make the offering more attractive. C) they are short-term instruments that become worthless after the expiration date. D) they are issued by a corporation.

B

The record date: A) is set by the issuing corporation as the mailing date for distribution of cash dividends. B) is set by the issuing corporation to determine which stockholders will receive a declared dividend. C) is fixed by the SEC to determine which investors own stock. D) indicates when the public offering of new issues can be made legally.

B

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above: A) $200 per share. B) $175 per share. C) $125 per share. D) $150 per share.

B

If a stock undergoes a 1-5 reverse split, which of the following increases? I. Market price per share. II. Number of shares outstanding. III. Earnings per share. IV. Market capitalization of the company. A) II and III. B) III and IV. C) I and III. D) I and II.

C

In a 3-for-2 stock split, an investor will: A) have 50% fewer shares at twice the price. B) have two-thirds fewer shares at a 50% higher price. C) have 50% more shares at two-thirds the price. D) have 50% more shares at half the price.

C

A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is: A) 2%. B) 10%. C) not determinable from the information given. D) 5%.

D

Minority stockholders are more likely to be able to elect directors through which form of voting? A) Regular. B) Statutory. C) Progressive. D) Cumulative.

D

When compared to statutory voting, cumulative voting gives an advantage to: A) majority stockholders. B) participating preferred stockholders. C) management rather than the board of directors. D) minority stockholders.

D

Common stockholders of a publicly traded corporation have which of the following rights and privileges? I. Residual claim to assets at dissolution. II. Right to a vote for stock dividends to be paid. III. Right to receive an audited financial report on an annual basis. IV. Claim against dividends in default. A) I and III. B) I and IV. C) II and III. D) II and IV.

A

Common stockholders have all of the following rights and privileges EXCEPT: I. Voting on the composition of the board of directors. II. Voting on routine decisions in the company's operations. III. Receiving par value at liquidation. IV. Receiving a dividend when declared. A) II and IV. B) II and III. C) I and III. D) I and IV.

B

Gargantuan Computers, Inc. (GCI) is proposing an additional public offering of common stock. It conducts a rights offering to its current shareholders at $55 per share, plus 5 rights. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights? A) 15. B) 2.5. C) 3. D) 5.

B

Holders of common shares may generally vote on: A) whether the company should issue additional preferred stock. B) whether a cash dividend is to be declared. C) which member of the board of directors should be chairman. D) whether an administrative assistant should be promoted to management.

A

If a stock's ex-dividend date is Tuesday, January 13, when is the record date? A) Thursday, January 15. B) Wednesday, January 7. C) Thursday, January 8. D) Tuesday, January 20.

A

The rate on an adjustable preferred stock may be indexed to the: A) Treasury bill rate. B) Consumer Price Index. C) Producer Price Index. D) Dow Jones Industrial Average.

A

Which of the following is a function of a registrar? A) Accounting for the number of shares outstanding. B) Recording the names of stockholders on the corporation's books. C) Canceling old shares. D) Transferring shares into the name of a new owner.

A

Which of the following represent ownership in a corporation? I. Debentures. II. Convertible bonds. III. Preferred stock. IV. Common stock. A) III and IV. B) I and II. C) I and III. D) II and IV.

A

Which of the following statements regarding preferred stock is NOT true? A) Voting rights of preferred shareholders take precedence over those of common shareholders. B) Unlike debt, preferred stock has no set maturity date. C) The dividend is fixed except in the case of adjustable preferred. D) Because there is no set maturity value or redemption date, the holder of preferred stock has to sell his shares in the open market to close out his position

A

Which of the following statements regarding the Committee on Uniform Securities Identification Procedures (CU.S.IP) number is CORRECT? A) It facilitates tracking and identification of a security. B) It is evidence of ownership in a corporation. C) It ensures that the security is negotiable. D) It is used in place of the registered owner's signature.

A

Which of the following are TRUE of treasury stock? I. Treasury stock is authorized but not yet issued. II. Treasury stock may pay a reduced dividend. III. Treasury stock is issued but has no voting or dividend rights. IV. Treasury stock is previously issued stock that has been repurchased by the issuing company. A) II and IV. B) III and IV. C) I and II. D) I and III.

B

Which of the following is TRUE concerning a 5:4 stock split? A) Retained earnings will be increased. B) Each shareholder's proportionate equity will be unchanged. C) The par value will be unchanged. D) The net worth of the company will be reduced.

B

Which of the following statements regarding warrants is TRUE? A) Warrants are safer than corporate bonds. B) Warrants are often issued with other securities to make the offering more attractive. C) Warrants give the holder a perpetual interest in the issuer's stock. D) Warrants' terms are generally shorter than rights' terms.

B

Your customer owns 100 shares of DWQ trading at $50 per share. He hears that DWQ has declared a 25% stock dividend and wants to know how that will affect his holdings after the stock dividend is paid. You should advise the customer that based on the current price he will own: A) 125 shares at $50. B) 125 shares at $40. C) 100 shares at $40. D) 100 shares at $50.

B

Which of the following statements regarding a 2-for-1 stock split are TRUE? I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles. A) I and III. B) II and III. C) II and IV. D) I and IV.

D

Which of the following statements regarding holders of common stock are TRUE? I. They must approve the payment of dividends. II. They are entitled to declared dividend distributions in proportion to their ownership. III. They have residual rights to corporate assets on dissolution. IV. They have unlimited liability. A) I and II. B) I and IV. C) II and IV. D) II and III.

D

Which of the following statements regarding the effects of a stock dividend is TRUE? A) Capital surplus is reduced. B) New capital is channeled to the company. C) Net current assets are decreased. D) The market value of the stock is decreased.

D