Unit 1
A client is considering the purchase of American depositary receipts (ADRs). She is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) ADRs are traded on exchanges and the OTC markets. B) ADRs are denominated and pay dividends in U.S. dollars. C) They are not subject to exchange rate, or currency, risk. D) Information regarding the foreign company is easily attainable.
C) They are not subject to exchange rate, or currency, risk. Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. In order to trade in the U.S. markets, information about the foreign company must be available to investors. ADRs representing the best-known companies typically trade on the NYSE or the Nasdaq stock market while lesser companies trade OTC.
Three years ago, an investor purchased 1,000 shares of stock in the Equity Protective Life Insurance Company (EPLIC). The purchase price was $53 per share. The current market value of EPLIC stock is $79 per share. If the investor is in the 24% federal income tax bracket, it is correct to state that: A) no tax is owed by the investor. B) the investor owes tax on a $26,000 long-term capital gain. C) the investor owes tax on a $26,000 short-term capital gain. D) the investor's tax liability is $3,900.
A) no tax is owed by the investor. Because the investor has not sold the EPLIC stock, the gain is unrealized. It is only when a gain (or loss) is realized that there are tax consequences. Had the stock been sold, it would have been a long-term capital gain, which is taxed at 15% rather than the investor's marginal rate.
If a woman owns 9% of the common shares of XYZ and her spouse owns 2% and wishes to sell his shares, which of these is true? 1. He is considered an affiliate. 2. He is not considered an affiliate. 3. He must file a Form 144 to sell. 4. He does not have to file a Form 144 to sell. A) I and IV B) I and III C) II and IV D) II and III
B) I and III If a married couple (either individually or jointly) owns a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. For exam purposes, assume spouses share the same residence.
Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? 1. Registered securities held by a control person 2. Unregistered securities held by a noncontrol person 3. Registered securities held by a noncontrol person 4. Unregistered securities held by a control person A) I and III B) II and IV C) II and III D) I and IV
B) II and IV The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.
An employee wishing to obtain long-term capital gain treatment would prefer the employer to offer A) nonqualified stock options. B) incentive stock options. C) listed stock options. D) portable stock options.
B) incentive stock options. Assuming the time limit conditions are met, exercise of an ISO can result in long-term capital gains while nonqualified options are always treated as ordinary income.
One of the rights of being a common stockholder is the ability to vote on important corporate matters, such as the election of members to the board of directors. The date that determines which shareholders are eligible to vote is: A) the ex-dividend date. B) the last day of the company's fiscal year. C) the record date. D) the election date.
C) the record date. The record date is a date announced by the company as the official date you must be an owner on the company's records in order to participate in the annual meeting and corporate election. A fact not tested is there is no standard regarding how far in advance of the voting date this should be other than it must be at least the normal settlement period, currently two business days.
Reasons why a corporation might issue a convertible preferred stock would include: A) tax savings to the issuer. B) a lower cost to the issuer than would be incurred by the issuance of convertible bonds. C) giving those shareholders the ability to convert into the issuer's bonds. D) giving those shareholders an opportunity to participate in the future success of the company.
D) giving those shareholders an opportunity to participate in the future success of the company. The benefit of any convertible security, debt security, or preferred stock is that the ability to convert into the issuer's common stock allows those investors to participate in the potential future growth of the company. One does not convert into a bond, and because preferred dividends are an after-tax outlay, there are no tax savings, as there would be with bond interest. Because stock is lower in claim than bonds, the dividend rate would have to be higher than the interest rate on bonds.
