Unit 1 (Quiz 1)
A customer investing in common equity securities could realize all of the following except: A) protection of principal investment B) current income via dividend declarations C) potential capital appreciation D) potential hedge against inflation
A ) protection of principal investment Explanation - While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it.
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year and was missed in the two previous years. If the company wants to pay a dividend to common shareholders, how much must the company pay this customer per share first? A) $24 B) $0 C) $8 D) $16
A) $24 Explanation - If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the 2 years missed, in addition to the $8 this year, for a total of $24.
Which of the following preferred stocks allows the issuer to pay the shareholders par and cease dividend payments following a stated period? A) callable B) redeemable C) adjustable D) puttable
A) Callable Explanation - The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.
Which of the following regarding established customers of a broker-dealer and the purchase of penny stocks are true? I. They are exempt from the suitability statement requirement II. They are not exempt from suitability statement requirement III. They are exempt from the disclosure rules IV. They are not exempt from the disclosure rules
A) I and IV Explanation - An established customer is one who has effected a non-penny securities transaction or made a deposit of funds or securities into the account at least one year before the proposed penny stock trade or has made three purchases of penny stocks on three separate days involving three separate issues. Established customers are exempt from the suitability statement required but are subject to the disclosure rules.
All of the following are possible actions of an investor who has received stock rights except: A) hold the rights for a possible long-term capital gain B) exercise the rights to purchase the new stock at a discount C) sell the rights for a short-term capital gain or loss D) allow the rights to expire unexercised
A) hold the rights for a possible long-term capital gain Explanation - A long-term capital gain would require a holding period of more than one year. Rights expire four-six weeks after issue, so this would not be possible.
A shareholder feels strongly about some of the issues to be voted on at the next shareholder meeting but is unable to attend. Which of the following is true? A) the shareholder can vote by proxy B) the shareholder will need to attend in person in order to vote C) the shareholder must relinquish the right to vote at this meeting D) the shareholder must deliver the vote in person but can do so before the date of the meeting
A) the shareholder can vote by proxy Explanation - If unable to attend a shareholder meeting, shareholders can vote by an absentee ballot, known as a proxy. Delivery of the proxy can be made online or by mail.
Interest-rate sensitivity for preferred shareholders should be understood to mean that: A) when interest rates rise, the prices for preferred shares can fall B) preferred share prices are not impacts by (insensitive to) changes in interest rates C) when interest rates rise, so do the prices of preferred shares D) when interest rates fall, so do the prices of preferred shares
A) when interest rates rise, the prices for preferred shares can fall Explanation - Preferred shares, like debt securities, are sensitive to and have an inverse relationship to interest rates. Rates up, prices down. Rates down, prices up.
For restricted stock (unregistered) held by a nonaffiliated, which of the following applies? A) No holding period, but volume limits always apply B) 6-month holding period, with sales allowed freely thereafter C) No holding period or any volume restrictions D) 6-month holding period, with volume limits thereafter
B) 6-month holding period, with sales allowed freely thereafter Explanation - For restricted stock (unregistered) held by a nonaffiliated, a six-month holding period before any sales can be made applies. After the holding period, sales can be made freely.
A company has distributed profits to its shareholders. This type of distribution would most likely be in the form of: A) options B) dividends C) bonds D) warrants
B) dividends Explanation - The distribution of profits to shareholders would generally be in the form of dividends to be received at the discretion of the board of directors (BOD). Bonds and warrants are other types of securities a company might issue, while options are a derivative product that would not be issued by the company.
A convertible feature for preferred shares allows the owner to exchange the shares: A) for the preferred shares of another issuer B) for a fixed number of shares of the issuing corporation's common stock C) for a fixed number of bonds issued by the corporation D) for as many bonds as the issuer is willing to issue at that point in time
B) for a fixed number of shares of the issuing corporation's common stock Explanation - The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares.
Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) unregistered stock acquired by a nonaffiliate under an investment letter B) stock acquired on the NYSE by a corporate affiliate C) unregistered stock acquired by a corporate affiliate in a stock option program D) stock acquired by a corporate affiliate in a private placement
B) stock acquired on the NYSE by a corporate affiliate Explanation - The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.
In order to receive a declared dividend a shareholder must be an owner of record at the close of business on the: A) declaration date B) record date C) payable date D) ex-dividend date
B. record date Explanation - Shareholders must be owners of the stock on or before the record date in order to receive the current dividend.
All of the following could be characterized as benefits to owning common stock except: A) income potential via the receipt of dividends B) limited liability C) low dissolution priority D) capital gains via increases in share prices
C) low dissolution priority Explanation - Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). Obviously, this is not a benefit. However, price appreciation and the receipt of dividends are potential benefits and limited liability is guaranteed, only being able to lose what one has invested.
By electing a board of directors (BOD), stockholders have: A) a say in day-to-day details of its operations but no say in the management selected to carry out those operations B) a say in the company's management and all day-to-day details of its business operations C) neither a say in the company's management nor a say in any of the day-to-day details of its operations D) a say in the company's management but are not involved in the day-to-day details of its operations
D) a say in the company's management but at not involved in the day-to-day details of its operations Explanation - By electing a BOD, stockholders have a say in the company's management but at not involved in the day-to-day details of its operations.
An investor needs to decide whether or not they would like to maintain their percentage of ownership in a company that has decided to increase the number of outstanding shares. Which of the following is the best description of what is taking place? A) warrants will be distributed to existing stockholders with an exercise price equal to the current market value B) warrants will be distributed to existing stockholders and they will have 2-5 years to decide whether or not to buy the stock at the stock price C) rights will be distributed to existing stockholders; they have only 2 options: exercise the rights or let them expire D) rights will be distributed to existing stockholders with an exercise price lower than the current market value
D) rights will be distributed to existing stockholders with an exercise price lower than the current market value Explanation - Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of 4-6 weeks (30-45 days). Existing shareholders who receive rights have 3 options: 1. they may be exercised 2. sold in the secondary market 3. allowed to expire at the end of their subscription
