Chapter 3 Equity Securities

Front 1

______ stocks are associated with companies that are resistant to recession.

Back 1

Defensive stocks are associatedwith companies that are resistant to recession.

Front 2

Issued stock - Treasury stock = _____

Back 2

Issued stock - Treasury stock = Outstanding Stock

Front 3

True or False: Common stockholders have the right to vote for the payment of dividends.

Back 3

False. Dividend payments are determined by the board of directors.

Front 4

Describe callable preferred stock.

Back 4

A form of preferred stock that the issuer can repurchase at a fixed price; it typically offers a higher dividend.

Front 5

A _______period is a length of time during which shareholders and insiders are prohibited from selling their shares.

Back 5

A lock-up period is a length of time during which shareholders and insiders are prohibited from selling their shares.

Front 6

True or False: Issuers of unsponsored ADRs are subject to SEC reporting requirements.

Back 6

Fals. Issuers of ADRs foreign governments, and foreign private issuers are exempt from the reporing requirements.

Front 7

The formula for finding conversion ratio on convertible preferred stock is: _______

Back 7

The formula for finding conversion ratio is: Par / Conversion Price (par for preferred is $100)

Front 8

List the securities that are considered equities.

Back 8

Common and preferred stocks

Front 9

What is restricted stock?

Back 9

Unregistered stock that is typically bought through a private placement before shares are offered publicly

Front 10

Define control stock.

Back 10

Stock that is owned by officers, directors, or greater than 10% owners. It is also referred to as affiliated stock.

Front 11

Under Rule 144, restricted stock must be held for ____ months before it can be sold.

Back 11

Under Rule 144, restricted stock must be held for six months before it can be sold.

Front 12

The _______ is responsible or overseeing a company and appointing its senior managers.

Back 12

The board of directors is responsible for overseeing a company and appointing its senior managers.

Front 13

What is the advantage existing stockholders receive through rights offersings?

Back 13

The ability to maintain their percentage of ownership and buy additional shares at a discount.

Front 14

If an issuer is buying its own securities on an exchange, how many broker-dealers is it allowed to use?

Back 14

It may only use one broker-dealer per trading session

Front 15

True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.

Back 15

True. However, it does not quarantnee them reprensentation on the board.

Front 16

$ ______ is normally the par value for preferred stock.

Back 16

$100 is normally the par value for preferred stock.

Front 17

______ stock is the amount of stock a corporation is legally permitted to issue.

Back 17

Authorized stock is the amount of stock a corporation is legally permitted to issue.

Front 18

May a warrant be detached and traded separately?

Back 18

Yes

Front 19

True or False: A FINRA member firm must disclose whether it has the ability to influence the issuer of securities.

Back 19

True. This is referred to as a control relationship which must be disclosed to investors.

Front 20

Issuers/affiliates repurchasing their own shares may not buy the shares in the last ___ minutes of the trading day

Back 20

Issuers/affiliates repurchasing their own shares may not buy the shares in the last 30 minutes of the trading day

Front 21

True or False: A stockholder is able to vote for a director, but not an officer.

Back 21

True.

Front 22

True or False: With approval of the board, preferred dividends can be skipped in some years.

Back 22

True. Unlike bond interest, preferred dividends are not required to paid each year.

Front 23

True or False: Corporate shareholders have limited liability.

Back 23

True. Shareholders can only lose their original investment if a company declares bankruptcy.

Front 24

Equiy holders are owners and are entitled to receive _____, which are derived from corporate ______.

Back 24

Equiy holders are owners and are entitled to receive dividends, which are derived from corporate profits.

Front 25

_______ preferred stock allows owners to exchange the preferred shares for common shares.

Back 25

Convertible preferred stock allows owners to exchange the preferred shares for common shares.

Front 26

What instruments are used to facilitate trading of foreign securities in the U.S.?

Back 26

American Depositary Receipts (ADRs)

Front 27

What time limit exists for issurers/affiliates of actively-taded securities that are repurchasing their own security?

Back 27

They may not purchase their security within the last 10 minutes of the trading day

Front 28

True or False: Customrs of a broker-dealer can request to see the firm's balance sheet.

Back 28

True. If requested, customers must be provided with the broker-dealer's most recent balance sheet.

Front 29

True or False: Common shares vote to authorize the issuance of additional shares of a company.

Back 29

True

Front 30

What group of stockholders receives dividends first?

Back 30

Preferred stockholders

Front 31

True or False: ADRs must be issued with cooperation from the foreign issuer.

Back 31

False. ADRs that are issued without assistance from the foreign company are considered unsponsored.

Front 32

What are not considered equity securities?

Back 32

Fixed-income products, such as bonds and notes

Front 33

_____ stocks are associated with major companies that have records of high earnings and dividend payments.

Back 33

Blue-chip stocks are associated with major companies that have records of high earnings and dividend payments.

Front 34

Describe cumulative preferred stock.

Back 34

Stock that requires payment of any missing dividends before common stockholders are paid

Front 35

ABC hasn't paid dividends in four years. If declared in year 5, what will a 3% cumulative preferred shareholder receive?

Back 35

$15 ($100 x 3% = $3 per year x 5 years of dividends)

Front 36

How do shareholder's typically inspect their company?

Back 36

By reviewing the annual and quarterly reports that are distributed by the corporation

Front 37

If attached to the issuance of a bond, may warrants be traded separately?

Back 37

Yes. The two may be detached and traded separately.

Front 38

Who are considered the owners of a corporation?

Back 38

Common and preferred stockholders

Front 39

True or False: All owners have the right to vote.

Back 39

False. Only common stockholders have the right to vote.

Front 40

What voting method permits one vote for each share owned to be voted for each director?

Back 40

Statutory

Front 41

Are ADR holders exposed to currency risk?

Back 41

Yes, since these securities will track the underlying stock.

Front 42

What is a stock legend?

Back 42

A notice on stock certificates stating that selling is restricted unless the shares are SEC-registered or exempt

Front 43

True or False: Both common and preferred stockholders are offered preemptive rights.

Back 43

False, Preemptive rights are only offered to commonb stockholders.

Front 44

When an issuer or an affiliate is repurchasing its own shares, how many BDs may it use in one day?

Back 44

Issuers or affiliates may use only one BD a day when repurchasing its own stock.

Front 45

True or False: Convertible preferred stock may be converted into a bond.

Back 45

False. Convertible securities are convertible into common stock.

Front 46

If a company's existing shareholders sell 2 millioin shares, by what amount will its shares outstanding increase?

Back 46

Zero. If a company's existing shareholders are offering their shares, no new shares are being issued.

Front 47

ABC hasn't paid dividends in four years. If declared in year 5, what will a 3% non cumulative preferred owner receive?

Back 47

$3. Since the shares are non-cumulative, ABC is only required to pay the full amount for year 5.

Front 48

When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?

Back 48

Lower, due to the added opportunity

Front 49

True or False: The lock-up provision lasts for exactly six months

Back 49

False. Although most lock-ups last for six months, there is no regulation which sets a maximum or minimum period.

Front 50

What type of stock may be entitled to extra dividends?

Back 50

In profitable years, participating preferred stockholders may be paid both prior to, and after, common stockholders.

Front 51

What is the benefit of buying convertible preferred stock?

Back 51

In addition to receiving dividends, investors have the ability convert the shares into common stock of the company.

Front 52

______ stock is stock that was issued and repurchased by the issuing corporation.

Back 52

Treasury stock is stock that was issued and repurchased by the issuing corporation.

Front 53

Existing stockholders receive _____right for every one share owned.

Back 53

Existing stockholders receive one right for every one share owned.

Front 54

_______ stock fluctuates with the business cycle.

Back 54

Cyclical stock fluctuates with the business cycle (auto companies)

Front 55

What is a derivative?

Back 55

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages

Front 56

_______ stock is the amount of stock a corporation has already sold to investors.

Back 56

Issued stock is the amount of stock a corporation has already sold to investors.

Front 57

True or False: All employees of a corporation are control persons.

Back 57

False. Control people are officers, directors, and greater than 10% owners.

Front 58

Warrants are a ________- term right to buy stock at a preset price.

Back 58

Warrants are a long-term right to buy stock at a preset price.

Front 59

List the two types of shares that may be sold under Rule 144

Back 59

1) Restricted (unregistered) stock 2) Control stock

Front 60

What is the purpose of a lock-up provision?

Back 60

To prevent larg sharholders from selling immediately after an IPO, since it could cause the share price to fall.

Front 61

_______ stocks are issues of a companies with sales, earnings, and market shares that are expanding

Back 61

Growth stocks are issues of a companies with sales, earnings, and market shares that are expanding.

Front 62

True or False: Treasury stock has no voting rights and receives no dividends.

Back 62

True

Front 63

Regarding rights, options, and warrants, which instrument has the longest maturity?

Back 63

Warrants

Front 64

________ stock pays higher than average dividends.

Back 64

Income stock pays higher average dividends (utility companies).

Front 65

Who is a lock-up agreement meant to protect?

Back 65

Shareholders/investors

Front 66

List some of the rights that shareholders receive.

Back 66

voting, inspecting books and records, receiving dividends, evidence of ownership, and transferability

Front 67

How are voting issues determined, by shares or shareholders?

Back 67

Voting issues are determined based on a majority of shares.

Front 68

What security helps clients to indirectly buy foreign shares?

Back 68

An American depository receipt (ADR)

Front 69

What are the volume limitations on an affiliate or issuer repurchasing its own security?

Back 69

No more than 25% of the average daily trading voume (ADTV) over a 4-week period in one day

Front 70

True or False: Callable preferred shares allow an investor to buy shares of common stock at a fixed price.

Back 70

False. If preferred shares are callable, the issuer is allowed to buy back the shares at a fixed price

Front 71

_____ and______ are generally bundled as single investment securities.

Back 71

Warrants and bonds are generally bundled as single inestment securities.

Front 72

True or False: If a BD holds a customer's stock in street name, the BD may vote on behalf f the customer.

Back 72

False. Without permission, BDs holding a customer's stock in street name may not vote on behalf of the customer.

Front 73

Name two priorities that preferred stock has over common stock

Back 73

Order of liquidation and dividends

Front 74

True or False: Warrants are generally attached to the delivery of another security (stock or bond)

Back 74

True

Front 75

What is a lock-up period?

Back 75

The length of time a pre-IPO shareholder must wait before selling his shares.

Front 76

This voting method allows stockholders to multiply the number of shares owned by the number of directorships.

Back 76

Cumulative voting

Front 77

Rights are a ______- term instrument allowing holders to buy additional shares at a discounted price.

Back 77

Rights are a short-term instrument allowing holders to buy additional shares at a discounted price.

Front 78

What is the longest duration for a warrant?

Back 78

Perpetual

Front 79

True or False: In bankruptcy, common shares are senior to preferred shares.

Back 79

False. If a company declares bankruptcy, preferred shares are paid before common shares.