• Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key

image

Play button

image

Play button

image

Progress

1/69

Click to flip

69 Cards in this Set

  • Front
  • Back
A customer sells 100 shares of GM short. GM pays a 5% stock dividend. When the customer covers the short position, the customer will have to deliver:
a. 5 shares of GM
b. 100 shares of GM
c. 105 shares of GM
d. None of the above
C
When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends paid are the responsibility of the customer who sold the stock short. In this example, GM paid a 5% stock dividend. Therefore, a customer who sold 100 shares of GM short would have to deliver 105 shares (100 shares x 5% = 5 additional shares) to cover the short sale. (4-8)
A stock trades ex-dividend on Monday the 20th. What is the last day an investor can purchase the stock and be entitled to the dividend?
a. Monday the 13th
b. Thursday the 16th
c. Friday the 17th
d. Monday the 20th
C
To be entitled to receive the dividend, the stock must be purchased prior to the ex-dividend date. Friday the 17th is the last day an investor could purchase the stock and be entitled to the dividend, since it is the business day prior to the ex-date. (4-7)
All of the following are TRUE of treasury stock EXCEPT it:
a. Is listed on the company's balance sheet
b. Has no voting rights and does not receive dividends
c. Is outstanding stock that has been repurchased by the corporation
d. Has been issued by the U.S. Treasury and was purchased by a corporation
D
Treasury stock is stock that has been issued and outstanding and has been repurchased by the company. Treasury stock does not have voting rights nor the right to receive dividends. (4-6)
ABC Corporation is paying a $5 yearly dividend on its preferred stock. The market price of the preferred stock is $80. The current yield is:
a. 5.55%
b. 6.25%
c. 7.35%
d. 8.25%
B
The current yield on common or preferred stock is found by dividing the yearly dividend by the market price of the stock. In this example, the market price of the preferred stock is $80 and the yearly dividend is $5. This equals a current yield of 6.25% ($5 divided by $80 equals 6.25%). (4-16)
CURRENT YIELD (S7) : A security's annual income divided by its current market price. CY = DIV / PRICE
PREFERRED STOCK (S7) :
(1) A class of stock with a claim on the company's earnings before payment may be made on the common stock and usually entitled to priority over common stock if the company liquidates. It is usually entitled to dividends at a specified rate when declared by the Board of Directors and before payment of a dividend on the common stock.
(2) An accounting measure carried at par (typically $100) on the books of the corporation.
A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. To determine if the stock increased or decreased from the close of trading, the price would be based upon:
a. 71.40
b. 71.70
c. 72.60
d. 72
A
The stock will be reduced by 60 cents. The stock must be reduced in price to entirely cover the dividend. Therefore, the stock will open at 71.40 (72 - .60 = 71.40). If the stock closed at 72.50 that day, it would be quoted as an increase of $1.10 (72.50 - 71.40). (4-8)
Co. A Earnings per Share : $2.00
Co. A Dividends : $0.10
Co. A Percentage of Retained Earnings : 95%

Co. B Earnings per Share : $6.50
Co. B Dividends : $2.50
Co. B Percentage of Retained Earnings : 62%

Co. C Earnings per Share : $5.20
Co. C Dividends : $2.60
Co. C Percentage of Retained Earnings : 50%

Co. D Earnings per Share : $7.80
Co. D Dividends : $6.00
Co. D Percentage of Retained Earnings : 23%

Which of the above companies is probably a growth company?
a. Company A
b. Company B
c. Company C
d. Company D
A
Company A is probably a growth company since it has the smallest dividend payout ratio and the largest percentage of retained earnings. The company pays out only 5% of its earnings in the form of dividends, retaining 95% to finance its growth. (4-19)
Co. A Earnings per Share : $2.00
Co. A Dividends : $0.10
Co. A Percentage of Retained Earnings : 95%

Co. B Earnings per Share : $6.50
Co. B Dividends : $2.50
Co. B Percentage of Retained Earnings : 62%

Co. C Earnings per Share : $5.20
Co. C Dividends : $2.60
Co. C Percentage of Retained Earnings : 50%

Co. D Earnings per Share : $7.80
Co. D Dividends : $6.00
Co. D Percentage of Retained Earnings : 23%

Which of the above companies is probably a utility?
a. Company A
b. Company B
c. Company C
d. Company D
D
Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings. (4-19)
The following dividend information for New York Stock Exchange listed common stocks is reported in The Wall Street Journal.

Cummings Corp.
Quarterly Dividend : 50 cents
Record Date : 4/10
Payable Date : 5/15

Federal Corp.
Quarterly Dividend : 85 cents
Record Date : 4/13
Payable Date : 5/25

General Electric Corp.
Quarterly Dividend : 95 cents
Record Date : 4/8
Payable Date : 5/21

A buyer of Cummings Corporation on May 10th:
a. Would be entitled to receive the 50-cent quarterly dividend
b. Would not be entitled to receive the 50-cent quarterly dividend
c. Would be entitled to receive the 50-cent quarterly dividend if the trade was made for "cash"
d. Would be entitled to the 50-cent quarterly dividend if he paid for the stock by May 15th
B
A buyer of Cummings Corporation would not be entitled to receive the 50-cent quarterly dividend because the purchase was made on May 10th. This was after the stock had already sold ex-dividend or without the dividend. The ex-dividend date is not given but the record date of April 10th is. Stocks sell without the dividend, or ex-dividend, on the second business day preceding the record date. This would be two business days prior to April 10th, which is more than one month before the customer bought the stock. Even if the purchase was made for cash, which requires a same-day payment, it would still be one month too late for the buyer to receive the dividend. (4-7)
ABC Corporation announces a 5-for-4 split. After the split the market price of ABC Corporation will be reduced by:
a. 15%
b. 20%
c. 25%
d. 50%
B
To find the market price of the stock after the split, multiply the original market price by the reciprocal of the split. In this example, the reciprocal of a 5-for-4 split is 4/5. The stock will now sell at 4/5 its original value. Therefore, it is selling for 1/5 less than its original value, which is a decrease of 20%. (4-8)
All of the following are true about treasury stock EXCEPT it:
a. Is stock that has been repurchased by a corporation
b. Does not receive dividends
c. Has voting rights
d. Is listed on the company's balance sheet
C
Treasury stock (shares repurchased by the company) does not receive dividends and does not have voting rights. (4-6)
TREASURY STOCK (S7) : Stock issued by a company but later reacquired. Treasury stock receives no dividends and does not carry voting rights while held by the company.
As far as rights offerings are concerned:
a. Common shareholders do not have the right to subscribe to rights offerings
b. Preferred shareholders do not have the right to subscribe to rights offerings
c. Both of the above are correct
d. None of the above are correct
B
As far as rights offerings are concerned, preferred stockholders do not have the right to subscribe to rights offerings but common stockholders do. (4-10)
Which of the following companies would most likely pay a dividend in stock rather than cash?
a. A company with a large cash position and very little growth in earnings
b. A company whose earnings are growing at 5% a year and has a small amount of cash
c. A company growing at 10% a year with 20% of its assets in cash
d. A company with a small amount of cash whose earnings are growing at a rate of 20% per year
D
A company that has a high rate of growth would pay a dividend in stock rather than cash. The company needs to retain the cash in the corporation to finance the high rate of growth. Of the choices given, the corporation with the largest growth rate would most likely pay a dividend in stock rather than a cash payout. This would be a company with a small amount of cash whose earnings are growing at a rate of 20% per year. (4-19
Which of the following statements is true regarding warrants?
a. Warrants receive dividends when the common stock receives dividends.
b. Warrants can be perpetual.
c. Warrants are only issued by blue chip corporations.
d. Warrants are guaranteed by the Options Clearing Corporation.
B
Warrants can be perpetual in their duration. Warrants give the holder the ability to convert the warrant into the common stock of the same corporation at a specified price and at the holder's option. (4-11)
WARRANT (S7) : A certificate giving the holder the right to purchase securities at a stipulated price within a specified time limit. Warrants are typically offered in a unit along with other securities as an inducement to buy. Warrants are long-term and may be perpetual.
Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation.
The effect of this offering will be:
I. A dilution in the earnings per share
II. An increase in the earnings per share
III. The number of shares outstanding will increase by 500,000
IV. The number of shares outstanding will increase by 250,000
a. I and III
b. I and IV
c. II and III
d. II and IV
B
After the offering is completed, there will be 250,000 new shares outstanding (the shares sold by the selling stockholders were already outstanding). This will result in the earnings per share being diluted because the earnings will now be divided by a greater amount (250,000 shares) of new outstanding stock. (4-6, 22-28)
A corporation intends to raise additional funds from its existing shareholders rather than using the services of an underwriter. The corporation would be engaging in a:
a. Rights offering
b. Secondary distribution
c. Special offer
d. Private placement
B
The corporation would be engaging in a rights offering. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities thereby saving the corporation the costs involved in using an underwriter. (4-10)
A customer owns stock of a corporation that has declared a $1 dividend to holders of record Monday, December 22nd. If the customer wishes to sell the stock but still be entitled to the dividend, he should sell the stock on:
I. Wednesday, December 17th, regular-way settlement
II. Thursday, December 18th, regular-way settlement
III. Monday, December 22nd, cash settlement
IV. Tuesday, December 23rd, cash settlement
a. I or III
b. I or IV
c. II or III
d. II or IV
D
The customer should sell the stock Thursday, December 18th on a regular-way settlement basis or Tuesday, December 23rd on a cash settlement basis. The ex-dividend date is Thursday, December 18th. This is two business days preceding the record date of December 22nd. This means that a seller on the ex-dividend date will receive the dividend because on this date the stock is selling without the dividend. If the stock is sold on December 23rd on a cash contract basis (which requires a same-day payment, same-day delivery), the seller would be entitled to receive the dividend. The buyer will not receive the dividend because the last day a buyer could receive the dividend on a cash contract would be the record date, which is December 22nd. (4-7)
REGULAR-WAY SETTLEMENT (S7) : The conclusion of a securities transaction when a broker-dealer pays for securities purchased or delivers securities sold and receives from the contra broker the proceeds of a sale. Regular-way settlement, for most securities, is three business days from the trade date. Government bonds and options settle the next business day. A transaction done for cash settles on the same day.
EX-DIVIDEND DATE (S7) : A synonym for without dividend. The first day that a buyer could purchase a security and not be entitled to receive the dividend. The ex-date is set by an SRO and is typically the record date minus two business days.
All of the following are true about a dividend paid by a corporation to its shareholders EXCEPT the dividend:
a. Is determined by a corporation's board of directors
b. Is voted upon by a corporation's shareholders
c. May be in the form of cash or the corporation's stock
d. May be in the form of stock owned in another corporation
B
A corporation can pay a dividend to its stockholders in the form of its own stock, stock owned in another corporation, or in cash. The amount of dividend to be paid is determined by the board of directors. Shareholders do not vote for dividend payments. (4-7)
The purpose of cumulative voting is to:
a. Give large stockholders greater voting power
b. Keep the existing management in office in the event of a proxy fight
c. Give the small stockholders the chance to gain representation on the Board of Directors
d. Give the small stockholder an opportunity to gain control of the corporation
C
Cumulative voting allows a shareholder a total number of votes equal to the number of shares owned times the number of directors to be elected. The shareholder can cast the total number of votes in any manner he chooses, such as all for one director or split between two directors. This method of voting allows small stockholders to cast all their votes for one director and thereby gain representation on the Board of Directors. (4-10).
CUMULATIVE VOTING (S7) : A method of voting for corporate directors that enables the shareholder to multiply the number of shares owned by the number of directorships being voted on and cast the total for one director or a selected group of directors. Cumulative voting tends to benefit the small investor.
The quarterly dividend of ABC company is 32 1/2 cents. The market price is $24.00 a share. What is the current yield?
a. 1.35%
b. 2.38%
c. 4.82%
d. 5.41%
D

The formula for computing current yield (also known as the dividend yield) is:
annual dividend / market price of the stock
Since the quarterly dividend is 32 1/2 cents, the annual dividend is $1.30 (32 1/2 x 4 = $1.30). $1.30 divided by the $24 market price equals 5.41%. (4-16)
CURRENT YIELD (S7) : A security's annual income divided by its current market price.
DIVIDEND YIELD (S7) : The annual percentage of return that an investor receives on either common or preferred stock. The yield is based on the amount of the annual dividend divided by the current market price of the stock.
A notice of sale appears showing that RFQ corporation is selling 800,000 units at $6 per unit. Each unit consists of 2 shares of pre-ferred stock and a warrant for 1/2 share of common stock. If all of the warrants are exercised, how many shares will be outstanding?
a. 400,000 shares of preferred and 400,000 shares of common
b. 800,000 shares of preferred and 400,000 shares of common
c. 800,000 shares of preferred and 800,000 shares of common
d. 1,600,000 shares of preferred and 400,000 shares of common
D
Each unit was composed of 2 shares of preferred stock and a warrant for 1/2 share of common stock. There would immediately be 1,600,000 (800,000 x 2) shares of preferred outstanding. If the warrants are exercised, there would be 400,000 (1/2 of 800,000) shares of common stock outstanding. (4-11)
A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would he need to buy 100 shares of stock?
a. 95
b. 100
c. 350
d. 950
D
The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights (10 rights x 100 shares = 1,000 rights). The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would have to purchase an additional 950 rights. (4-10)
A corporation has declared a two for one stock split payable on November 30th to holders of record on November 1st. The ex-date is December 1st. The first day that the stock will trade without a due bill attached is:
a. October 28th
b. November 29th
c. November 30th
d. December 1st
D
Whoever is the stockholder of record on the record date (Nov. 1) will be credited with the additional shares resulting from the split. If that person liquidates the position prior to the ex-date (Dec. 1), the buyer must receive a due bill upon settlement of that trade. This is because on Dec. 1 the value of the stock will be cut in half. If the buyer does not receive the additional shares, then the position would lose half its value on the ex-dividend date. The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill. (4-8)
DUE BILL (S7) : A printed statement showing the transfer of a securitys title or rights, or showing the obligation of a seller to deliver the securities or rights to the purchaser. If a security is purchased prior to the ex-date but delivered after the record date, the security will be delivered with a due bill attached. The due bill states that the purchaser is entitled to receive the dividend, rights, or additional shares of stock.
An individual owns 100 shares of GHI stock. If GHI announces a 3-for-1 stock split, the individual:
I. Will receive an additional stock certificate for 200 shares
II. Must return his old stock certificate and will be issued a new certificate for 300 shares
III. Will see the value of his investment in GHI stock increase due to the split
IV. Will not see any increase in the value of his investment in GHI stock due to the split
a. I and II only
b. I and IV only
c. II and III only
d. II and IV only
B
After a 3-for-1 split, a stockholder owning 100 shares of common stockwould receive a stock certificate for an additional 200 shares. However, the value of the investment in GHI stock will remain the same because a stock split creates more shares thus lowering the market price of the stock. (4-8)
STOCK SPLIT (S7) : The division of the outstanding shares of a corporation into a larger number of shares. A 3-for-1 split by a company with 1 million shares outstanding results in 3 million shares outstanding, but proportionate equity in the company would remain the same. Ordinarily, splits must be voted by directors and approved by shareholders.
Which of the following pertain to ADRs?
I. They facilitate the trading of foreign securities in U.S. markets.
II. They facilitate the trading of U.S. securities in foreign markets.
III. They are receipts issued for foreign securities.
IV. They are receipts issued for U.S. securities.
a. I and III
b. I and IV
c. II and III
d. II and IV
A
American Depositary Receipts (ADRs) are receipts issued for foreign stock. The actual stocks are deposited in foreign branches of American banks and the receipts are traded in the U.S. The issuance of the receipts aids in the transfer of ownership and facilitates the trading of foreign securities in U.S. markets. (4-19)
All of the following are true about warrants EXCEPT:
a. They are frequently attached to a new issue of stock or bonds
b. They may trade on an exchange or in the OTC market
c. They receive dividends when declared by the board of directors
d. Some have been issued without an expiration date
C
The holder of a warrant would not be entitled to dividends paid on the underlying stock. Warrants allow an investor to purchase the stock of the same company at a specific price, for a specific period of time. Some warrants may be perpetual. They are frequently issued attached to stock or bonds and when detached will trade either on an exchange or in the OTC market. (4-11)
The market price of ABC Corporation common stock is $56. The yearly dividend is $3. The quarterly dividend is 75 cents. What is the current yield of the stock?
a. 1.3%
b. 4.7%
c. 5.3%
d. 6.8%
C
The current yield of a stock is found by dividing the yearly dividend by the market price of the stock. The market price is $56, the yearly dividend is $3. Therefore, $3 divided by $56 equals 5.3%. (4-16)
CURRENT YIELD (S7) : A security's annual income divided by its current market price.
A company has a noncumulative preferred stock outstanding that pays a $5 dividend per year. If dividends on the preferred stock were not paid last year, but will be paid this year, how much should the preferred stockholder receive?
a. $5
b. $10
c. $15
d. $20
A
The preferred stock is noncumulative, which means that if the dividend is not paid, it does not accumulate to the next year. Therefore, the preferred stockholder will receive only $5 for this year. (4-14)
NONCUMULATIVE (S7) : A type of preferred stock on which unpaid dividends do not accrue.
On Tuesday May 1st, XYX Corporation's Board of Directors announce a dividend payable on Friday, May 25th to stockholders of record on Monday, May 14th. The ex-dividend date would be:
a. Wednesday, May 23rd
b. Thursday, May 10th
c. Monday, May 14th
d. Tuesday, May 1st
Explanation:
B
Stocks sell ex-dividend on the second business day preceding the record date. The record date is Monday, May 14th. Therefore, the ex-dividend date would be two business days before or Thursday, May 10th. (4-7)
RECORD DATE (S7) : The date on which you must be registered as a shareholder of a company in order to receive a declared dividend.
EX-DIVIDEND DATE (S7) : A synonym for without dividend. The first day that a buyer could purchase a security and not be entitled to receive the dividend. The ex-date is set by an SRO and is typically the record date minus two business days.
A corporation calls for redemption 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock is $2.50 per share. The common stock is selling at 35.75.
Which of the following alternatives would be least attractive to a preferred stockholder?
a. Redeem the shares
b. Sell the shares
c. Convert the shares
d. All alternatives would be equally attractive
C
The least attractive alternative to a preferred stockholder would be to convert the shares into common stock. If an investor redeemed the shares, the preferred stockholder can receive $20 + $0.12 of accrued dividends which would amount to $20.12. If the investor sells the preferred stock at the current market price, the investor would receive $19.00 per share. If the preferred stock was converted into common stock, it would equal $17.87, making the conversion the least attractive alternative. (4-15)
A corporation calls for redemption 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock is $2.50 per share. The common stock is selling at 35.75.
If all shares were converted, how many shares of common stock would be outstanding?
a. 500,000
b. 2,000,000
c. 2,500,000
d. 3,000,000
C
If all of the preferred stock were converted into common stock, there would be an additional 500,000 shares of common stock outstanding (1/2 of 1,000,000 = 500,000). This, added to the 2,000,000 shares outstanding, would equal 2,500,000 shares of common stock. (4-15)
A corporation calls for redemption 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock is $2.50 per share. The common stock is selling at 35.75.
What would the market price of the preferred stock be if it were selling at parity with the common stock?
a. 17.88
b. 19
c. 20
d. 71.50
A
The preferred stock is convertible into 1/2 share of common stock. The common stock is selling for 35.75. Parity (or equality in dollar value) for the preferred stock would be 1/2 of 35.75 (17.88). (4-15)
PARITY (S7) : The price at which a convertible security's value would be equal to that of the underlying stock if converted.
All of the following are true regarding the role of a transfer agentEXCEPT that the transfer agent:
a. Keeps a record of each stockholder's name and shares owned
b. Issues and cancels stock certificates
c. Resolves problems due to mutilated certificates
d. Makes sure that outstanding shares do not exceed authorized shares
D
The transfer agent is responsible for issuing new certificates, cancelling old certificates, keeping a record of shareholders and the number of shares each owns, and handling problems that come about in cases of missing, lost, stolen, or mutilated securities. The registrar makes sure that outstanding shares do not exceed authorized shares. (4-6)
TRANSFER AGENT (S7) : An entity that, on behalf of an issuer, keeps a record of the name of each registered shareowner, their addresses, the number of shares owned, and sees that certificates presented to the agent's office for transfer are properly canceled and new certificates issued in the name of the new owner.
REGISTRAR (S7) : Usually a trust company or bank charged with the responsibility of auditing the firms transfer agent and keeping a record of the owners of a corporations securities to prevent the issuance of more than the authorized number of shares.
An investor owns a $100 convertible preferred stock which is convertible into 2 shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at 105. What should the investor do?
a. Sell the preferred stock
b. Allow the preferred to be called
c. Convert to common and sell the common
d. Wait for a more favorable call
B
The value of the preferred ($104) equals the value of converting to common (2 shares at $52 per share). The investor would receive the greatest amount ($105) by allowing the preferred to be called. (4-15)
A corporation would primarily split its stock to:
a. Increase its retained earnings
b. Decrease its retained earnings
c. Increase the market price of its stock to make it more marketable
d. Decrease the market price of its stock to make it more marketable
D
A corporation would split its stock to decrease the market price to make it more marketable. (4-8)
XYZ Corporation has 2,000,000 shares of common stock authorized. The company has issued 1,000,000 common shares of which 200,000 shares are treasury stock. The company has earnings of $2.00 per share. The XYZ Corporation has repurchased:
a. 200,000 shares
b. 500,000 shares
c. 800,000 shares
d. 1,000,000 shares
A
XYZ corporation has repurchased 200,000 shares. This is known as treasury stock. Treasury stock is previously outstanding stock which has been repurchased by a corporation. (4-6)
XYZ Corporation uses the cumulative voting method of electing directors. A shareholder owning 100 shares of stock voting for the election of five new directors could vote:
a. A total of 100 votes for all the directors
b. 100 votes for each of the directors only
c. 500 total votes divided in any manner chosen by the stockholder among the five new directors to be elected
d. 500 votes for each of the five directors, a total of 2,500 votes, but no more than 500 votes for any one director
C
Under cumulative voting, the shareholders can multiply the number of shares owned by the number of directors nominated. A shareholder owning 100 shares of stock voting for the election of five new directors would have a total of 500 votes. This could be divided in any manner chosen by the stockholder among the five new directors to be elected. (4-10)
CUMULATIVE VOTING (S7) : A method of voting for corporate directors that enables the shareholder to multiply the number of shares owned by the number of directorships being voted on and cast the total for one director or a selected group of directors. Cumulative voting tends to benefit the small investor.
A company declares a cash dividend. Standard and Poor's details this information in its dividend book. Ten days after the record date this information is published in a local newspaper. When is the ex-dividend date?
a. Two business days from the time it is published in the local newspaper
b. Two business days prior to the record date
c. Two business days prior to the payable date
d. On the day Standard and Poor's decides
B
The ex-dividend date is two business days prior to the record date. It is immaterial when the information is published in the local newspaper. Standard and Poor's does not determine the ex-dividend date. The exchange where the security is traded determines the ex-dividend date. (4-7)
EX-DIVIDEND DATE (S7) : A synonym for without dividend. The first day that a buyer could purchase a security and not be entitled to receive the dividend. The ex-date is set by an SRO and is typically the record date minus two business days.
RECORD DATE (S7) : The date on which you must be registered as a shareholder of a company in order to receive a declared dividend.
A Japanese company would like to have its stock traded in the U.S. securities markets. This would most likely be accomplished through the issuance of:
a. Japanese yen options
b. Eurodollar bonds
c. Bankers' acceptances
d. American Depositary Receipts
D
American Depositary Receipts (ADRs) facilitate U.S. investment in foreign securities. 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. (4-19)
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1st.
An owner of Foremost Corporation who sold the stock on November 29th:
a. Would be entitled to receive the dividend
b. Would not be entitled to receive the dividend
c. Would be entitled to receive the dividend only if the stock was delivered before the ex-dividend date
d. None of the above
A
The record date is given as December 1st. The ex-dividend date is on the 2nd business day preceding the record date. Therefore, anyone who owned Foremost Corporation and sold it on November 29th would be entitled to receive the dividend, because the stock would be selling ex-dividend (without the dividend) and the buyer would not be entitled to the dividend. (4-7)
Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1st.
The dividend would be paid to all stockholders whose name appeared on the record books of Foremost Corporation on:
a. November 28th
b. November 29th
c. November 30th
d. December 1st
D
The dividend would be paid to all stockholders whose name appeared on the record books of Foremost Corporation on the record date which is given in this example as December 1st. (4-7)
(Personal note: The reason it is Dec. 1 is because if you had bought the stock on Nov 30 you would not be entitled to the dividend since Nov 30 is outside of the record date of 2 days prior to the record date.)
Growth stocks would typically have which two of the following characteristics?
I. High price-earnings ratios
II. High dividend payout ratios
III. Low price-earnings ratios
IV. Low dividend payout ratios
a. I and II
b. I and IV
c. II and III
d. III and IV
Explanation:
B
The term growth stock applies to a company that has shown a consistent high rate of growth for earnings over a period of time. Historically, investors have been willing to pay more for one dollar of earnings for these stocks and they usually sell at higher price-earnings ratios. Since the company is in a growth stage, a large percentage of the profits will be retained by the company resulting in a low dividend payout ratio. Growth stocks have high price-earnings ratios and low dividend payout ratios. (4-19)
A company declares a forward stock split. What is the effect on the stock's par value?
a. No effect on the par value
b. An increase in the par value
c. A decrease in the par value
d. An increase in the par value and a decrease in the number of shares outstanding
C
When a company declares a forward stock split, the number of outstanding shares increase and the par value decreases proportionately. One reason for a forward stock split is to make the stock attractive to a wider range of investors. By having the stock split, it causes the stock to sell at a lower price. (4-8)
Of the different securities listed below, the one with the longest expiration date would normally be a:
a. Put
b. Call
c. Warrant
d. Right
C
A warrant generally has an expiration date longer than a put, call, or right. There are some warrants which never expire. (4-11)
RIGHT (S7) : A short-term equity security that gives stockholders the opportunity, ahead of others, to buy the new securities in proportion to the number of shares each owns. Because the additional stock is usually offered to stockholders below the current market price, rights ordinarily have a market value of their own and are actively traded. In most cases they must be exercised within a relatively short period or else they will expire worthless. See also: Preemptive Right.
Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock?
a. 0.83%
b. 1.25%
c. 3.33%
d. 4.00%
C
The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%. (4-16)
Mr. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:
1. 10 rights plus $10.50 are required to subscribe to one new share of stock
2. Fractional shares become whole shares
3. The record date is Friday, October 17th
4. JPMorgan Chase and Bank of America are the transfer agents
5. Goldman Sachs and Morgan Stanley are the standby underwriters
Mr. Jones owns 87 shares of the XYZ Corporation. How many shares can he subscribe to and how much will it cost him?
a. 8.7 shares plus $91.35
b. 8 shares plus $84.00
c. 9 shares plus $91.35
d. 9 shares plus $94.50
D
Mr. Jones can subscribe to nine shares at a cost of $94.50. The terms of the rights offering indicate that 10 rights plus $10.50 are needed to subscribe to one new share of stock. Fractional shares become whole shares. He will receive 87 rights. It takes 10 rights to get one new share of stock. 10 rights divided into 87 rights equals 8.7 shares. Since fractional shares become whole shares, Mr. Jones can subscribe to nine shares at a cost of $10.50 a share for a total of $94.50 (9 x $10.50 = $94.50). (4-11)
Mr. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:
1. 10 rights plus $10.50 are required to subscribe to one new share of stock
2. Fractional shares become whole shares
3. The record date is Friday, October 17th
4. JPMorgan Chase and Bank of America are the transfer agents
5. Goldman Sachs and Morgan Stanley are the standby underwriters
Mr. Jones also owns 87 shares of the preferred stock of the XYZ Corporation. How many additional shares can he subscribe to and at what cost?
a. 8.7 shares plus $91.35
b. 9 shares plus $91.35
c. 9 shares plus $94.50
d. Preferred stockholders are not permitted to participate in a rights offering
D
Preferred stockholders are not permitted to participate in a rights offering. Only the common stockholders are permitted. (4-11)
Mr. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:
1. 10 rights plus $10.50 are required to subscribe to one new share of stock
2. Fractional shares become whole shares
3. The record date is Friday, October 17th
4. JPMorgan Chase and Bank of America are the transfer agents
5. Goldman Sachs and Morgan Stanley are the standby underwriters
Mr. Jones chose to subscribe to the rights offering and purchased additional XYZ Corporation common stock on October 16th. Based on his latest stock purchase, he would:
a. Be permitted to subscribe
b. Be permitted to subscribe provided that the trade was executed regular way
c. Not be permitted to subscribe because the stock traded ex-rights on October 15th
d. Be permitted to subscribe because the record date has no bearing on when the stock trades ex-rights
C
Mr. Jones would not be permitted to subscribe to the rights offering for the new shares because he purchased the stock on October 16th. The stock sold ex-rights on October 15th. Therefore, Mr. Jones would not be a stockholder of record for these shares on the record date of October 17th. (4-11)
Mr. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows:
1. 10 rights plus $10.50 are required to subscribe to one new share of stock
2. Fractional shares become whole shares
3. The record date is Friday, October 17th
4. JPMorgan Chase and Bank of America are the transfer agents
5. Goldman Sachs and Morgan Stanley are the standby underwriters
Mr. Jones would tender (submit) his rights to:
I. JPMorgan Chase
II. Bank of America
III. Goldman Sachs
IV. Morgan Stanley
a. I only
b. I or II only
c. I or III only
d. I, II, III, or IV only
B
Mr. Jones would tender (submit) his rights to either of the transfer agents, JPMorgan Chase or Bank of America. (4-11)
The Board of Directors of a corporation is responsible for establishing all of the following EXCEPT the:
a. Declaration date
b. Payable date
c. Ex-date
d. Record date
C
The ex-dividend date is standardized in the securities industry and is normally two business days prior to the record date. (4-7)
The stock price of XYZ Corporation has remained stable despite the fact that the company has increased the amount of its dividend. Under these conditions, what would happen to the stock's current yield?
a. It would increase.
b. It would decrease.
c. It would remain the same.
d. The effect on current yield cannot be determined without knowing the investor's tax bracket.
A
The current yield of a stock is found by dividing the stock's annual dividend by its market price. If the dividend increases while the market price remains the same, the stock's current yield would increase. (4-16)
Warrants would most likely be issued to:
a. Replace outstanding common shares
b. Reduce the interest rate on an issue of debentures
c. Compensate the underwriting syndicate
d. Reduce the issue price of securities
Explanation:
B
Debentures may be issued with warrants attached. This allows the corporation to pay a lower interest rate on the debentures. (4-11)
DEBENTURE (S7) : A corporate bond backed by the general credit of a company and not secured by a mortgage or lien on any specific property.
WARRANT (S7) : A certificate giving the holder the right to purchase securities at a stipulated price within a specified time limit. Warrants are typically offered in a unit along with other securities as an inducement to buy. Warrants are long-term and may be perpetual.
On Monday August 3, the board of directors of XYZ Corporation issued a press release stating that at today's meeting, they had decided to pay a 25 cent quarterly dividend. The checks for the dividend are to be sent out on September 15. The checks will be made out to anyone who is recorded as a shareholder as of Friday, August 28. The first trading day on which purchasers of XYZ stock will not receive the dividend is Wednesday, August 26. Wednesday, August 26 is called the:
a. Ex-dividend date
b. Declaration date
c. Payable date
d. Record date
B
The ex-dividend date is the first day a stock trades without a dividend; this date is typically two business days prior to the record date. Therefore, a person who purchases the stock on or after the ex-dividend date is not entitled the dividend. (4-7)
A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7 dividend in 2002 and $8 in 2003. If the company wants to pay a common stock dividend in 2004, the cumulative preferred stockholders must first receive a dividend of:
a. 0
b. $3
c. $9
d. $12
D
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 2004 the cumulative preferred stockholders must first receive $12 ($2 for 2002 plus $1 for 2003 plus $9 for 2004). (4-14)
(Personal note: tricky question here, since the preferred stock holders are “cumulative”, and the next dividend would be $9, the preferred stock holders would receive an additional $3 ($2 from the $7 paid in 2002 and $1 from the $8 paid in 2003)
CUMULATIVE PREFERRED (S7) : Preferred stock having a provision stating that omitted dividends (arrearages) must be paid before any other future dividend.
Which of the following events would generally require a shareholder vote?
I. Declaration of a stock dividend
II. Declaration of a stock split
III. Declaration of a cash dividend
IV. Election of a director
a. I and II only
b. I and IV only
c. II and IV only
d. II, III, and IV only
C
Shareholders vote on stock splits and director elections, but not on cash dividends and stock dividends. Cash and stock dividends fall under the authority of the board of directors. (4-9)
In establishing a defensive portfolio, which of the following types of company stocks should not be included?
a. Utility
b. Defense
c. Supermarket
d. Tobacco
B
Defensive stocks are those that are not drastically influenced by changes in the economy. This includes stocks of food, liquor, and tobacco companies. Stocks of defense companies are influenced by changes in government spending in the area of defense. (4-19)
DEFENSIVE STOCK (S7) : A stock that is resistant to changes in general economic activity. Examples include food, utility, and tobacco stocks.
A corporation's shareholders must vote for:
a. Cash dividends
b. Stock dividends
c. Stock splits
d. Stopping dividends
B
The board of directors has control over dividends but must have shareholder approval for a stock split. (4-9)
A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:
a. $28
b. $55
c. The same price as before the notice appeared
d. A price near $60
D
Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price). (4-15)
Which of the following would be most likely considered a defensive stock?
a. An aerospace stock
b. A utility stock
c. An airline stock
d. An automobile stock
B
Utility, food, beer, candy, pharmaceutical, tobacco, and soft drink stocks would be considered defensive stocks. They would offer the investor a greater amount of safety because in periods of recession and adverse economic conditions these companies would be the last to be affected. (4-19)
An investor owns 280 shares of XYZ Corporation. XYZ Corporation pays a 15 cents quarterly dividend. XYZ Corporation announces a 5-for-4 split. The dividend per share is adjusted to reflect the split. How much will the investor receive in dividends each quarter after the split?
a. $40.00
b. $42.00
c. $52.50
d. $80.00
B
After the split, the investor would own 350 shares (280 x 5/4 = 1,400/4 = 350) and would receive $42.00 each quarter (350 shares x $0.12 = $42.00) in dividends. To find the adjusted dividend per share, multiply the inverse of the split by the original dividend of $0.15. Since the dividend is adjusted for the split, the investor would receive the same total dividends after the split as before (280 shares x $0.15 per share = $42). (4-8)
XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20.
The value of the outstanding common stock on the balance sheet is:
a. $4,500,000
b. $5,000,000
c. $7,000,000
d. $90,000,000
A
Outstanding shares are issued shares minus treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at $1 par value for a total of $4,500,000. (4-6)
XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20.
The market capitalization of XYZ common stock is:
a. $4,500,000
b. $5,000,000
c. $90,000,000
d. $100,000,000
C
A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = $90,000,000. (4-6)
A common shareholder has all of the following rights EXCEPT the right to:
a. Vote for the board of directors
b. Receive dividends if voted by the board of directors
c. Give or sell shares to anyone he wishes
d. Examine any and all corporate records
D
Shareholders have the right to examine some, but not all corporate records. (4-3)
All of the following would normally be a characteristic of a growth company EXCEPT that it has a:
a. High price-earnings ratio
b. High dividend payout ratio
c. High amount of research and development costs
d. Wide trading range for the price of its stock
B
Growth companies will normally retain most of their earnings to enable the company to continue its growth. They would typically have low dividend payout ratios, high research and development expenses, and high price-earnings ratios, as well as a wide trading range for the stock. (4-19)
A stock closes at $37. The next day the stock sells ex-dividend $0.68 per share. At what price should the stock open the next day if it opens at the same level it closed the day before?
a. 36.66
b. 36.32
c. 37.00
d. 37.68
B
The price of a stock is reduced by an amount sufficient to cover the dividend. The price will be reduced by 68 cents. Therefore, $37 - .68 = $36.32. (4-8)
Shares that are issued but not outstanding are classified as:
a. Restricted stock
b. Treasury stock
c. Preferred stock
d. Participating stock
B
Treasury stock is stock that is issued by a corporation and is repurchased at a later point in time. It is no longer considered to be outstanding, does not receive dividends, and has no voting rights. (4-6)
When a stock splits 5 for 4, by what percentage will the price of the stock be reduced?
a. 20%
b. 25%
c. 50%
d. 80%
A
When a stock splits 5 for 4, the price will be 4/5 of its original price. This represents a decrease of 1/5 or 20%. The number of shares that an investor owns will increase by a ratio of 5/4, which represents an increase of 1/4 or 25%. (4-8)
A company based in Europe with offices also located in New Jersey would like to have its stock traded on the NYSE. This would most likely be accomplished through the issuance of:
a. Yankee bonds
b. Eurodollar bonds
c. Bankers' Acceptances
d. American Depositary Receipts
D
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. (4-19)
An investor owns 4,000 shares of common stock which pays a quarterly dividend of 35 cents. If the investor purchases 500 additional shares prior to the first ex-dividend date of the year, what is the investor's expected annual income from the investment?
a. $1,400
b. $1,575
c. $5,600
d. $6,300
D
The annual income from the common stock is determined by multiplying the annual dividend by the number of shares owned by the client. Since the additional 500 shares were purchased prior to the first ex-dividend date of the year, the investor is entitled to four quarterly dividends on an ownership level of 4,500 shares. If the annual dividend is $1.40 (35 cents x 4), the annual income would be $6,300 (4,500 x $1.40). (4- 7)
A customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver:
a. 40 shares
b. 360 shares
c. 400 shares
d. 440 shares
D
When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 10% stock dividend. Therefore, a customer who sold short 400 shares would be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale. (4-8)