Unit 1

An affiliate holding unregistered shares can sell under Rule 144

A)
one time a year.
B)
two times a year.
C)
four times a year.
D)
as often as wished.
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An affiliate holding unregistered shares can sell under Rule 144

A)
one time a year.
B)
two times a year.
C)
four times a year.
D)
as often as wished.
C

Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.
An investor would expect which type of preferred stock to pay the highest stated dividend rate?

A)
Convertible
B)
Callable
C)
Straight
D)
Cumulative
B

With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.
Voting rights are a privilege generally afforded to

A)
preferred shareholders only.
B)
both common and preferred shareholders.
C)
neither common nor preferred shareholders.
D)
common shareholders only.
D

One of the differences between common and preferred shareholders is that preferred shareholders generally have (with few rare exceptions) no voting rights.
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)
$8
C)
$0
D)
$16
A

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 two years missed, in addition to $8 this year, for a total of $24.
Someone who purchases shares of a corporation's common stock has

A)
limited liability and voting rights.
B)
unlimited liability and voting rights.
C)
no liability and no voting rights.
D)
neither liability nor voting rights.
A

Common stockholders enjoy limited liability in that they can only lose what was invested. They are in no way responsible for any debt of the corporation. Voting rights are one of the key benefits for common shareholders.
Penny stock rules
apply to both solicited and unsolicited transactions.
specify that established customers of the firm need not sign a suitability statement.
mandate that an account holding penny stocks only need not be provided with a monthly statement.
require that prospects be given a copy of a risk disclosure document before their initial penny stock transaction.

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

Penny stock rules only apply to solicited transactions, and it is required that the penny stock disclosure document be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.
Which of the following securities is the underlying asset used to create an American depositary receipt (ADR)?

A)
Bonds
B)
Common shares
C)
Preferred shares
D)
Warrants
B

ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares of a foreign issuer are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of foreign-company stock held on deposit.
A preemptive right for existing shareholders is best described as

A)
the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares.
B)
the right for the board of directors (BOD) to preempt existing shareholders and only allow them to purchase the newly issued additional shares after the board has purchased the shares they want.
C)
the right that allows new investors to purchase shares before existing shareholders when a company issues additional shares.
D)
the right for the board of directors (BOD) to preempt existing shareholders from purchasing additional shares so that they may be used for paying stock dividends by the corporation.
A

Existing shareholders have what is known as a preemptive right, which is the right to maintain their proportionate share of ownership in the corporation if the company wants to issue additional shares.
DEF Corporation has 4% noncumulative preferred stock outstanding. The company eliminated its dividend payments for the past three years but now is in a position to resume paying them again. Before paying common shareholders a dividend, the company would be required to pay the preferred shareholders
A)
nothing.
B)
$4.00.
C)
$1.00.
D)
$2.50.
B

With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.
What is the tax status of a dividend paid to a U.S.-based American depositary receipts (ADR) investor?
A)
These dividends are tax deferred.
B)
These dividends are tax free.
C)
These dividends are only taxable to foreign buyers.
D)
These dividends may be taxed by both the foreign country and the United States.
D

Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability. Note: Any trading profits (capital gains) from the ADR would only be taxable here in the United States.
Common shareholders have the right to A) limited access to a company's books and records. B) no access to a company's books and records. C) full access to a company's books and records. D) access a company's books and records with Securities and Exchange Commission (SEC) permission.A By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors (BOD).Exempt from the penny stock rules are A) unsolicited transactions. B) all transactions. C) solicited transactions. D) both solicited and unsolicited transactions.A Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt and the rules therefore apply.Different categories of preferred shares offered by an issuer A) all must have the same fixed dividend rate. B) must all be convertible shares. C) all have preference over the issuer's common shares. D) must all be callable shares.C all have preference over the issuer's common shares. Separate categories of preferred shares may differ in several ways, including dividend rate and profit participation privileges. However, all maintain preference over common stock shares issued.A company's business operations are overseen by A) stockholders placed in position by the board of directors (BOD). B) bondholders placed in position by the board of directors (BOD). C) a board of directors (BOD) elected by bondholders. D) a board of directors (BOD) elected by shareholders.D Most corporations are organized in such a way that their stockholders regularly vote for and elect individuals to a BOD to oversee company business operations.Which of the following preferred stocks' price would remain most stable in an environment of changing interest rates? A) Nocumulative preferred B) Adjustable rate preferred C) Straight preferred D) Participating preferredB Adjustable rate preferred dividend resets when interest rates change so the price remains stable.How would you define a security:1. An invest of money 2. made into a common enterprise 3. with the expectation of profit 4. through the efforts of a third partyName the two major types of securitiesStocks & bondsBonds are a _______ security, whereas stocks are a ______ securityDebit EquityWhat are the classes of common stocks for a corporationAuthorize Issued Outstanding TreasuryIssued StockAuthorized stock that has been sold to investors. Those investors have bought the stock and the company has received the moneyOutstanding Stockincludes any shares that a company has issued and are in the hands of investorsTreasury StockStock a corporation has issued and subsequently repurchased from the public.Penny Stockan unlisted security trading at less than $5 per share Highly speculativeStatutory VotingEach share gets one vote in the election of each board nomineeCumulative Votingallows stockholders to allocate their total votes in any manner they chooseStock RightsExisting stockholders have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings. Before they offer it to the publicWarrantsA certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time the warrants are issued, and at some time in the futureRestricted StockRestricted securities are those acquired thorough some means other than a registered public offeringControl Stockare those owned by directors, officers, or persons who own or control 10% or more of the issuer's voting stock.ADRsa type of equity security designed to simplify foreign investing for AmericansPreferred Stockequity security because it represents a class of ownership in the issuing corporation.Common shareholders have the right to A) full access to a company's books and records. B) no access to a company's books and records. C) access a company's books and records with Securities and Exchange Commission (SEC) permission. D) limited access to a company's books and records.D) limited access to a company's books and records By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors (BOD).By purchasing shares of stock in a company, investors can benefit from which of the following? I. An increase in the price of the shares II. An increase in price of the company's debt securities III. An increase in the yield of the company's outstanding debt securities IV. The receipt of profits to be distributedI n IV Stockholders as owners can benefit from an increase in the price of the shares (capital appreciation) and by sharing in earnings through the receipt of dividends (distributed profits). Both are potential benefits, but neither are guaranteed.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 and they will have two to five years to decide whether or not to buy the stock at the strike price. B) Rights will be distributed to existing stockholders with an exercise price lower than the current market value. C) Rights will be distributed to existing stockholders; they have only two options: exercise the rights or let them expire. D) Warrants will be distributed to existing stockholders with an exercise price equal to the current market value.B 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 four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.penny stock rules apply to both solicited and unsolicited transactions. T or FFALSE 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 four to six weeks (30-45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.