60 terms

1 Equity Securities

Commonly missed questions on the 1st section, equity securities, of the series 7.
Common stockholders of a publicly traded corporation have which of the following rights and privileges?
Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. Stockholders never get to vote on dividends.
What happens in a 2-for-1 stock split?
In a 2-for-1 stock split, the number of outstanding shares is doubled and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same
A change in earnings would affect the price of which of the following securities the most?
Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm.
Holders of common shares may generally vote on:
Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilutes the common shares' residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation.
ABC Corporation declares a 5-4 stock split. On the ex-date, the price of ABC common will be reduced by:

For example: an investor owns 100 shares at $50 per share worth $5,000. After a 5-4 split, the investor will have 125 shares (100 × 5/4); the total ownership interest of $5,000 is divided by the new number of shares to determine the per share price of $40. The decrease of 50 to 40 is a 20% reduction.
A customer owns 200 shares of GHI common stock at $10 per share and 300 shares of GHI preferred Class A stock at par. If GHI declares a 2:1 split for its common shares, how will the customer's preferred Class A shares be adjusted?
Splits or adjustments to the common stock do not impact the preferred share classes, just as adjustments to any preferred class shares would not impact the common shares.
A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats on the board, the stockholder could cast the votes in which of the following ways?
A stockholder has 1 vote per seat for each share of stock he owns. Thus, in this case, the stockholder has a total of 600 votes. Under the statutory voting method, he must allocate an equal number to each seat, or 200 for each of 3 seats.
The rate on an adjustable preferred stock may be indexed to the:
The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark.
ABC Corporation has a 10% noncumulative preferred stock outstanding at $100 par value. Two years ago, ABC omitted its preferred dividend, and last year, it paid a dividend of $5 per share. To pay a dividend to common shareholders, each preferred share must be paid a dividend of:
Because this is noncumulative preferred stock, the company must pay only this year's full stated dividend of $10 per share before paying dividends to the common shares.
Conversion price of common stock is what?
Par value divided by the number of shares into which the preferred is convertible

A convertible preferred stock issue (par value $100) is selling at $125 and is convertible into 5 shares of common stock. The conversion price of the common stock is:

In general, a corporation assumes the least risk when it obtains funds from:
Unlike the other choices, the sale of preferred stock does not entail the assumption of debt and is therefore the least risky. It is always riskier to borrow than it is to raise equity because equity does not have to be paid back.
A similarity between common and preferred stock is:
All dividends, both common and preferred, must be declared by the board of directors. Preferred shares usually have a fixed dividend rate and usually have no (or very limited) voting powers. Both types of stock are equity, not debt, securities.
A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is:
The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14.
Formula for parity of common?
Market price of convertible divided by the conversion ratio
Current Yield formula?
current yield is the annual income (dividend) divided by price.
GHI currently has earnings of $4 and pays a $.50 quarterly dividend. If GHI's market price is $40, the current yield is:
The quarterly dividend is $.50, so the annual dividend is $2; $2 /· $40 market price = 5% current yield.
Dividend Yield formula?
Income dividend / price
Short-term gains are taxed at
The same rate as ordinary income
A customer purchases stock for $40 per share, holds it for 10 months, and then sells it for $50 per share. If the customer's tax bracket is 30%, what is the after-tax rate of return?

The customer's return on the stock is the $10-per-share short-term capital gain ($50 − $40). The after-tax rate of return is found by computing the after-tax earnings ($10 [100% - 30%] or $10 [.70] = $7) and dividing this amount by the amount originally invested ($7 / $40 = .175 or 17.5%). Short-term gains are taxed at the same rate as ordinary income.
What is the registrar's function?
The registrar's function is to ensure that the number of shares outstanding does not exceed the number accounted for on the corporation's books.
What are the transfer agent's functions?
The transfer agent records the names of stockholders on the corporation's books, cancels old shares, and transfers shares into a new owner's name.
For reporting purposes, an order to sell 25 shares of an OTC equity security priced at $230 per share is:
For OTC equity securities trading at or above $175 per share, 1 share is considered to be a round lot unit of trading. Therefore all last sale information will be disseminated for any transaction of one share or more.
When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above:
In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.
The regular way ex-dividend date for cash dividends is the:
he regular way ex-dividend date is 2 business days before the record date.
If a stock's ex-dividend date is Tuesday, January 13, when is the record date?
The record date is two business days after the ex-dividend date (Thursday, January 15).
While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of:
The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.
What does it mean to engage and underwriter on standby basis?
The underwriter will buy all unsold shares of an issue.
If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation?
Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest.
What does a warrant usually allow an issuer to do?
Issue a debt instrument with a slightly lower rate of interest.
What is a warrant?
A warrant is a long-term option to buy stock at a fixed price, and, like options cannot pay dividends.
How many rights is an investor entitled to per share that they own in a company?
1 right per share
What can increases in a debt issue when a warrant is added to it?
It's marketability. Because of the warrant the issuer can offer the bonds with a lower coupon rate and, as a result, reduce fixed costs.
What is a stock right?
A corporation issues rights to existing shareholders to allow them to purchase enough stock, within a short period and at less than current market price, to maintain their proportionate interest in the company.
Can rights be traded? If so, where?
Yes, in the secondary market.
What are typically offered with debentures?
Warrants to "sweeten" the offering.
How long to warrants typically last?
2-10 years
Can warrants be traded? If so, where?
Yes, on the secondary market.
Which security is safer? Warrants or Bonds?
Because warrants are considered equity securities bonds are safer than warrants.
How to find warrants outstanding from a total of issued debentures?
Divide totaled debentures issued/outstanding by par value per bond

ex. $40M debentures/$1000 par value per bond
What is "leverage"?
The use of various financial instruments or borrowed capital, such as margin, to increase the potential return on investment.
Are warrants attractive to speculators? Why?
Yes, because the subscription price is higher than the current market price at issuance; therefore, the warrant's purchase price is low, as they are out-of-the-money.
What is the purpose of rights?
To maintain your proportionate ownership in a company?
If a company is going to increase their total amount of shares outstanding via a rights offering how do you find how many rights will buy new shares?
- first determine the percentage by which the companies shares are increasing (new issue/shares outstanding)
- then multiply the amount of rights you have by the percentage increase in the total stock to be issued
- then take that number and divide your current amount of rights by it


Company has 1M shares outstanding and will be offering 200K more shares via a rights offering. You own 200 sh. How many rights will it take to buy 1 new share?

200k/1M = 20%
200 rights * 20% = 40
200 rights / 40 = 5 rights per share
A company is offering investors the opportunity to purchase shares for the next 5 years at a fixed price slightly above today's market price. The company is issuing:
A warrant is a security that allows the holder to purchase shares of the underlying issue at a fixed price (above the current market price when issued) for an extended period (typically 2 years or longer). Call options are similar, except they are short-term securities (9 months at issue).
What does it mean when the stock is trading "cum rights"?
It means that the rights being offered are rights + 1
It is "cum rights" because it is trading before the ex-rights date passes.

5 rights being offered + 1 = 6 rights
How long are rights offerings typically?
30-45 days
The subscription price of a right is typically....
Below the current market value of the security
Do warrants have intrinsic value?
Warrants have no intrinsic value when issued and may expire without ever having intrinsic value.
What is intrinsic value?
The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.
Can rights be redeemed for cash?
No, they may be exchanged for stock, traded in the secondary market or given away but they are not redeemable by the issuer.
An ADR represents a...
Foreign security trading in the U.S. market
What are ADRs?
ADRs (American Depository Receipts) are receipts issued by U.S. banks that represent ownership of a foreign security and are traded in U.S. securities markets.
What is the purpose of an ADR?
The purpose of the ADR is to facilitate trading in U.S. markets. The ADR can only be traded here. If the owner exercises the right to obtain the actual foreign security, it may be sold overseas.
What type of a security is an ADR?
A negotiable security which represents an ownership interest in a non-U.S. company.
Do the holders of ADRs have voting rights? Why or Why not?
No because they don't hold the actual shares of the underlying security but rather, they hold a receipt for those shares.
For U.S. investors holding American Depositary Receipts (ADRs), dividends received are taxable...
Any tax taken on dividends received from ADRs is taken in the country of origin. This is a foreign withholding tax for U.S. investors. The foreign withholding tax may later be taken as a credit against any U.S. income taxes owed by the U.S. investor.
How do investors liquidate REITs? Are they redeemable?
In order to liquidate a REIT, an investor must sell them in the OTC marketplace (secondary market). REITs are not redeemable by the issuer .
What are some of the advantages of REITs?
Professional management, liquidity (secondary market trading), diversification.
Are REITs tax deferred?
No, the IRS does not permit tax deferrals on REIT investments.
What is a redeemable security?
One that cannot be traded in the secondary market (OTC), and the issuer stands ready to redeem if a customer wishes to sell.