series 7

  1. Which of the following have equity positions in a corporation?

    1Common stockholders.
    2Preferred stockholders.
    3Convertible bondholders.
    4Mortgage bondholders.

  2. A customer owns 1,000 shares of ABC corporation. Which of the following actions on the part of ABC would dilute her equity?

  3. An informal network of market makers that offers to trade securities NOT listed on an exchange is called:

  4. Common stockholders of a publicly traded corporation have which of the following rights and privileges?

    Residual claim to assets at dissolution.
    Right to a vote for stock dividends to be paid.
    Right to receive an audited financial report on an annual basis.
    Claim against dividends in default.

  5. A client has 100 shares of GHI when the stock undergoes a split. After the split, the client has:

  6. After a company splits its stock 2 for 1, an investor who owns 100 shares receives:

  7. A 2-1 split does which of the following?

    Increases the number of outstanding shares.
    Decreases retained earnings.
    Decreases par value per share.

  8. If a stock undergoes a 1-5 reverse split, which of the following increases?

    Market price per share.
    Number of shares outstanding.
    Earnings per share.
    Market capitalization of the company.

  9. ABC Inc. has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $10 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-1 stock split?

    A) The par value would decrease to $5 per share. .
    B) The retained earnings would be decreased by $10 million.
    C) The number of shares outstanding would decrease by 50%.
    D) The market price of the stock would double.
    Answer: A

    A stock split results in more outstanding shares at a lower par value per share. The total value of stock outstanding is unchanged. Retained earnings are not affected by a stock split.
  10. Which of the following statements regarding a 2-for-1 stock split are TRUE?

    The share price is reduced by half.
    The total market value of the outstanding stock decreases.
    The total market value of the outstanding stock may increase or decrease as a result of the split.
    The number of shares doubles.

    A) I and III.
    B) II and III.
    C) II and IV.
    D) I and IV.
    Answer: D

    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.
  11. A change in earnings would affect the price of which of the following securities the most?

    A) Common stock.
    B) 10% debentures maturing in 10 years.
    C) 6% preferred stock.
    D) Treasury stock.
    Answer: A

    Common stock is most sensitive to earnings changes because, as owners, common shareholders have a claim on the earnings of the firm.
  12. The residual right of common stockholders refers to their right to:

    A) vote in elections for the board of directors and in other important business decisions, such as changes to the charter.
    B) examine the corporation's annual reports and other reports, and take legal action if irregularities are found.
    C) receive all announced dividends in accordance with the number of shares held.
    D) claim company assets in bankruptcy after wages, taxes, creditors and preferred shareholders have been paid.
    Answer: D

    The residual right of common shareholders refers to their position in the event of bankruptcy.
  13. If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares?

    A) 400
    B) 500
    C) 100
    D) 300
    Answer: C

    The investor will receive an additional 100 shares from a 3 for 2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares.
  14. Holders of common shares may generally vote on:

    A) whether the company should issue additional preferred stock.
    B) whether a cash dividend is to be declared.
    C) which member of the board of directors should be chairman.
    D) whether an administrative assistant should be promoted to management.
    Answer: A

    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.
  15. Which of the following statements regarding holders of common stock are TRUE?

    They must approve the payment of dividends.
    They are entitled to declared dividend distributions in proportion to their ownership.
    They have residual rights to corporate assets on dissolution.
    They have unlimited liability.

    A) II and III.
    B) I and II.
    C) I and IV.
    D) II and IV.
    Answer: A

    Common stockholders are entitled to dividend distributions in proportion to their ownership and to residual rights to corporate assets on dissolution. They do not vote on the payment of dividends, and they have only limited liability.
  16. A corporation authorized to issue 1 million shares of common stock originally issued 600,000 shares and later repurchased 40,000 shares for its treasury. How many shares of common stock will remain outstanding?

    A) 960,000.
    B) 560,000.
    C) 40,000.
    D) 600,000.
    Answer: B

    Stock issued minus stock reacquired equals the amount of stock outstanding. Shares repurchased are called treasury stock.
  17. A corporation must have stockholder approval to:

    A) declare a 15% stock dividend.
    B) declare a cash dividend.
    C) issue convertible bonds.
    D) repurchase 100,000 shares of stock for its treasury.
    Answer: C

    Stockholders are entitled to vote on the issuance of additional securities that would dilute shareholders' equity (the shareholder's proportionate interest). Conversion of the bonds would cause more shares to be outstanding, thus reducing the proportionate interest of current stockholders. Decisions that are made by the board of directors and do not require a stockholder vote include the repurchase of stock for its treasury, declaration of a stock dividend, and declaration of a cash dividend.
  18. ABC Corporation declares a 5-4 stock split. On the ex-date, the price of ABC common will be reduced by:

    A) 0.8.
    B) 0.2.
    C) 0.25.
    D) 0.5.
    Answer: B

    As a result of a stock split, an investor will have more shares at less value per share, but overall value of the investment will remain the same. 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. Generally, the percent decrease in price will always be less than the percent increase in the number of shares. The percent increase in shares in a 5-4 split is 25%.
  19. Shareholder approval is required for all of the following corporate events EXCEPT:

    A) stock dividends.
    B) stock splits.
    C) the acceptance of a tender offer from a non-affiliated company.
    D) the issuance of convertible bonds.
    Answer: A

    Shareholder approval is not required for the payment of dividends, but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.
  20. In a 3-for-2 stock split, an investor will:

    A) have 50% more shares at half the price.
    B) have 50% fewer shares at twice the price.
    C) have two-thirds fewer shares at a 50% higher price.
    D) have 50% more shares at two-thirds the price.
    Answer: D

    If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by one-third, but the total value of the position will stay the same. For example, if a shareholder owns 100 shares before the 3 for 2 split, the shareholder will have 150 shares after the split (3 / 2 × 100 = 150).
  21. If ABC Corp. declares a 5-4 stock split, an investor who owns 300 shares would receive how many additional shares?

    A) 75.
    B) 30.
    C) 60.
    D) 100.
    Answer: A

    A 5-4 split represents a 25% increase in shares. For each 4 shares owned, the investor will receive 1 new share. 1/4 = 25% increase. 300 shares × 25% = 75 shares.
  22. When compared to statutory voting, cumulative voting gives an advantage to:

    A) minority stockholders.
    B) majority stockholders.
    C) participating preferred stockholders.
    D) management rather than the board of directors.
    Answer: A

    Cumulative voting allows shareholders to aggregate their votes and cast them as they please. For example, they could cast all of their votes for a single candidate. Cumulative voting makes it easier for a minority group of shareholders to gain representation on the board.
  23. Common stockholders have all of the following rights and privileges EXCEPT:

    Voting on the composition of the board of directors.
    Voting on routine decisions in the company's operations.
    Receiving par value at liquidation.
    Receiving a dividend when declared.

    A) II and III.
    B) I and III.
    C) I and IV.
    D) II and IV.
    Answer: A

    Ownership of common stock allows shareholders the right to vote on the important affairs in the life of the company, not routine operational decisions. No promise is offered with regard to the stockholder's initial investment, which might be lost, or dividends, which might not be declared.
  24. A company has reverse-split its common stock. The effect on the earnings per share will be:

    A) a decrease.
    B) no effect.
    C) none of these..
    D) an increase.
    Answer: D

    When a reverse split takes place, the number of outstanding shares is reduced. Since the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.
  25. Minority stockholders are more likely to be able to elect directors through which form of voting?

    A) Progressive.
    B) Cumulative.
    C) Regular.
    D) Statutory.
    Answer: B

    Minority stockholders are more likely to be able to elect representatives to the board of directors through cumulative voting. Small stockholders may cast all of their votes on 1 position rather than spread them out and thus dilute them over 2 or 3 positions.
  26. The common stock of ABC Corporation currently earns $3 per share. If the price-to-earnings ratio for this stock is 14, what is the current market price?

    A) 17.
    B) 21.
    C) 37.
    D) 42.
    Answer: D

    The price-to-earnings ratio equals the market price divided by earnings per share. The PE ratio is 14, and earnings per share is $3. Therefore, the market price is 14 × $3 = $42.
  27. The board of directors of DMF, Inc., announces a 5:4 stock split. The market price of DMF after the split should decrease in value by

    A) 0.25.
    B) 0.3.
    C) 0.2.
    D) 0.1.
    Answer: C

    The easy way to handle questions about stock splits is to turn the split into a fraction. You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5:4 stock split, the new price should be about 4/5 the old price. A 1/5-change equals 20% (100% / 5 = 20%).
  28. Which of the following is TRUE concerning a 5:4 stock split?

    A) The par value will be unchanged.
    B) The net worth of the company will be reduced.
    C) Retained earnings will be increased.
    D) Each shareholder's proportionate equity will be unchanged.
    Answer: D

    Since each shareholder will receive additional stock, the proportional equity will remain the same.
  29. If Flying Horse Corp. splits 5:4, the presplit $.40 par value of the common stock would now be adjusted to:

    A) 0.4.
    B) 0.48.
    C) 0.32.
    D) 0.3.
    Answer: C

    Stock splits will change the par value of the stock. To calculate the new value multiply the original par by the inverse of the split: 4/5 × $.40 = $.32.
  30. Which of the following represent ownership in a corporation?

    Convertible bonds.
    Preferred stock.
    Common stock.

    A) I and III.
    B) II and IV.
    C) III and IV.
    D) I and II.
    Answer: C

    Common and preferred stocks represent ownership in a company. Convertible debentures may be converted to equity securities, but until they are, they are considered debt.
  31. Treasury stock is:

    A) stock repurchased by the issuer.
    B) authorized but unissued stock owned by the company.
    C) preferred stock.
    D) issued by the U.S. Treasury Department.
    Answer: A

    A company may, from time to time, go into the market and buy some of its own outstanding stock, which is then placed in the treasury and called treasury stock. Treasury stock has no voting rights and does not receive dividends. Treasury stock is not included when calculating shareholders' equity, or net worth.
  32. Which of the following are TRUE of treasury stock?

    Treasury stock is authorized but not yet issued.
    Treasury stock may pay a reduced dividend.
    Treasury stock is issued but has no voting or dividend rights.
    Treasury stock is previously issued stock that has been repurchased by the issuing company.

    A) II and IV.
    B) III and IV.
    C) I and II.
    D) I and III.
    Answer: B

    Treasury stock is a company's stock that has been issued, sold through an offering, and then bought back by the company. When a company repurchases its own stock, that stock has no voting rights or dividend rights and is held in the issuer's treasury.
  33. IBM's common stock is included in the S&P 100 Index. IBM declared a 5:4 stock split. What impact will this split have on the S&P Index value?

    A) Trading will be halted.
    B) It will have no effect.
    C) It will increase.
    D) It will decrease.
    Answer: B

    Just as the total portfolio value of an individual does not change when splits and stock dividends occur, the index will experience no real change, because the stock value used in the index is weighted by the number of shares outstanding.
  34. 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) 300 votes for each of 2 directors.
    B) 100 votes for each of 6 directors.
    C) 200 votes for each of 3 directors.
    D) 600 votes for any 1 director.
    Answer: C

    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.
  35. Stockholders' preemptive rights include the right to:

    A) serve as an officer on the board of directors.
    B) purchase treasury stock.
    C) sell stock back to the issuing corporation.
    D) maintain proportionate ownership interest in the corporation.
    Answer: D

    Preemptive rights allow stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. For example, if a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase 5% of the new shares.
  36. Which of the following securities is subject to the greatest risk?

    A) BAA-rated ABC convertible bond.
    B) Series EE bond.
    C) A-rated municipal bond.
    D) XYZ Inc., common stock.
    Answer: D

    Common stock is a junior security. It is considered less safe than bonds because it has the lowest claim to assets in the event of the issuing firm's liquidation, and is paid dividends after bonds are paid interest.
  37. Which of the following securities carries the greatest amount of risk?

    A) Common stock.
    B) Debentures.
    C) Preferred stock.
    D) Corporate bonds.
    Answer: A

    Common stockholders are always the last to receive payment in the event of a corporate liquidation and, therefore, have the most risk. However, common stockholders have the greatest potential reward of ownership if the corporation is successful.
Card Set
series 7
series 7 equity security