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Flashcards in A - Equities Deck (40):
1

Dell Corporation calls for the redemption of 1 million shares of convertible preferred stock, redeemable at $60 plus an accumulated dividend of $0.25. Each share of preferred stock can be converted into 1/2 share of common stock. The convertible preferred stock is selling at $59. The common stock has 2 million shares outstanding, earnings are $2.50 per share, and it is selling at 122.75. If the corporation calls the convertible preferred stock for redemption, the shareholder should choose which of the following actions to maximize the investment in the convertible preferred stock?

A. Allow the stock to be called for redemption at 60 B. Sell the stock in the market at 59
C. Convert the preferred into common stock
D. Do nothing

Correct Answer: C. Convert the preferred into common stock

Convert the preferred into common stock. If the convertible preferred stock is called for redemption, the owner can receive $60 per convertible preferred share. If the owner of the convertible preferred stock sells the stock in the market, the current price is $59 per share. If the owner of the convertible preferred stock converts these shares into common shares, the owner will receive 1/2 share of common stock for each share of convertible preferred or $61.375 ($122.75 divided by 2) per share in market value of convertible preferred. Therefore, the highest value the owner of the convertible preferred stock can receive is if the shares are converted to common and sold at the current market price. [Module 1, Equities, Sections 4.2]

2

Star Inc., a new Internet company, is bringing to market an initial public offering (IPO) that has 3 million units for $50 per unit. Each unit consists of two shares of common stock and a warrant to purchase three more shares of the common stock at $30. If all of the units are purchased, how many shares of common stock will be outstanding?

A. 3 million shares
B. 6 million shares
C. 9 million shares
D. 15 million shares

The correct answer is: B. 6 million shares

6 million shares of common stock will be outstanding. Upon the initial offering, only the shares within the units become outstanding. Therefore, with 3 million units of 2 shares of common stock per unit, the total number of shares outstanding at the end of the offering will be 6 million shares (2 x 3 million = 6 million shares issued). If the warrants were used to purchase additional shares and all of the warrants were exercised, 9 million more shares would become outstanding (3 million units of 1 warrant per unit x 3 shares per warrant). These additional shares would boost the common stock outstanding to 15 million. However, nothing is said in the question about the warrants being exercised. [Module 1, Equities, Sections 2.1 & 8.0]

3

When shareholders of common stock are issued cumulative voting rights, which of the following statements is true?

A. If the shareholders do not vote, their vote carries over to the next election.
B. Minority shareholders have an opportunity to elect a director.
C. All shareholders must vote for more than one director.
D. Common shareholders only have one vote for each director being elected.

Correct Answer: B. Minority shareholders have an opportunity to elect a director.

Minority shareholders have an opportunity to elect a director. In cumulative voting, minority shareholders are able to pool all of their votes to vote for one or more directors. Each shareholder has one vote for each share they own multiplied by the number of directors being elected. Each shareholder can cast all votes to one director or split them amongst several directors. [Module 1, Equities, Section 6.2]

4

Microsoft, Inc. calls 1 million shares of convertible preferred stock for redemption. The corporation announces that the convertible preferred will be redeemed at $20 per share plus an accumulated dividend of $0.12. Each share of convertible preferred can be converted into 1/2 share of common. The convertible preferred stock is selling at $19. The common stock has 2 million shares outstanding with earnings of $2.50 per share, and is selling in the market at 35.75. Which of the following alternatives would be the best for a convertible preferred stockholder to pursue?

A. Redeem the shares
B. Convert the shares
C. Sell the shares
D. All alternatives would be equally attractive

Correct Answer: A. Redeem the shares

Redeem the shares. By redeeming the shares, the investor will receive $20 per share. If the investor converts the shares, the investor will receive 1/2 share of common stock per share of convertible preferred stock. At a stock price of 35.75 per share, the value received per share of convertible preferred would be 17.875 per share ($35.75 divided by 2). By selling the shares, the investor will receive $19 per share. Therefore, the investor will receive the highest value by redeeming the shares at $20 per share. The $0.12 per share dividend will not add significantly to the price and there is no guarantee that the earnings will be paid to any investors. [Module 1, Equities, Section 4.2]

5

The EGG board of directors has declared a 25% stock dividend to all stockholders of record as of April 29, payable on May 15. Each stockholder receives:

A. A check from the company
B. More shares of stock from the company
C. 25% of the current price of the stock
D. Undeterminable from the information given

Correct Answer: B. More shares of stock from the company

More shares of stock from the company. When a company grants a 25% stock dividend, each common shareholder will receive 25% more shares than they currently own (owners as of the record date of April 29). The question states that stockholders will receive a stock dividend, so the only correct answer is the one that indicates each stockholder will receive more shares of stock. Since each stockholder will receive 25% more shares, for every four shares an investor owns, the investor will receive one more new share. [Module 1, Equities, Section 5.1]

6

The DOW board of directors has declared a dividend on the stock of $0.25 per share to all stockholders of record as of April 29, payable on May 15. Each stockholder receives:

A. A check from the company
B. More shares of stock from the company
C. The converted value of shares from the dividend D. Undeterminable from the information given

Correct Answer: A. A check from the company

A check from the company. When a company's board of directors declares a dividend to shareholders of record, the board can grant either cash or stock as a dividend. If the company gives a cash dividend, stockholders will receive a check from the company. If the company gives a stock dividend as a percentage or ratio, stockholders will receive proportionally more shares of stock for the number of shares owned. [Module 1, Equities, Section 5.1]

7

A preferred stock that can be called by the issuing corporation, thus forcing the redemption, is called a:

A. Cumulative preferred
B. Participating preferred
C. Convertible preferred
D. Callable preferred

Correct Answer: D. Callable preferred

Callable preferred. Callable preferred is a type of stock that can be redeemed (called) by the issuer (the company). Callable preferred gives the issuing corporation the option to call the stock back from the shareholders. If the company exercises the call, it must pay a predetermined amount that is usually described in the prospectus at the time the stock is issued. Participating preferred stock participates in dividends given to common stock, convertible preferred stock can be converted to common stock, and cumulative preferred stock can receive unpaid dividends. [Module 1, Equities, Section 4.2]

8

Which of the following rights are the same for a holder of an ADR and a regular stockholder?

A. Proxy rights
B. The right to declared dividends
C. Preemptive rights
D. The right to vote

Correct Answer: B. The right to declared dividends

The right to declared dividends. Both the holder of an ADR and a stockholder have the right to stated dividends and the right to transfer (sell) their shares (receipts). Holders of ADRs have no preemptive rights, no say in the running of the company, nor any voting rights. They only have the right to declared dividends, which are usually paid in U.S. dollars. [Module 1, Equities, Section 11.2]

9

A preferred stock that can be changed into shares of common stock of the same company any time the owner of the preferred stock desires is called:

A. Cumulative preferred stock
B. Callable preferred
C. Participating preferred
D. Convertible preferred stock

Correct Answer: D. Convertible preferred stock

Convertible preferred stock. Convertible preferred stock allows the owner to convert at their will. [Module 1, Equities, Section 4.2]

10

A customer owns 800 shares of a 7% callable convertible preferred stock (par $100) of ORCL. If the company only pays a dividend of $4 per share in one year and a dividend of $5 per share in the next, how much must the company pay to the preferred stockholders in the following year to give the common stockholders a $0.16 dividend?

A. 0
B. $5
C. $7
D. $12

Correct Answer: C. $7

$7. For the company to pay the common stockholders a dividend, it must pay the preferred stockholders this year's dividend first. This is callable and convertible preferred, not cumulative preferred; thus, the company does not have to make up any missed dividends to the preferred stockholders prior to the common stockholders receiving theirs. In this case, the preferred must pay $7 per year. It is a 7% preferred, with a par of $100 -- 7% of $100 is $7 per year. No missed dividends need to be paid to the preferred, only this year's dividend of $7. [Module 1, Equities, Section 4.1]

11

A customer owns 500 shares of a 5% cumulative preferred stock (par $100) of MSFT. If the company only pays a dividend of $3 per share in one year and a dividend of $1 per share in the next, how much must the company pay to the preferred stockholders in the following year to give the common stockholders a $0.15 dividend?

A. 0
B. $5
C. $6
D. $11

Correct Answer: D. $11

$11. Before the company can pay the common stockholders any dividends, it must make up all past dividends to the preferred stockholders. This is cumulative preferred, which always receives any missed dividends prior to the common stockholders receiving a dividend. In this case, the preferred stockholders must be paid $5 per year. It is a 5% preferred, with a par of $100, so 5% of $100 is $5 per year. The company only paid $3 in the first year, so it owes the preferred stockholders $2 for that year. The next year, the company only paid $1, so it owes the preferred stockholders $4 for that year. Missed dividends to the preferred equal $6 and added to this year's dividend, the company is required to pay $11 in order for the common to receive any dividend. [Module 1, Equities, Section 4.1]

12

Chevron Oil, Inc. calls 1 million shares of convertible preferred stock for redemption at $40 plus an accumulated dividend of $0.18. Each share of convertible preferred stock can be converted into 1/2 share of common stock and is selling at $30. The common stock has two million shares outstanding with earnings at $4.50 per share, and it is selling at 81.72. If all the called convertible preferred stock shares were converted to common, how many shares of common stock would be outstanding?

A. 500,000
B. 2 million
C. 2.5 million
D. 3 million

Correct Answer: C. 2.5 million

2.5 million. There are already 2 million shares of common stock outstanding. With the conversion of 1 million shares to common stock at the conversion ratio of one share of convertible preferred stock for one-half share of common stock, the 1 million shares of convertible preferred convert to 500,000 shares of common. Add the 500,000 new shares of common to the existing 2 million to arrive at 2.5 million shares of common, if all convertible preferred stock shares are converted. When reading exam questions, take care to analyze the specific question and not be distracted by information that is not relevant. [Module 1, Equities, Section 4.2]

13

All of the following are true regarding an ADR, except:

A. A bank in the foreign country holds the shares of the stock.
B. Each receipt issued is for only one share of the stock.
C. Holders of ADRs have a right to declared dividends.
D. Dividends are declared in the foreign currency, but paid in U.S. dollars

The correct answer is: B. Each receipt issued is for only one share of the stock.

Correct answer (false statement): Each receipt issued is for only one share of the stock. This is not true -- each ADR represents a specified number of shares of the foreign stock. The ADRs are issued by a bank that holds the shares of the foreign stock. The dividends are declared in the foreign currency. The bank that is holding the shares converts the dividend to U.S. dollars and sends it to the ADR holders. ADR holders are entitled to the dividends, but cannot vote in corporate elections and may not subscribe to any rights offerings. [Module 1, Equities, Sections 11.1 & 11.2]

14

A client, Mr. Armstrong, is interested in investing in Nissan Corporation. However, Nissan stock only trades on the Tokyo stock exchange. Mr. Armstrong would like to understand how to invest in Nissan using ADRs. With this in mind, which of the following statements is not true about ADRs?

A. ADR investors receive dividends in U.S. dollars. B. ADR investors do not have voting rights, as do stockholders.
C. ADR investors do not have preemptive rights, as do stockholders.
D. The dividends for ADRs are declared in U.S. dollars.

The correct answer is: D. The dividends for ADRs are declared in U.S. dollars.

Correct answer (false statement): The dividends for ADRs are declared in U.S. dollars. Actually, dividends are declared in the currency of the country where the stock trades -- in this case, the Japanese yen. However, because the ADRs trade in the U.S., investors receive any dividends in U.S. dollars. They also have all of the other rights of a regular stockholder with two exceptions: ADR investors do not have voting rights or preemptive rights, as do stockholders. [Module 1, Equities, Section 11.2]

15

Dell Computer has 70 million shares of stock authorized and has issued 40 million shares of stock. The balance sheet of Dell Computer shows there are 7.5 million shares of treasury stock. How many shares of stock are outstanding?

A. 7.5 million shares
B. 32.5 million shares
C. 40 million shares
D. 47.5 million shares

Correct Answer: B. 32.5 million shares

32.5 million shares. Forty million shares were issued out of the 70 million shares authorized, but the company has repurchased 7.5 million shares. This leaves 32.5 million still in the hands of stockholders, which is the amount of shares that are outstanding. [Module 1, Equities, Section 2.1]

16

The board of directors of EGG, Inc. announces a 5-for-4 stock split. The number of shares outstanding would increase by what percentage?

A. 25%
B. 20%
C. 15%
D. 10%

Correct Answer: A. 25%

25%. This is found by taking the split, 5-for-4, and dividing the bottom number into the top number: 5 divided by 4 = 1.25, which is 1/4 more than before, or 25%. [Module 1, Equities, Section 5.1]

17

ABC Corporation is planning to issue 5 million more shares of stock. They are having a rights offering prior to the public offering. An investor holding 2,000 shares of stock would be able to do all of the following with the preemptive rights she will receive, except:


A. Redeem the rights for cash
B. Give the rights away to another party
C. Buy the stock through the rights offering
D. Sell the rights in the open market where the stock sells

Incorrect! The correct answer is: A. Redeem the rights for cash

Correct answer (false statement): Redeem the rights for cash. Preemptive rights have a value, but they cannot be redeemed for cash. The rights can be traded; however, the value of each right may not be sufficient to attract a buyer. The value associated with the right is the intrinsic value to the current owner who will be able to use the rights to purchase shares of common stock at a discount to the current market value of the common shares. The company only offers rights either as a benefit to existing shareholders or because rights offerings are mandated in the corporate charter. The company will not redeem preemptive rights for money. [Module 1, Equities, Section 7.0]

18

Which two of the following are considered owners of a corporation?

I. Debenture holders
II. Common stockholders
III. Mortgage bondholders
IV. Preferred stockholders

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

Correct Answer: A. II and IV

II and IV. Both preferred and common stockholders are owners. Bondholders are creditors, not owners. Companies owe money to bondholders, while stockholders have purchased a share of the company to benefit from the growth of the company and possible earnings. [Module 1, Equities, Section 2.1]

19

Treasury stock is:

A. Unauthorized stock
B. Stock that receives a dividend
C. A deduction from the issued shares
D. Government-backed stock of a corporation

Correct Answer: C. A deduction from the issued shares

A deduction from issued shares. Treasury stock results from the corporation buying back outstanding shares and is a deduction from the issued and outstanding shares that are on the books of the company. It is authorized stock that had been issued but that has now been bought back by the company. Since treasury stock is no longer considered outstanding, dividends are not paid to the "owner" of these shares, because the owner is the company itself. [Module 1, Equities, Section 2.1]

20

Why would an ADR be issued?

A. To facilitate the trading of U.S. securities on foreign exchanges
B. To facilitate trading of foreign securities on U.S. exchanges
C. To facilitate foreign trade in the U.S
D. To facilitate U.S. trade in foreign markets

The correct answer is: B. To facilitate trading of foreign securities on U.S. exchanges

ADRs are used to facilitate trading of foreign securities on U.S. exchanges. ADRs are receipts issued in lieu of certificates of foreign stock. The stock is actually deposited in correspondent branches of U.S. banks in the foreign country, and then the receipts are traded in the United States. One receipt represents a specific number of shares of the underlying stock. These receipts aid in the transferring of ownership of the stock and thus "facilitate trading of foreign securities in the United States." [Module 1, Equities, Sections 11.0 & 11.1]

21

A customer is interested in buying stock in a closely held corporation with a small number of outstanding shares. The customer's registered rep should advise her:

A. That it is a good investment B. That the customer will receive a greater percentage of ownership C. About the risk inherent in buying thinly-traded issues D. About the profit possibilities in a rising market

Correct Answer: C. About the risk inherent in buying thinly-traded issues

About the risk inherent in buying thinly-traded issues. A closely held company is a company where a small group of people, generally the original owners, holds most of the shares. Thus, any others that have shares are not going to have much voice in the company and may not have much of an impact on the market price of the stock. However, thinly-traded stocks may be prone to high fluctuations in price, since few shares are available if the demand for shares increases. [Module 1, Equities, Section 3.0]

22

Who decides for a company if some of the outstanding shares of stock are bought back and made into treasury stock?

A. The board of directors B. Approval of the SEC C. Approval of shareholders D. The state securities department

Correct Answer: A. The board of directors

The board of directors. The board of directors determines if stock is to be issued, called back in and retired, or treated as treasury stock. The SEC and the state securities department have no say in what a company can and cannot do regarding its stock. They just register the securities before they are issued. The stockholders do have some say in the issuance of more shares, but not the calling in of stock. [Module 1, Equities, Section 2.1]

23

A company gives the stockholders of record a 100% stock dividend. To stockholders owning shares of stock, this means which two of the following?

I. Stockholders will receive one new share for each share they now own.
II. Stockholders will receive one new share for every two shares they now own.
III. The value of their holdings will double.
IV. The value of their holdings will stay the same.

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

Incorrect! The correct answer is: A. I and IV

I and IV. Stockholders will receive one new share for each share they now own and the value of their holdings will stay the same. When a company gives the stockholders a stock dividend, the total value of the stockholders' holdings remains the same. If the dividend is paid in cash, the stockholder will receive cash and the value of the shares will decrease by the amount of the cash dividend. The customer will still have the original shares -- at a reduced price -- plus the cash received, which together total the original value before the dividend. If the dividend is in the form of more shares of stock, the value of each share will decrease, but the amount of shares owned will increase. In this case, each shareholder will receive one new share for every share presently held, but the value of each share will be cut in half. The total value will remain the same. For example, if this investor had 100 shares with a value of $40 per share, the investor would end up owning 200 shares with a value f $20 per share after the stock dividend. The total value of the investor's holdings will still equal $4,000. [Module 1, Equities, Sections 5.1]

24

Which of the following industry's stock is considered defensive stock?

A. Aerospace B. Utilities C. Automotive manufacturing D. High-tech

Correct Answer: B. Utilities

Utilities. Utilities are defensive issues. Aerospace is a defense industry stock and automotive manufacturing is considered a cyclical stock. A defensive stock is issued by a company that does well in both good and bad times. For instance, grocery store stocks may be considered defensive stocks since grocery stores may perform better during slow economic times than during good economic times -- fewer people frequent restaurants or spend money on entertainment when times are bad. High-tech stocks are generally associated with volatile businesses that are prone to wide fluctuations in value. [Module 1, Equities, Sections 12.4 & 12.5]

25

Pan Am has been in arrears in the payment of dividends. Before paying dividends to the common shareholders, which of the following shareholders must be paid past dividends when dividends are resumed?

A. Participating preferred shareholders B. Cumulative preferred shareholders C. Convertible preferred shareholders D. None of the above

Correct Answer: B. Cumulative preferred shareholders

Cumulative preferred shareholders. All of the preferred shareholders are entitled to receive dividends if and when they are granted. Only cumulative preferred shareholders will receive dividends that have not been paid in past years as well as the current dividend. All other stockholders, both preferred and common, lose any dividends when the board decides not to pay a dividend. [Module 1, Equities, Section 4.2]

26

PNDA, Inc. follows the statutory method in voting for its board of directors. If a shareholder owns 100 shares of stock, and elects four new directors out of six people running, the shareholder can vote:

A. A total of 100 votes for all the directors in any manner they choose B. 100 votes for each of the four directors that the shareholder wishes C. 400 total votes among the four new directors to be elected in any manner chosen by the stockholder D. 400 votes for each of four directors of the shareholder's choice, but no more than 400 votes for any one director

Correct Answer: B. 100 votes for each of the four directors that the shareholder wishes

100 votes for each of the four directors the shareholder wishes. Statutory voting allows one vote per share per director of the shareholder's choice. The shareholder can vote the total number of votes equal to the number of shares owned for each of the directors being elected. The shareholder cannot combine the number of votes allotted for each director and cast the total number of votes to one candidate, which is allowed with cumulative voting. [Module 1, Equities, Sections 6.1 & 6.2]

27

All of the following types of investments can pay dividends to the shareholder, except:

A. Common stock B. Preferred stock C. ADRs D. Warrants

Correct Answer: D. Warrants

Warrants. Warrants do not pay dividends. Warrants represent promises by a company to sell shares of stock at some future date at a price that is higher than the current market price. Warrants themselves are not actual shares of stock, only a right to buy stock. Common and preferred stock pay dividends if dividends are declared, and ADRs represent ownership of foreign stock in which the investor is entitled to dividends if dividends are declared. [Module 1, Equities, Section 8.0]

28

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 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

Correct Answer: C. Give small stockholders the chance to gain representation on the board of directors

Give small stockholders the chance to gain representation on the board of directors. These small stockholders may not have fair representation if they are not able to accumulate their votes in an attempt to elect a favored candidate to the board of directors. In this way, small shareholders may be able to sway management or the board of directors to accept some of their ideas about running the corporation. The object of cumulative voting is for small shareholders to gain seats, not to gain complete control, of a corporation's board of directors. [Module 1, Equities, Section 6.2]

29

Mobil Oil is paying a quarterly dividend of $0.57. If the present price of Mobil Oil Co. is $102.50, what is the yield from Mobil Oil for the stockholders?

A. 0.56% B. 2.22% C. 5.41% D. 5.56%

Incorrect! The correct answer is: B. 2.22%

2.22%. Don't forget that the dividend shown is a quarterly dividend, or $0.57 x 4 quarters = $2.28. Now, yield is always the dividend or interest divided by the going market price. In this case, 2.28 divided by 102.50 = .0222, or 2.22%. [Module 1, Equities, Section 5.2]

30

The board of directors at Ampex declares a 10% stock dividend to holders of record as of September 15, payable on October 1. A person who owns 300 shares of stock worth $20 on September 15 will receive which of the following?

A. A check for $2 shortly after October 1 B. A check for $60 shortly after October 1 C. A certificate for 10 shares of stock shortly after October 1 D. A certificate for 30 shares of stock shortly after October 1

Incorrect! The correct answer is: D. A certificate for 30 shares of stock shortly after October 1

A certificate for 30 shares of stock shortly after October 1. Since this dividend is a stock dividend, shareholders on record as of September 15 will receive 10% of their current ownership in new shares. The investor owns 300 shares, and 10% of 300 is 30, so the investor will receive 30 more shares. Another way of finding this answer is to calculate that holders of outstanding shares will receive one new share for every 10 shares owned. [Module 1, Equities, Section 5.1]

31

A customer owns 300 shares of 4% nonconvertible cumulative preferred stock (par $100) of UAL. If UAL only pays $2 per share three years ago, $1 two years ago, and $3 last year, how much must UAL pay the preferred stockholders now to give the common stockholders a $0.25 dividend this year?

A. $0 B. $4 per share C. $6 per share D. $10 per share

Incorrect! The correct answer is: D. $10 per share

$10 per share. This question asks how much of a dividend will be paid to owners of a nonconvertible cumulative preferred stock. Therefore, this stock will receive cumulative dividends. When a stock is cumulative, all past dividends that are unpaid must be paid. In this case, the company should have been paying $4 each year, because the stated stock dividend is "4% preferred." Over the past three years, the company missed dividends of $2 in the first year, $3 in the second, and $1 in the third, for a total of $6 missed dividends. Add these missed dividends to the latest dividend of $4 that must be paid to the preferred stockholders before the common stockholders receive their $0.25 -- $6 + $4 = $10. [Module 1, Equities, Section 4.1]

32

Beachwear, Inc. is a large company with a number of smaller companies as part of the corporation. One of the smaller companies is not doing well, so the board of directors has decided to divest the small company from the large corporation by issuing shares of the small company to the existing stockholders. What is this called?

A. A wheel-off B. A leveraged buyout C. A sell-off D. A spin-off

Correct Answer: D. A spin-off

A spin-off. A spin-off occurs when the company issues new shares of stock of a company that will dispersed to the existing stockholders. This keeps the value for the shareholders. A leveraged buyout would occur if the small company had issued stock and bonds and bought itself out of the large corporation. [Module 1, Equities, Section 10.2]

33

A customer owns 300 shares of $8 nonconvertible preferred stock (par $35) of UAL. If the company only pays a dividend of $6 per share in one year and a dividend of $3 per share in the next, how much must the company pay the preferred stockholders in the following year to give the common stockholders a $0.30 dividend?

A. $0 B. $7 per share C. $8 per share D. $12 per share

Incorrect! The correct answer is: C. $8 per share

$8 per share. This question asks how much must be paid to the owners of nonconvertible preferred stock. Nonconvertible preferred stockholders are not entitled to any makeup dividends; only cumulative preferred shareholders will receive missed dividends. Unless a preferred stock is cumulative, past dividends that weren't paid will not be made up. If the stock had been cumulative preferred, the past dividends and the latest dividend would have to be paid before the common shareholders could receive any dividends. In this question, the nonconvertible preferred stockholders only receive the current dividend, which is the "stated" dividend of $8 per share. The common stockholders will receive the $0.30 dividend only after the preferred shareholders are paid. [Module 1, Equities, Sections 4.1]

34

To help support the price of its common stock, CCD Worldwide recently purchased 2.5 million shares of its common stock in the open market. CCD Worldwide had previously issued 82 million shares of common stock. After these recent purchases, it now holds 9 million shares of its common stock as treasury stock. How many shares of CCD Worldwide common stock are outstanding?

A. 70.5 million shares
B. 73 million shares
C. 82 million shares
D. 91 million shares


Correct Answer: B. 73 million shares


73 million shares. Outstanding stock is shares of the company that are owned by investors and not the company itself. In this case, CCD Worldwide had issued 82 million shares but then repurchased 9 million shares as treasury stock. This leaves 73 million (82 million issued - 9 million treasury = 73 million) shares of stock outstanding. Always be sure to read each question very carefully. [Module 1, Equities, Section 2.1]

35

Which of the following is true regarding statutory voting for the directors of a company by the common shareholders?

A. If the shareholders do not vote, their vote carries over to the next election.
B. The minority shareholders get a chance to elect a director.
C. The shareholders must vote for more than one director.
D. The shareholders only get to vote one vote per share of stock owned for each director being elected.


Correct Answer: D. The shareholders only get to vote one vote per share of stock owned for each director being elected.


The shareholders only get to vote one vote per share of stock owned for each director being elected. In statutory voting, the shareholders can only vote as many times for each director being elected as they have shares of stock. This is different from cumulative voting. In statutory voting, if a person has 300 shares and four directors are being elected, they can vote three hundred shares for each of four directors that are running for election. If it had been cumulative, all 1,200 votes could have gone to one director. [Module 1, Equities, Section 6.1]

36

The board of directors of CMI Inc. announces a 7-for-5 stock split. If an investor has 200 shares of CMI, how many shares would he own after the 7-for-5 stock split?

A. 70 shares B. 140 shares C. 200 shares D. 280 shares

Incorrect! The correct answer is: D. 280 shares

280 shares. To calculate this, multiply the number of shares presently held by the split or ratio of 7-for-5: 200 shares presently held x 7 divided by 5, which equals 280. The investor with 200 shares will own 280 shares after receiving the stock dividend, or stock split. The investor's holdings have increased by 80 shares or 40%. [Module 1, Equities, Section 5.1]

37

Amber Corporation has issued 40 million shares of common stock and 2 million shares of preferred stock. Which two of the following are rights of the common stockholders?

I. Vote for the board of directors
II. Vote on the election of officers
III. Vote on the decision to give cash dividends
IV. Vote on the takeover of another company

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

Correct Answer: C. I and IV

I and IV. Common stockholders have the right to vote for the members of the board of directors and on any major issues, such as mergers, some major takeovers, and changing or continuing the corporate strategy. The board is responsible for the election of officers and the declaration of dividends. [Module 1, Equities, Sections 5.1 & 6.0]

38

Shareholders of common stock:

A. Have part ownership in a corporation B. Are creditors of the corporation C. Have no ownership in the corporation D. Are debtors of the corporation

Correct Answer: A. Have part ownership in a corporation

Have part ownership in a corporation. Stockholders have part ownership in a corporation because stock represents an investment in the company -- unlike debt, which represents a loan to the company. Each initial stockholder invests money in the corporation and becomes a part owner. Bondholders or debt holders do not purchase an ownership interest in a company. Rather, these investors will expect to receive interest for lending money to the company. A debtor is defined as a person or business that owes money to the corporation. A creditor, on the other hand, is a person or business that is owed money by the company. [Module 1, Equities, Section 2.1]

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An ADR has been issued by a bank. For which of the following is the ADR developed?


A. To facilitate the trading of U.S. securities on foreign exchanges B. To facilitate the trading of foreign securities on U.S. exchanges C. To facilitate the trading of U.S. securities on U.S. exchanges D. To facilitate the trading foreign securities on foreign exchanges

Correct Answer: B. To facilitate the trading of foreign securities on U.S. exchanges

To facilitate the trading of foreign securities on U.S. exchanges. ADRs represent foreign stock of companies that trade in the U.S. on the various exchanges or over-the-counter markets. [Module 1, Equities, Section 11.1]

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EZ Sleep Beds, Inc. uses the cumulative voting method of electing directors. In a race where eight candidates are vying for five spots on the board, how many votes could a shareholder who owns 100 shares of stock vote?

A. A total of 100 votes for all the directors in any manner the shareholder wishes B. 100 votes for each of five of the directors only C. 500 total votes among the five new directors to be elected in any manner chosen by the stockholder D. 500 votes for each of the five directors, but no more than 500 votes for any one director

Correct Answer: C. 500 total votes among the five new directors to be elected in any manner chosen by the stockholder

500 total votes among the five new directors to be elected in any manner chosen by the stockholder. Cumulative voting allows the shareholders to vote in any manner they choose with the number of shares they have times the number of directors being elected to the board. In this case, 100 shares x five directors allow this shareholder to cast 500 votes (100 votes x 5 open director positions). These votes can be cast in any manner the shareholder wishes. [Module 1, Equities, Section 6.2]