Common and Preferred Stocks

Question 1

Authorized Stock

Answer 1

Maximum number of shares a corporation may issue

Question 2

Treasury Stock

Answer 2

Shares that have been purchased by the corporation (stock buy-back). Does NOT pay dividends and holds NO voting rights

Question 3

Outstanding Stock [equation]

Answer 3

Authorized Stock - Treasury Stock

Question 4

Stated Value (Par Value)

Answer 4

$1

Question 5

Preemptive Right

Answer 5

Right to maintain proportionate ownership. Mechanism used to engage in preemptive rights is a Rights Offering

Question 6

True or False: Rights are short term and are exercisable over Current Market Price

Answer 6

False: Short term and exercisable UNDER Current Market Price
(remember: Rights = less than CMP [discount], Warrants = greater than CMP [premium])

Question 7

What are shareholders able to access within the corporate books?

Answer 7

3x 10Qs and 1x 10K
(remember: 10Q = Quarterly Reporting, 10K = Annual Reporting)

Question 8

Statutory Voting vs. Cumulative Voting

Answer 8

Statutory: 500 shares = 500 votes (protects majority/larger share holders)
Cumulative: 500 shares x # board seats (protects minority/smaller share holders)

Question 9

Theoretical liqudation value is also know as…

Answer 9

Book value

Question 10

Penny Stock

Answer 10

Non-NASDAQ over the counter (OTC) stock under $5

Question 11

True or False: Penny Stocks send out monthly statements

Answer 11

True

Question 12

True or False: Penny Stocks do not require suitability statements for new customers

Answer 12

False: REQUIRED

Question 13

Establish Customer

Answer 13

Has established funds with a BD for at least 1 year or has conducted at least 3 transactions

Question 14

Preferred Stock

Answer 14

Reflects as a fixed income vehicle that has preferential treatment to Common Stock

Question 15

Preferred Stock is senior to Common Stock in … and …

Answer 15

Dividends and Liquidation

Question 16

Cumulative Preferred Stock

Answer 16

Goes into arears when the issuer misses dividends

Question 17

Non-Cumulative Preferred Stock

Answer 17

Does NOT go into arears when the issuer misses dividends

Question 18

Preferred Stock Par Value

Answer 18

$100

Question 19

Participating Preferred Stock

Answer 19

Gives holders the ability to participate in excess earnings beyond stipulated amount
(bad in downtrends)

Question 20

Convertible Preferred Stock

Answer 20

Gives holders the ability to switch status from Preferred Stock holder to Common Stock holder

Question 21

Convertible Preferred Stock: Conversion Ratio [equation]

Answer 21

When given the Conversion Price, establish the Conversion Ratio
Par / Conversion Price = Conversion Ratio (in shares)
(remember: Preferred Stock Par = $100, Bond Par = $1,000)

Question 22

Parity [equation]

Answer 22

Value of Convertible Security (Common or Preferred Stock) / Conversion Ratio
(ie. if you bought a Preferred Stock at $120 and you are able to convert it into 5 Common Stock shares, Parity/Cost Basis of Common Stock = $120 / 5 = $24)

Question 23

Call risk is associated with a…

Answer 23

Declining interest rate environment

Question 24

Call Protection consists of…

Answer 24

Time and Price

Question 25

Adjustable Rate

Answer 25

Moves against the Base Rate (standard: LIBOR + 200 bps)

Question 26

True or False: Preferred Stock holders are senior in dividends to Common Stock holders

Answer 26

True

Question 27

Rights vs. Warrants

Answer 27

Rights are ST and exercisable below Current Market Price Warrants are LT and exercisable above Current Market Price

Question 28

Anti-Dilution Agreement

Answer 28

Right to give Rights holders the first right of refusal

Question 29

Electronic exchanges/auction markets are best characterized as...

Answer 29

Order-driven markets (ie. NYSE)

Question 30

ECNs and OTCs are best characterized as...

Answer 30

Negotiated/Quote-driven markets (ie. NASDAQ, Bulletin Board)

Question 31

Dark Pools allow participants to trade...

Answer 31

Anonymously

Question 32

ADRs

Answer 32

American Depository Receipts - foreign securities traded in domestic markets (ie. Nintendo)

Question 33

ADRs are subject to what kind of risk?

Answer 33

Currency Risk (remember: anything foreign/international is subject to Currency Risk due to exchange rates. ADRs are traded in currency of the home country and settled in USD)

Question 34

Capital Gains Tax Treatment

Answer 34

ST Gains (hold for 12 months or less): Ordinary Income Tax Rate LT Gains (hold for more than 12 months): Taxed at 20% maximum

Question 35

How much are you able to offset earned income on realized losses?

Answer 35

$3,000

Question 36

Non-Qualified Dividends are taxed at...

Answer 36

Ordinary Income Tax Rates (remember: non-qualified dividends are ST = Ordinary Income Tax Rate)

Question 37

True or False: Cash Dividends are not taxable.

Answer 37

False: Cash Dividends are taxable (remember: cash dividends = paid income = always taxable)

Question 38

Wash Sales

Answer 38

IRS rule states that you must wait at least 30 days to buy back a sold security

Question 39

Conversion to Common Stock is TAXABLE / NOT TAXABLE

Answer 39

Not Taxable

Question 40

True or False: Stock Dividends are not taxable.

Answer 40

True (remember: stock dividends = not paid out in cash = not taxable)

Question 41

Stock Dividend and Adjusted Cost Basis [equation]

Answer 41

1) Calculate Total Cost Basis (Shares * Cost Basis) 2) Calculate Additional Shares (Shares * % Stock Dividend) 3) Calculate Adjusted Cost Basis (Cost Basis / [Shares + Additional Shares]) ie. If you buy 100 shares of AAPL at $50/share (CB) and AAPL declares 10% stock dividend... 1) 100 * $50 = $5,000 (Total Cost Basis) 2) 100 * 10% = 10 shares (Additional Shares) 3) $5,000 / (100 + 10) = $5,000 / 110 = $45.45 (Adjusted Cost Basis)

Question 42

Inherited Securities Cost Basis

Answer 42

Also known as "Step Up Basis" - Market Value at death of original holder

Question 43

Gifted Securities Cost Basis

Answer 43

Recipient (Gifted) assumes Cost Basis of the Donor (Gifter)

Question 44

IRS automatically imposes ... if you haven't held good records

Answer 44

First-In, First-Out (FIFO)

Question 45

LIFO

Answer 45

Last-In, First-Out - sells last-bought shares first

Question 46

Identified Shares

Answer 46

Choose either FIFO or LIFO - good when you can identify tax optimization