Equity Securities Flashcards
Jenna is a young investor who has a high risk tolerance and an investment objective of capital appreciation. She has $10,000 to invest from a winning lottery ticket. She calls her RR for a short-term stock recommendation. Which of the following would best match Jenna’s request?
[A] A utility stock
[B] A special situation stock
[C] An ADR
[D] A growth stock
[B] A special situation stock
Special situation stocks are typically undervalued stocks that rise in price suddenly, usually due to a significant, company-specific event such as an approval of a patent, approval of a new drug, or the roll-out of a new product. This can result in significant capital appreciation within a short time period. Given the customer’s stated objective–short-term stock trade– and her risk tolerance, a special situation stock best meets her request. Also, although growth stocks can deliver capital appreciation, the time horizon is typically longer than a special situation stock.
Ch1 Sec3
All of the following are correct regarding common stock EXCEPT:
[A] Common shares may be held in street name by a broker-dealer.
[B] Common shares may be called by the issuing corporation after a specified date.
[C] Common shares may be used as collateral for a loan in a margin account.
[D] Ownership of common shares may be transferred with proper assignment on the back of the stock certificate.
[B] Common shares may be called by the issuing corporation after a specified date.
Ch1 Sec1
Which of the following can authorize the repurchase of a company’s own stock in the secondary market?
[A] Common stockholders
[B] Preferred stockholders
[C] Board of Directors
[D] Common and preferred stockholders
[C] Board of Directors
Stockholder approval is not required for repurchasing a company’s own stock in the secondary market; it only needs to be approved by the Board of Directors
Ch1 Sec2
When a company does a Rights Offering, the rights are
[A] sold to the general public.
[B] sold to only existing shareholders.
[C] only given to existing shareholders, proportionately to shares held.
[D] given to the public on a first come, first serve basis.
[C] only given to existing shareholders, proportionately to shares held.
Rights are a short-term privilege granted by a corporation to existing common shareholders which give them the opportunity to subscribe to a proportionate number of newly issued shares at a price that is lower than the public offering price before the public is allowed to purchase the new shares. Rights are distributed to the existing shareholders at no cost.
Ch1 Sec5
Which of the following features of preferred stocks could cause dilution?
[A] A call feature
[B] A participation/participating feature
[C] A cumulative feature
[D] A conversion feature
[D] A conversion feature
If convertible preferred shares are converted to common shares, it would lead to dilution as the total number of outstanding common shares increases. The other preferred stock features are not dilutive. Dilution increases the number of outstanding shares and decreases EPS (earnings per share).
Ch1 Sec6
A customer reads in a news article that the consensus among economists regarding the economic outlook has turned negative. He calls his RR to ask how he should adjust his equity portfolio given this news. Which of the following recommendations would best address the customer’s concern?
[A] Sell cyclical stocks and buy growth stocks
[B] Sell blue chip stocks and buy growth stocks
[C] Sell cyclical stocks and buy counter-cyclical stocks
[D] Sell defensive stocks and buy cyclical stocks
[C] Sell cyclical stocks and buy counter-cyclical stocks
The RR’s recommendation to sell cyclical stocks and buy counter-cyclical stocks is the most appropriate given the economic news of a declining economy. In short, cyclical stocks move in the same direction as the economy and counter-cyclical stocks move in the opposite direction of the economy.
Ch1 Sec3
Equity Real Estate Investment Trusts will usually invest in which of the following?
[A] properties in oil and gas
[B] income producing properties
[C] residential mortgage loans
[D] public municipal facilities
[B] income producing properties
Equity Real Estate Investment Trusts will generally invest in income producing properties such as apartment buildings.
Ch1 Sec8
Which of the following securities receives no dividends and has no voting rights?
[A] American Depository Receipts.
[B] Preferred stock.
[C] Treasury stock.
[D] Common stock.
[C] Treasury stock.
Treasury Stock is stock which has been issued and repurchased by a corporation. Once it is repurchased, it does not receive dividends or voting privileges.
Ch1 Sec2
Of the choices listed below, which represent an equity interest in a corporation?
[A] Preferred Stock
[B] Corporate Bonds
[C] Debentures
[D] Convertible bonds
[A] Preferred Stock
Ch1 Sec6
An RR has a customer whose primary objectives are investment income and capital appreciation. Which of the following investment options would best meet the customer’s objectives?
[A] A growth stock
[B] A warrant
[C] A REIT
[D] A utility stock
[C] A REIT
A Real Estate Investment Trust (REIT) provides income via dividends and offers the potential for capital appreciation. A growth stock could provide capital appreciation, but growth stocks generally pay little or no dividends. A warrant does not pay dividends. A utility stock is appealing because of its reliable and often large dividend. However, it does not offer as much capital appreciation potential as a REIT.
Ch1 Sec8
All of the following statements with regard to warrants on common stock are true EXCEPT:
[A] when they are issued they have intrinsic value
[B] when they are issued they do not have intrinsic value
[C] the value of the warrant is directly related to the market value of the common stock
[D] the performance of the company will impact the value of the warrants
[A] when they are issued they have intrinsic value
When they are first issued, warrants do not have any intrinsic value because generally the stock value is lower than the exercise price of the warrant. As time passes if the value of the stock increases the warrants will then have intrinsic value if the value of the stock is higher than the exercise price of the warrant.
Ch1 Sec5
All of the following are rights of common stockholders EXCEPT:
[A] To vote for members of the Board of Directors
[B] To inspect the corporate books
[C] To receive a pro rata share of dividends declared by the Board of Directors
[D] To vote for the amount of stock dividends they will receive
[D] To vote for the amount of stock dividends they will receive
Common stockholders are not allowed to vote for their own dividend distributions. Dividend distributions are determined by the Board of Directors of the corporation.
Ch1 Sec1
A customer wishes to sell a stock just after the stock pays a dividend with a record date of Friday, October 20th. Assuming a regular-way settlement, the earliest that the customer could sell the stock and still receive the dividend is
[A] Monday, October 16th.
[B] Tuesday, October 17th.
[C] Wednesday, October 18th.
[D] Thursday, October 19th.
[D] Thursday, October 19th.
The ex-date on a dividend is one business day prior to the record date. In this case, the record date is listed as Friday, October 20th. This would mean that the ex-date for the security is Thursday, October 19th. The customer would have to sell on or after October 19th to still receive the dividend, making 10/19 the earliest that the customer could sell the stock and still receive the dividend.
Remember, the key is which investor is it: the buyer or the seller?
The Buyer must trade BEFORE the ex-date in order to get the dividend. (On or after the Ex-date the buyer would not get the dividend). The Seller must trade ON or After the Ex-date in order to get the dividend.
Ch1 Sec7
Customer A owns a common stock that offers cumulative voting, while Customer B owns a common stock that offers statutory voting. Which of the following statements would be TRUE regarding the voting rights of Customer A and Customer B?
[A] Customer A must vote for more than one director, whereas, Customer B can cast all votes for one director.
[B] Minority stockholders of Customer A’s company have a better chance of electing a director of their choice, than do the minority stockholders of Customer B’s company.
[C] Customer A’s company directors must be elected by a majority, whereas Customer B’s company only requires plurality.
[D] Customer A’s company allows uncast votes to be carried forward to the next election whereas, Customer B’s company does not.
[B] Minority stockholders of Customer A’s company have a better chance of electing a director of their choice, than do the minority stockholders of Customer B’s company.
Ch1 Sec1
The Eskimo Cup Company announces a 20 cent dividend payable March 15th to owners of record Thursday, February 19th and declares a 5% stock dividend payable March 15th to owners of record Friday, February 13th. An investor buys 2,000 shares regular way on Monday, February 16th. He would expect a cash dividend of
[A] 20 cents per share on 2,000 shares.
[B] 20 cents per share on 2,100 shares.
[C] 21 cents per share on 2,000 shares.
[D] 21 cents per share on 2,100 shares.
[A] 20 cents per share on 2,000 shares.
Ch1 Sec7
Of the following assets, which are most likely to be included in the investment portfolio of a real estate investment trusts:
[A] Farmland and parks
[B] Airports and stadiums
[C] Single family housing and raw land
[D] New apartment houses and shopping centers
[D] New apartment houses and shopping centers
Shareholders in a REIT look for income from rents received from apartment buildings and shopping centers as well as capital gains as buildings are sold at a profit. Funding for airports and stadiums would generally come from the issuance of municipal bonds, not reits.
Ch1 Sec8
Which of the following factors tends to affect the price of utility common stocks more than industrial common stocks?
[A] Earnings per share.
[B] The book value of the company.
[C] Interest rates.
[D] The consumer Price Index.
[C] Interest rates.
Utility stocks are very strongly tied to interest rates since they are so highly leveraged (carry a lot of debt).
Ch1 Sec3
Claire purchased 100 shares of ABC common stock on Monday, June 2nd, and pays for her purchase on Wednesday, June 4th. Assuming no other information, it can be assumed that this is a
[A] regular-way settlement.
[B] cash settlement.
[C] standing settlement.
[D] Reg T settlement.
[A] regular-way settlement.
Regular-way Settlement is Trade Date plus Two Business Days or T+2. If Claire purchases on Monday, June 2nd, and she settles her purchase on Wednesday, June 4th, then this can be assumed to be a regular-way settlement on the trade.
Ch1 Sec2
Which of the following is FALSE concerning rights?
[A] They are required to be traded OTC .
[B] They are freely transferable.
[C] They normally have a short-term life span.
[D] They may be listed on a stock exchange.
[A] They are required to be traded OTC .
Rights allow the holder to subscribe to stock at less than the current market price. Rights can be freely traded on the exchanges and usually have a maximum maturity of 90 days. Rights can be traded on an Exchange or OTC.
Ch1 Sec5
Which of the following happens when a company declares a stock split?
[A] There is a reduction in the company’s earned surplus account and an increase in its capital account.
[B] The company’s assets are frozen.
[C] The proportionate share of ownership in the company by each stockholder does not change.
[D] There is no effect on the par or stated value of the stock.
[C] The proportionate share of ownership in the company by each stockholder does not change.
Ch1 Sec4
An equity investor is primarily concerned with preservation of capital. Currently, interest rates have been rising and are forecasted to continue to rise. Which of the following stock recommendations is most appropriate for this investor?
[A] Defensive stocks
[B] Utility stocks
[C] Cyclical stocks
[D] Emerging growth stocks
[A] Defensive stocks
Defensive (non-cyclical) stocks would be the most appropriate recommendation because they are the least affected (of the choices presented) by rising interest rates. Utility stock is also an appealing choice but not the best answer given the investor’s primary objective: preservation of capital. Rising interest rates negatively impact utilities because utilities carry a large amount of debt and rising interest rates means higher interest payments for these companies.
Ch1 Sec3
With regard to common stock, prior stockholder’s vote is required for which of the following?
[A] 20% stock dividend
[B] A 3 for 1 stock split
[C] Primary distribution of 400,000 unissued shares
[D] A purchase of 100,000 treasury shares
[B] A 3 for 1 stock split
Ch1 Sec4
All of the following are examples of a regular stock split EXCEPT:
[A] 3:2
[B] 5:4
[C] 8:7
[D] 2:3
[D] 2:3
When the larger number is the second number (2:3), it represents a reverse split. If the larger number is the first number, it would be a regular stock split (3:2).
Ch1 Sec4
When a registered representative is trying to determine if a stock is a growth stock, public utility, or blue chip, they would most likely look at the:
[A] Earnings per share
[B] Current Ratio
[C] Dividend Payout ratio
[D] Advance/Decline ratio
[C] Dividend Payout ratio
The dividend payout ratio would help the RR determine what type of company they were looking at since most Blue Chip stocks maintain a dividend payout ratio of approximately 50%, growth stocks 25%, and public utilities 75%.
Ch1 Sec3A
