Unit 12

Question 1

Characteristics of Preferred Stock

Answer 1

• Usually does not have the same voting rights or appreciation potential as common stock
• Priority claims over common stock
• Dividends are fixed
• Like a bond, its price is sensitive to interest rate changes

Question 2

What are the basic features of common stock?

Answer 2

• potential capital appreciation
• income from dividends
• hedge against inflation

Question 3

What is a 2 for 1 stock split?

Answer 3

2 stocks for every 1 you own (twice as many shares)

Question 4

What is a property dividend?

Answer 4

shares in a subsidiary company/product

Question 5

Rights of common stockholders:

Answer 5

• right to vote for the BOD
• common stockholders usually have the preemptive right to maintain their proportionate share of ownership in the corporation

Question 6

What is the record date?

Answer 6

Before a votre or a payment of a dividend, the company established a record date. This is the date by which an investor must be an owner of record in order to vote or receive the announced dividend.

Question 7

Risks of owning common stock?

Answer 7

Mark risk, business risk, and low priority at dissolution

Question 8

Because the primary objective by investing in preferred stock is income, when analyzing a specific preferred stock, the most important determination should be

Answer 8

the ability of the company to meet its dividend payments.

Question 9

Straight (noncumulative)

Answer 9

no special features beyond the stated dividend payment, missed dividends are not paid to the holder

Question 10

Callable Preferred

Answer 10

company can buy back at a stated price after a specified date

Question 11

Convertible Preferred

Answer 11

owner can exchange the shares for a fixed number of shares of common stock of the issuing corporation. Convertible preferred price tends to fluctuate in line with the common.

Question 12

For investors looking for fixed income through preferred stocks, what would be the LEAST appropriate choice.

Answer 12

adjustable-rate

Question 13

For exam purposes, all preferred stock:

Answer 13

is nonvoting and it makes no difference if the par value is $10, $25, or $100.

Question 14

Benefits of owning preferred stock

Answer 14

• Fixed income from dividends
• Prior claim ahead of common stock
• Convertible preferred sacrifices income in exchange for capital appreciation. Preferred stock is a perpetual security.

Question 15

Risks of owning preferred stock:

Answer 15

• Market risk
• Possible loss of purchasing power
• Interest rate (money rate) risk
• Business difficulties leading to possible reduction of elimination of the dividend and even bankruptcy leading to loss of principal.

Question 16

Fundamental analysts evaluate:

Answer 16

broad-based economic trends, current business conditions within an industry, and the quality of a particular corporation’s business, finances, and management

Question 17

What is a dividend model?

Answer 17

some analysts believe that the value of a stock can be determined based upon current or anticipated dividends

Question 18

Dividend Discount Model

Answer 18

this model states that the current market value of a stock should be equal to the present value of all future dividends.

• Divide annual dividend / required rate of return

Question 19

Dividend Growth Model

Answer 19

assumes that the amount of the annual dividend will grow at a constant rate

Question 20

Which model computes a higher current stock price?

Answer 20

The answer is one that factors in growth.

Question 21

Technical analysts attempt to:

Answer 21

predict the direction of prices on the basis of charts reflecting price and trading volume patterns of a specific securities without regard to the issuer’s profitability

They chart a stock’s price and volume over a period of time.

Question 22

Support Level

Answer 22

the price where the stock price bottoms

Question 23

Resistance Level

Answer 23

where the stock’s price reaches a high enough level where there are now more sellers than buyers

Question 24

Breakout

Answer 24

when the price movement penetrates the support or resistance level

Question 25

Moving Averages

Answer 25

attempts to modify the fluctuations of stock prices into a smoothed trend

Question 26

Short Interest Theory

Answer 26

refers to the number of shares that have been sold short, higher short interest is a bullish indicator and low short interest is a bearish indicator

Question 27

Odd-Lot Theory

Answer 27

the belief that small investors invariably buy and sell at the wrong times

Question 28

Advance/Decline Theory

Answer 28

the number of issues closing up or down on a specific day reflects market breadth, the number of advances and declines can be significant indications of the market’s relative strength