Series 65: Multiple Choice Questions

What is the difference between preferred stock and common stock?

Preferred stock holders recieve

• fixed dividends

• usually no voting rights

• payment priority

• limited growth/volatility

• less liquid

Common stock holders recieve

• may or may not receive dividends

• voting rights

• unlimited growth

• highly liquid

Which of the following statements regarding rights is true?
A. Common stockholders would not generally receive preemptive rights.
B. Preferred stockholders would not generally receive preemptive rights.
C. Both common and preferred stockholders would generally receive preemptive rights.
D. Neither common nor preferred stockholders would receive preemptive rights.

B. Preferred stockholders have no right to maintain a percentage of ownership when new shares are issued (no preemptive rights).

Holders of each of the following are creditors except
A. investors owning preferred stock.
B. Investment companies owning corporate bonds
C. corporations owning municipal bonds
D. states owning U.S. government bonds

A. all stock holders are owners and bonds are a debt security (making bond holders creditors)

Limited liability regarding ownership in a U.S. corporation means all of the following except
A. investors might lose more than the amount of their investment.

B. investors might lose their investment.

C. creditors of the corporation cannot seek relief from the shareholders.

D. investors are not liable to the full extent of their personal property.

A. An advantage of owning stock is that an investor’s liability is limited to the amount of money they invested when the stock was purchased.

An investor who has purchased preferred stock with the goal of receiving steady quarterly income would be most interested in the
A. seniority of the stock compared to other securities
B. ability of the company to continue paying the stated dividend
C. voting power of the shares
D. par value of the shares

B. They are most concerned with whether the company can sustain the dividend, since it represents a fixed percentage return based on the par value of their preferred shares.

Owners of a corporation’s equity securities
A. are always assured dividends if the company is profitable
B. are creditors of the corporation.
C. have limited liability
D. have the right to vote their shares

C. have limited liability

A company that has issued cumulative preferred stock
A. pays past and current preferred dividends before paying dividends on common stock
B. pays the preferred dividend before paying the coupons due on its outstanding bonds
C. pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common.
D. forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.

A. pays past and current preferred dividends before paying dividends on common stock.