SIE Chapter 3

What is the formula for finding conversion ratio on convertible preferred stock?

Par ÷ Conversion Price (par for preferred is $100)

What is a warrant?

A long-term right to buy stock at a preset price.

What are two priorities that preferred stock has over common stock?

Order of liquidation and dividends.

If ABC hasn't paid dividends in four years, what will a 3% non-cumulative preferred owner receive if declared in year 5?

$3. Since the shares are non-cumulative, ABC is only required to pay the full amount for year 5.

What type of preferred stock allows owners to exchange the preferred shares for common shares?

Convertible preferred stock.

True or False: If a BD holds a customer's stock in street name, the BD may vote on behalf of the customer.

False. Without permission, BDs holding a customer's stock in street name may not vote on behalf of the customer.

True or False: A FINRA member firm must disclose whether it has the ability to influence the issuer of securities.

True. This is referred to as a control relationship which must be disclosed to investors.

In securities repurchase, issuers/affiliates may not buy their shares in the last how many minutes of the trading day?

30 minutes.

What are considered equities?

Common and preferred stocks.

What security helps clients to indirectly buy foreign shares?

An American depository receipt (ADR).

True or False: Issuers of unsponsored ADRs are subject to SEC reporting requirements.

False. Issuers of ADRs, foreign governments, and foreign private issuers are exempt from the reporting requirements.

True or False: Customers of a broker-dealer can request to see the firm's balance sheet.

True. If requested, customers must be provided with the broker-dealer's most recent balance sheet.

Define control stock.

Stock that is owned by officers, directors, or greater than 10% owners. It is also referred to as affiliated stock.

What are some rights that shareholders receive?

Voting, inspecting books and records, receiving dividends, evidence of ownership, and transferability.

If ABC hasn't paid dividends in four years, what will a 3% cumulative preferred shareholder receive if dividends are declared in year 5?

$15 ($100 x 3% = $3 per year x 5 years of dividends).

If a company's existing shareholders sell 2 million shares, by what amount will its shares outstanding increase?

Zero. If a company's existing shareholders are offering their shares, no new shares are being issued.

What is the normal par value for preferred stock?

$100.

Who are considered the owners of a corporation?

Common and preferred stockholders.

True or False: Callable preferred shares allow an investor to buy shares of common stock at a fixed price.

False. If preferred shares are callable, the issuer is allowed to buy back the shares at a fixed price.

What type of stocks are associated with major companies that have records of high earnings and dividend payments?

Blue-chip stocks.

What is the formula for outstanding stock?

Issued stock - Treasury stock = Outstanding stock.

Describe callable preferred stock.

A form of preferred stock that the issuer can repurchase at a fixed price; it typically offers a higher dividend.

What is a derivative?

A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages.

What is issued stock?

The amount of stock a corporation has already sold to investors.

What is authorized stock?

The amount of stock a corporation is legally permitted to issue.

What type of stock fluctuates with the business cycle?

Cyclical stock (e.g., auto companies).

True or False: With approval of the board, preferred dividends can be skipped in some years.

True. Unlike bond interest, preferred dividends are not required to be paid each year.

Who is responsible for overseeing a company and appointing its senior managers?

Board of directors.

Describe cumulative preferred stock.

Stock that requires payment of any missing dividends before common stockholders are paid.

How do shareholders typically inspect their company?

By reviewing the annual and quarterly reports that are distributed by the corporation.

Can a warrant be detached and traded separately?

Yes.

True or False: Warrants are generally attached to the delivery of another security (stock or bond).

True.

True or False: ADRs must be issued with cooperation from the foreign issuer.

False. ADRs that are issued without assistance from the foreign company are considered unsponsored.

What are the two types of shares that may be sold under Rule 144?

1) Restricted (unregistered) stock 2) Control stock.

What time limit exists for issuers/affiliates of actively-traded securities repurchasing their own securities?

They may not buy securities within the last 10 minutes of the trading day.

True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.

True. However, it does not guarantee them representation on the board.

True or False: A stockholder is able to vote for a director but not an officer.

True.

What voting method permits common shareholders to vote in any manner in which they choose?

Cumulative voting.

If an issuer is buying its own securities on an exchange, how many broker-dealers is it allowed to use?

It may use only one broker-dealer per trading session.

What group of stockholders receives dividends first?

Preferred stockholders.

How are voting issues determined, by shares or shareholders?

Voting issues are determined based on a majority of shares.

If attached to the issuance of a bond, can warrants be traded separately?

Yes. The two may be detached and traded separately.

True or False: Convertible preferred stock may be converted into a bond.

False. Convertible securities are convertible into common stock.

What are income stocks?

Income stocks pay higher than average dividends (e.g., utility companies).

True or False: The lock-up provision lasts for exactly six months.

False. Although most lock-ups last for six months, there is no regulation setting a maximum or minimum.

What are the volume limitations on an affiliate or issuer repurchasing its own security?

No more than 25% of the average daily trading volume (ADTV) over a 4-week period in one day.

What is the benefit of buying convertible preferred stock?

Investors have the ability to convert the shares into common stock of the company in addition to receiving dividends.

What type of stock may be entitled to extra dividends?

Participating preferred stockholders may be paid both prior to and after common stockholders in profitable years.

What instruments are used to facilitate trading of foreign securities in the U.S.?

American Depository Receipts (ADRs).

True or False: Shareholders can lose more than their original investment if a company declares bankruptcy.

True. Shareholders can only lose their original investment if a company declares bankruptcy.

What two securities are generally bundled as single investments?

Warrants and bonds.

True or False: Treasury stock has no voting rights and receives no dividends.

True.

What is a lock-up period?

A length of time during which shareholders and insiders are prohibited from selling their shares.

What are not considered equity securities?

Fixed-income products, such as bonds and notes.

What do existing stockholders receive for every one share owned?

One right for every one share owned.

True or False: Common stockholders have the right to vote for the payment of dividends.

False. Dividend payments are determined by the board of directors.

True or False: In bankruptcy, common shares are senior to preferred shares.

False. If a company declares bankruptcy, preferred shares are paid before common shares.

True or False: All owners have the right to vote.

False. Only common stockholders have the right to vote.

What type of stocks are associated with companies that are resistant to recession?

Defensive stocks.

True or False: Not all employees of a corporation are control persons.

True.

What type of instrument allows holders to buy stock at a price below the current market value?

Rights are a short-term instrument.

Who is a lock-up agreement meant to protect?

Shareholders/investors.

What advantage do existing stockholders have through rights offerings?

They can maintain their percentage of ownership and buy additional shares at a discount.

What are equity holders entitled to receive?

Dividends, which are derived from corporate profits.

When warrants are attached to bonds, what happens to the rate of interest paid?

The issuers pay a lower rate of interest due to the added opportunity.

Under Rule 144, how many months must restricted stock be held before it can be sold?

Six months.

What is restricted stock?

Unregistered stock that is typically bought through a private placement before shares are offered publicly.

What is the purpose of a lock-up provision?

To prevent large shareholders from selling immediately after an IPO, which could cause the share price to fall.

What is a lock-up period?

The length of time a pre-IPO shareholder must wait before selling their shares.

Are ADR holders exposed to currency risk?

Yes, since these securities will track the underlying stock.

True or False: Common shares vote on a per share basis, not per shareholder basis.

True.

Regarding rights, options, and warrants, which instrument has the longest maturity?

Warrants.

What is the longest duration for a warrant?

Perpetual.

What voting method permits one vote for each share owned to be voted for each director?

Statutory voting.

What type of stocks are issues of companies with sales, earnings, and market shares that are expanding?

Growth stocks.

What is a stock legend?

A notice on stock certificates stating that selling is restricted unless the shares are SEC-registered or exempt.

True or False: Both common and preferred stockholders are offered preemptive rights.

False. Preemptive rights are only offered to common stockholders.

When an issuer or an affiliate is repurchasing its own shares, how many BDs may it use in one day?

Issuers or affiliates may use only one broker-dealer a day when repurchasing its own stock.

What is treasury stock?

Stock that was issued and repurchased by the issuing corporation.