Ch9: Equities

Tender offer:

a public proposal or bid by a company or investor to buy a large portion of a company’s shares at a fixed price for a set amount of time

A tender offer must be open for …

at least 20 business days

Schedule TO is

the document a party submitting a tender offer must publish on the first day (Schedule Tender Offer)

After … days from when the … is submitted, the board of the target company must make…

after 10 business days from when the Schedule TO is commenced, the board of the target company must make a statement to shareholders recommending acceptance or rejection, netural, or can’t take a position on the tender offer

During the tender period, the purchaser can/can’t buy the same security it has submitted a tender offer for in the open market.

can’t buy the same security in the open market

During the tender period, can the purchaser buy convertible preferred or convertible bonds in the open market?

no

During the tender period, can the purchaser buy non-convertible preferred or non-convertible bonds in the open market?

yes

If a tender offer is over-subscribed, how are the shares accepted?

pro-rate, the same percentage of each shareholder’s tendered shares

Earned income is

derived from active participation in a business (salaries, bonuses, tips)

Portfolio income is

dervied from investments and securities, includes capital gains and losses, dividends, and interests

Passive income is

derived from businesses in which you have no active participation but do have ownership, like rental properties, DPPs, or limited parnterships

The holding time period for an investment to get long term capital gains treatment is

more than one year

Steps to calculate portfolio tax liability:

1. subtract ST Gains - ST Losses, 2. subtract LT Gains - LT Losses, 3. add the net ST and LT

Personal tax year runs over the

calendar year

In any given personal tax (calendar) year, if capital losses exceed capital gains, … can be offset against earned income

up to 3000 dollars

Any excess capital losses above the … can be …

3000 can be carried forward into the next tax year

The annual taxable income capital loss deduction cap is $3,000 and it applies …, no matter …

$3,000 and it applies every single tax year, no matter how large your capital loss carryforward is.

A wash sale is

when you sell a security at a loss and then buy the same or substantially identical security within 30 days before or after the sale.

If you sell a security at a loss and then buy the same or substantially identical security within 30 days before or after the sale, called a wash sale, the IRS …

does not allow that capital loss to be deducted from taxable income for that tax year and is instead added to the cost basis of the newly purchased shares.

What types of securities are considered “substantially identical” to common stock under the wash sale rule?

convertible preferred stock (anything that could become CS), convertible bonds, call options, and the same ETF tracking the same index

A tax lot is

a group of shares or units of a security that were all purchased at the same time and at the same price,

The IRS uses tax lots to determine …

shares you sold, gain or loss realized, and if it’s short‑term or long‑term cap gains

To get the most favorable tax treatment, the lowest taxes today, you would sell the tax lot with the …

highest cost basis, since taxable gains is the proceeds (current market price - cost basis) are the smallest

If an investor doesn’t specifically identify which shares are being sold, the IRS uses

FIFO method, the earliest purchase lot is used first

Use the … method to calculate the average cost per share with different tax lots.

weighted average

Cost basis:

what you are deemed to have paid for the securities to calculate the taxable gain or loss on an investment

A security is inherited if

the owner has passed away and given it to someone in their will

The recipient’s basis of a gifted security is called the … and is

is called the carryover basis and is the original purchase price

The recipient’s basis of an inherited security is called the

is called the stepped up basis, and is the fair market value at the time of transfer of death

When does the stepped up basis not apply for an inherited security?

if it is an annuity

Gifting between which parties are excluded from the gift tax?

spouses

How does preferred stock move with interest rates?

preferred stock moves inversely with interest rates since they act like bonds with fixed coupon payments (higher interest rates will decrease their value since higher paying coupon bonds out there)

Converstion ratio =

par value / conversion price

The typical par value for preferred stock =

100

When should you convert a convertible security?

when the market price of the stock is greater than the conversion value

Participating preferred stock lets holders

receive more than the fixed dividend if the company performs well, like a share of extra earnings or common dividends

Class F shares are

preferred shares only issued to founders

Dual class shares

give certain holders (often founders) super-voting rights to retain control of the

company

Class Q shares are

common stock shares associated with an issuer's dividend reinvestment plan (DRIP)

Value of Cumulative Preemptive Right =

(Market Price - Subscription Price) ÷ (Number of Rights Needed to Buy One Share + 1)

Value of Ex-rights Preemptive Right =

(Market Price - Subscription Price) ÷ (Number of Rights Needed to Buy One Share)

A shareholder's preemptive rights gives them

the opportunity to buy new shares at a discount to market price before they are issued (to avoid dilution)

Warrant stock breakeven =

when market price = warrant exercise price + warrant cost

The question “what happens when a convertible security is called by the issuer?” is basically telling you

a call is a forced conversion when the stock is doing well, in that an investor will be forced to convert their security is the security is being called but the market price is higher than the call price

What document must investors receive before trading penny stocks?

the penny stock risk disclosure document

Up to $… per year can be deducted from ordinary income for net capital loss

3000

Unused capital losses can be carried forward

indefinitely

If a registered representative receives a transferred account with securities they did not recommend, they should

review and determine whether the holdings remain suitable

A broker may route an order to a specific trading venue…

at a customer's requestO

OTC Link ATS is

an alternative trading system used by BDs to quote OTC securities

Companies issue different classes of common stock to

provide investors different voting or dividend rights

Normal Class A stocks have

regular, single voting rights with full economic dividend and capital appreciation

Class A shares sometimes have … in dual class structures

super-voting rights compares to Class B shares

What does a stock split do to the P/E ratio?

it doesn’t change it (since it doesn’t change the price, nothing would change)

The purpose of the wash sale rule is to

To prevent investors from claiming a tax loss if they repurchase the same or substantially identical security within 30 days.

A wash sale is

selling a security you own at a loss to incur the tax loss then buying a substantially identical security within 30 days before or after the sale

Cash dividends on stocks are taxed as

dividend income (lower rate than ordinary income)

Qualified dividends are taxed at

long‑term capital gains rates, which are lower than ordinary income.

Non‑qualified dividends are taxed as

ordinary income.

Ordinary income is the … tax category

highest

LTCG is attained after a security is held for… and generally taxed at a rate … than ordinary income

held for one year and taxed at a rate lower than ordinary income

Qualified corporate dividends have to be held for … and have a max tax rate of

…%.

Qualified corporate dividends have to held for 61 out of 121 days surrounding the ex-dividend date and have a max tax rate of 15%.

How are stock splits and stock dividends?

not taxable when received, but cost basis may need to change

Realized gains are

when securities are liquidated and a gain is actually realized and therefore become taxable

What is the dividend exclusion rule for corporations receiving dividends from other corporations?

50% of the dividend received is tax-exempt; the remaining 50% is taxable.

Under the dividend exclusion rule, a corporation that …

receives dividends from another domestic corporation may exclude 50% of those dividends from taxable income, while the remaining 50% is taxable.

A tender offer is

a public bid by an investor or company to buy shares from existing shareholders at a specified price, usually at a premium, for a limited time.

During a tender offer, (Rule …) the purchaser (the party making the offer) may not …, but can …

SEC Rule 14e-5: buy the same security in the open market while the offer is active, but can buy non-convertible securities of the issuer

Tender offers must remain open for at least

20 days

A tender offer is oversubscribed when … To determine the percentage accepted…

A tender offer is oversubscribed when more shares are tendered than the bidder wants to buy

Divide the number of shares the purchaser is willing to buy by the number of shares shareholders tender. For example, if a company offers to buy 1,000 shares but shareholders tender 2,000 shares, each shareholder will have 50% of their shares accepted (1,000 ÷ 2,000), and the remaining shares are returned.

A reverse merger is when

a private company acquires a public company to take itself from private to public without going through a traditional IPO.

Reverse mergers involving foreign private companies are usually done to … and are subject to

done to gain access to US capital markets and public listing status, and are subject to SEC reporting and disclosure requirements.

Taxable interest from corporate bonds, dividends on stock that was held for 60 days or less, and dividends from stock in foreign corporations are all … dividends and are taxed as …

non-qualified dividends and are taxed as ordinary income.

1), 2), and 3) are all non-qualified divideds and are taxed as ordinary income

Taxable interest from corporate bonds, dividends on stock that was held for 60 days or less, and dividends from stock in foreign corporations

The decision on when to declare a cash dividend is that of the

board of directors

An investor who holds both long and short positions of a stock may participate in a tender offer to the extent of their …

net long position (long stocks - short stocks)

A cash mergers, or …, is a … in which the acquiring company …

a specific type of takeover where the consideration paid to shareholders is entirely cash, in which the acquiring company pays a share price above the market to merge (taking over) the target company

You can/can’t hold onto preemptive rights for long term appreciation

can’t

The total period of time that is considered to determine whether an investor violated that terms of the wash sale rule in the sale of mutual funds is

61 days

The cost basis of shares that are inherited is …. This change in basis from the original purchase price is called a step up in basis.

the net asset value on the date of death, called a step up in basis.

When shares are gifted during life, the new cost basis equals …

the donor’s original cost basis, a carryover basis

A carryover basis is

when shares are gifted during life, equal to the donor’s original purchase price of the shares

A warrant is a security typically issued with a … instrument that entitles the purchaser of that instrument to … during a given time period.

debt, to buy shares of common stock at a set price

If a company wants to acquire more control after a first tender offer was too small by raising the tender‑offer price, it must

first close the original tender offer, and only then may it launch a new tender at the higher price, since all tender‑offer purchases must occur at one uniform price and cannot be raised selectively while the offer is open.

Substantially identical securities include …

call options and bonds or preferred stocks that convert into the security.

Penny stock customers must receive a … statement that shows an …

a monthly statement that shows an estimated market value of each penny stock owned.

Lower basis → bigger gain → … tax bill

higher tax bill

Preferred stock will typically make a … dividend payment to shareholders.

quarterly

… gives the most flexibility to designate for sale specific shares that will produce optimum tax consequences.

specific share identification

… is the most tax-effective way to leave transfer stocks to another person because…

Inheriting upon death since the cost basis is the market value at the TOD

Mutual funds typically use the …method as the default for the calculation of basis. 

Average Cost

Class C shares of common stock, typically non-voting, are often reserved for

employee ownership. 

Which type of preferred stock is likely to pay the highest stated dividend rate, as a percentage of the money she invests?

1. A.Convertible preferred

2. B.Cumulative preferred

3. C.Straight preferred

4. D.Participating preferred

straight preferred has the highest stated divided rateT

True or false: ADR holders will receive dividends if declared but cannot vote on company legal matters.

true

Investors use capital losses first to offset capital gains taken in ,,,. Then, they can use up to $,,, per year of capital losses to reduce ordinary (taxable) income. The balance of capital losses is ,,, and may be used in subsequent years, subject to the same $,,,limit. 

Investors use capital losses first to offset capital gains taken in the same year. Then, they can use up to $3,000 per year of capital losses to reduce ordinary (taxable) income. The balance of capital losses is carried forward and may be used in subsequent years, subject to the same $3,000 limit. 

Divided yield =

annual dividend yield / current market price

A spinoff is when … and distributes …. Shareholders end up owning …

A spinoff is when a parent company separates a division or subsidiary into a new, independent company and distributes shares of that new company to existing shareholders, usually tax‑free. Shareholders end up owning 2 companies.

In a spinoff, the parent’s stock price

falls because assets were removed.

When selling shares and trying to lower the capital gains tax, … would ^{be most advantageous in a market with volatility but no consistent direction.} 

share identification

An investor who purchased shares during a falling bear market would pay the highest price on her initial purchase, then pay lower prices on each subsequent purchase, so they should sell using the … method

FIFO, assuming the first shares were the most expensive so would have the highest cost basis