BigDaddy U | SIE Module 3 Test Bank

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1. All of the following statements are correct regarding preferred stock EXCEPT:

A. If a dividend on a preferred stock is received by a corporate taxpayer, some or all of the dividend will be tax-free.

B. In the event of bankruptcy, preferred stock shareholders are considered residual claimants to common shareholders.

C. The issuer of preferred stock is under no obligation to declare a dividend to shareholders.

D. If the stock is cumulative, unpaid dividends in one period must be paid in subsequent periods before dividends on common stock can be paid.

2. Which of the following statements is correct regarding stock rights?

A. Upon issue, the exercise price of a stock right is typically set equal to or greater than the current market price.

B. The market price of a stock right during the ex-rights period would never be lower than its intrinsic value.

C. The ex-rights date precedes the cum-rights date.

D. Companies typically issue rights as a substitute for dividend payments to shareholders.

3. All of the following statements are correct regarding warrants EXCEPT:

A. They have both an intrinsic and speculative value.

B. They involve the issuance of new shares of the company’s stock when they are exercised.

C. They are usually attached to a bond issue, allowing the company to offer a lower coupon rate.

D. They typically have a shorter term to expiration than LEAPs®.

4. Which of the following statements is correct regarding the characteristics of American Depository Receipts (ADRs)?

A. There must be a 1-to-1 ratio between the number of shares held and the number of ADRs issued.

B. Due to the high costs of unsponsored ADRs, there are no new ones being established today.

C. There are four levels of trading for a sponsored ADR.

D. The underlying company participates in the creation process in an unsponsored ADR.

5. An investor recently purchased nonconvertible, noncumulative preferred stock of a company listed on the NYSE. Which one of the following statements is correct regarding the stock?

A. The stock is less volatile than bonds of the same company.

B. The stock dividends that have been accrued in the past may never be paid.

C. The stock can be converted into common stock of the same company.

D. The stock is more susceptible to a decline in value than common stock of the same company.

6. All of the following are correct regarding equity-related instruments EXCEPT:

A. Rights are company-issued options to buy stock.

B. Warrants generally expire within 9 months of issue.

C. The conversion value of a convertible bond equals the exchange ratio multiplied by the current value of the stock.

D. Convertible bonds are generally sold with lower interest rates than equally risky straight bonds.

7. A penny stock typically refers to the stock of a small company that trades for less than:

A. 1 cent per share.

B. 10 cents per share.

C. $1 per share.

D. $5 per share.

8. Several years ago, Ronnie purchased 100 shares of convertible preferred stock in ABC Company for $500 per share. The conversion privilege indicated that Ronnie could convert each share of preferred stock into 50 shares of common stock. When the price of the ABC Company common stock reached $20 per share, Ronnie decided to convert all his preferred shares into common shares. He later sold the common shares for $15 per share. What was the amount of Ronnie’s gain or loss upon the sale?

A. $5,000 loss.

B. $5,000 gain.

C. $25,000 gain.

D. $50,000 gain.

9. Which one of the following statements is correct regarding preferred stock?

A. It has a much higher potential for price appreciation than common stock of the same company.

B. It can be issued by an S corporation only if the S corporation already has shares of common stock issued and outstanding.

C. It has a higher liquidation preference in the event of a corporate liquidation than a convertible bond.

D. It is generally considered a hybrid security because it possesses characteristics of both common stocks and bonds.

10. ABC Company has issued several types of debt and equity securities. Which one of the following ABC Company securities would be most influenced by the price of ABC Company’s common stock?

A. 10-year, 5% coupon bonds.

B. Convertible preferred stock.

C. Subordinated debentures.

D. Cumulative preferred stock.

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11. Which one of the following statements is correct regarding stock rights?

A. They usually expire very quickly after issuance.

B. They are issued with a subscription price that exceeds the value of the underlying stock.

C. Typically only one right is needed to purchase one new share of the underlying company’s stock.

D. They are highly illiquid assets.

12. Which one of the following statements is correct regarding stock warrants?

A. They are typically granted for a very short-term, such as three or six months.

B. They are issued by investors already holding shares of the underlying stock.

C. They are typically issued with an exercise price above the current market price of the stock.

D. They are excluded from the definition of security under the Uniform Securities Act.

13. Which one of the following statements is correct regarding American Depositary Receipts?

A. They allow U.S. securities to be traded in foreign countries.

B. Similar to mutual funds, they only trade at the end of each day.

C. They pay dividends in foreign currency.

D. They are permitted investments in a Roth IRA.

14. Which of the following types of stock voting could be used to provide representation for minority shareholders?

A. Straight voting.

B. Cumulative voting.

C. Referendum voting.

D. Quorum voting.

15. If a corporation is liquidated, which of the following represents the priority in which individuals are paid from the assets of the company?

A. Mortgage holders, preferred stock shareholders, debenture holders, common stock shareholders.

B. Debenture holders, mortgage holders, common stock shareholders, preferred stock shareholders.

C. Mortgage holders, debenture holders, preferred stock shareholders, common stock shareholders.

D. Debenture holders, mortgage holders, preferred stock shareholders, common stock shareholders.

16. SEC Rule 144 applies to the sale of:

A. Exchange-traded funds.

B. Moral obligation bonds.

C. Treasury Inflation Protected Securities.

D. Control securities.

17. For a company that does not have to make filings with the SEC, what is the holding period requirements applicable to restricted securities under SEC Rule 144?

A. 6 months.

B. 12 months.

C. 18 months.

D. 24 months.

18. Which one of the following represents a requirement under SEC Rule 144 that must be satisfied for unregistered securities to be permissibly sold?

A. A seller desiring to sell more than 100 shares must submit a notice filing to the state securities administrator.

B. An adequate amount of information regarding the security must be disclosed to the public prior to sale.

C. The amount of securities to be sold is no more than 15% of the total outstanding shares.

D. The seller of the security must wait at least two years from the date of acquisition before selling the security.

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