1,001 Series 7 Exam Practice Questions For Dummies®

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About the Author

After earning a high score on the Series 7 exam in the mid-1990s, Steven M. Rice began his career as a stockbroker for a broker dealership with offices in Nassau County, Long Island, and in New York City. In addition to his duties as a registered representative, he also gained invaluable experience about securities registration rules and regulations when he worked in the firm’s compliance office. But it was only after Steve began tutoring others in the firm to help them pass the Series 7 exam that he found his true calling as an instructor. Shortly thereafter, Steve became a founding partner and educator in Empire Stockbroker Training Institute (www.empirestockbroker.com).

In addition to writing Series 7 Exam For Dummies and 1,001 Series 7 Exam Practice Questions For Dummies (published by Wiley), Steve developed and designed the Empire Stockbroker Training Institute online (Series 7, Series 6, Series 63, Series 66, and more) exams. Steve has also coauthored a complete library of securities training manuals for classroom use and for home study, including the Series 4, Series 6, Series 7, Series 11, Series 24, Series 63, Series 65, and Series 66. Steve’s popular and highly acclaimed classes, online courses, and training manuals have helped tens of thousands of people achieve their goals and begin their lucrative new careers in the securities industry. Steve continues to tutor students online through his two tutoring websites (www.series7tutoring.com and www.insightprofessionaltraining.com).

Dedication

I dedicate this book to my beautiful wife, Melissa. Melissa is the love of my life, my joy, my inspiration, and my best friend.

Author’s Acknowledgments

There is a phenominal team at Wiley that made this book possible. I would like to start by thanking my acquisitions editor, Erin Calligan Mooney, for seeing something in me that told her that I was the right guy for the job. She is a professional through and through, and I appreciate all of her help.

A load of thanks also goes to senior project editor Tim Gallan, for his rapid-response emails, which provided guidance and helped to keep me moving in the right direction.

I would also like to thank my copy editor, Jennette ElNaggar, for making suggestions and tweaking my writing to make it more in line with For Dummies style. Her input ultimately made this book more fun to read for all of you.

Next, I would like to thank the entire composition team and the technical editor, Christopher Rohn. Although I didn’t get a chance to communicate with any of you directly, this book wouldn’t be possible without every one of you. I sincerely appreciate all of your hard work.

I would also like to thank my dad, Tom Rice, his wife, Maggie, my sisters Sharlene and Sharlet, and my son Jim for all of their love and support.

Publisher’s Acknowledgments

Acquisitions Editor: Erin Calligan Mooney

Senior Project Editor: Tim Gallan

Copy Editor: Jennette ElNaggar

Technical Editor: Christopher Rohn

Art Coordinator: Alicia B. South

Project Coordinator: Emily Benford

Illustrator: Rashell Smith

Cover Image: ©iStock.com/leungchopan

Chapter 1

Underwriting Securities

A good place to start is at the beginning. Prior to corporations “going public,” they must register and have a way of distributing their securities. The Series 7 exam tests your ability to understand the registration process, the entities involved in bringing new issues to market, and types of offerings. In addition, you’re expected to know which securities are exempt from Securities and Exchange Commission (SEC) registration.

The Problems You’ll Work On

As you work through this chapter, be sure you can recognize, understand, and, in some cases, calculate the following:

  • The process involved with bringing new issues to market
  • Who gets what (distribution of profits)
  • The different types of offerings
  • Exempt securities and transactions

What to Watch Out For

Read the questions and answer choices carefully and make sure that you

  • Watch out for words that can change the answer you’re looking for, such as EXCEPT, NOT, ALWAYS, and so on.
  • Recognize that there’s a difference between exempt securities and exempt transactions.
  • If you’re not certain of the correct answer, try to eliminate any answers that you can. Doing so may make the difference between passing and failing.

1–34 Bringing New Issues to Market

1. Which of the following types of underwriting agreements specify that any unsold securities are retained by the underwriters?

(A) mini-max

(B) firm commitment

(C) all-or-none (AON)

(D) best efforts

2. Pluto Broker-Dealer is offering an IPO that will not be listed on the NYSE, NASDAQ, or any other exchange. How long after the effective date must Pluto provide a final prospectus to all purchasers?

(A) 20 days

(B) 30 days

(C) 40 days

(D) 90 days

3. The cooling-off period for a new issue lasts approximately how many days?

(A) 20

(B) 30

(C) 40

(D) 60

4. GNU Corporation is planning to issue new shares to the public. GNU has not yet filed a registration statement with the SEC. An underwriter for GNU may do which of the following?

(A) Accept money from investors for payment of the new issue of GNU.

(B) Send a red herring to investors.

(C) Accept indications of interest.

(D) None of the above.

5. Which of the following is NOT a type of bond underwriting?

(A) mini-max

(B) best efforts

(C) standby

(D) AON

6. A tombstone ad would include all of the following names EXCEPT

(A) selling group members

(B) syndicate members

(C) the syndicate manager

(D) the issuer

7. A registered rep may use a preliminary prospectus to

(A) solicit orders from clients to purchase a new issue

(B) show prospective investors that the issue has been approved by the SEC

(C) obtain indications of interest from investors

(D) accept orders and payments from investors for a new issue

8. All of the following are included in the preliminary prospectus EXCEPT

  1. the public offering price
  2. the financial history of the issuer
  3. the effective date

(A) I only

(B) I and II

(C) II and III

(D) I and III

9. What is the underwriting arrangement that allows an issuer whose stock is already trading publicly to time the sales of an additional issue?

(A) shelf registration

(B) a standby underwriting

(C) a negotiated offering

(D) an Eastern account underwriting

10. A primary offering would do which of the following?

  1. Increase the number of shares outstanding.
  2. Decrease the number of shares outstanding.
  3. Raise additional capital for the issuer.
  4. Include selling treasury stock.

(A) I, III, and IV

(B) II, III, and IV

(C) I and IV

(D) I and III

11. Which of the following are types of state securities registration?

  1. filing
  2. communication
  3. qualification
  4. coordination

(A) I, III, and IV

(B) II, III, and IV

(C) I, II, and III

(D) I, II, III, and IV

12. Which of the following securities acts covers the registration and disclosure requirements of new issues?

(A) the Securities Act of 1933

(B) the Securities Exchange Act of 1934

(C) the Trust Indenture Act of 1939

(D) all of the above

13. Which TWO of the following are considered securities under the Securities Act of 1933?

  1. variable annuities
  2. fixed annuities
  3. FDIC insured negotiable CDs
  4. oil and gas limited partnerships

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

14. All of the following would be included on a tombstone ad EXCEPT

(A) the name of the issuer

(B) the names of the selling groups

(C) the names of the syndicate members

(D) the name of the syndicate manager

15. Under the Securities Act of 1933, the SEC has the authority to

  1. approve new issues of common stock
  2. issue stop orders
  3. review registration statements

(A) I and II

(B) II and III

(C) I and III

(D) all of the above

16. Stabilizing bids may be entered at

(A) a price at or below the public offering price

(B) the stabilizing price stated in the final prospectus

(C) a price at or slightly above the public offering price

(D) a price deemed reasonable by the Fed

17. All of the following may be determined by the managing underwriter EXCEPT

(A) the takedown

(B) the public offering price

(C) the effective date

(D) the allocation of orders

18. A corporation in the process of issuing stock has not filed a registration statement with the SEC. An account executive may do which of the following relating to the new issue?

(A) Accept money from customers.

(B) Obtain indications of interest.

(C) Guarantee to customers that they will be able to purchase 1,000 shares of the new issue.

(D) Nothing.

19. HIJ Corporation is issuing common stock through an IPO that will trade on the OTCBB when it is first issued. Broker-dealers who execute orders for clients in HIJ common stock must have a copy of a final prospectus available for how long?

(A) 25 days after the effective date

(B) 30 days after the effective date

(C) 40 days after the effective date

(D) 90 days after the effective date

20. Zamzow, Inc., has filed a registration statement and is currently in the cooling-off period. Zowie Broker-Dealer is the lead underwriter for Zamzow and is in the process of taking indications of interest. Which TWO of the following are TRUE regarding indications of interest?

  1. They are binding on Zowie.
  2. They are binding on customers.
  3. They are not binding on Zowie.
  4. They are not binding on customers.

(A) I and II

(B) III and IV

(C) I and IV

(D) II and III

21. A syndicate has just won a bid on a new issue of corporate bonds. The syndicate is expected to start receiving orders for this issue shortly. What is the normal order for filling orders from highest priority to lowest priority?

  1. group net
  2. member
  3. designated
  4. presale

(A) IV, I, III, II

(B) I, III, II, IV

(C) III, II, I, IV

(D) IV, II, I, III

22. All of the following terms apply to a new issue of securities EXCEPT

(A) stabilization

(B) due diligence

(C) matching orders

(D) cooling-off period

23. Which of the following are covered under the Securities and Exchange Act of 1934?

  1. margin accounts
  2. trust indentures
  3. proxies
  4. short sales

(A) I, II, and III

(B) II and IV

(C) III and IV

(D) I, III, and IV

24. An investment banking firm has won a competitive bid for a corporate underwriting of ABCDE common stock. The investment banking firm has agreed to purchase the shares from the issuer. This type of offering is a(n)

(A) all-or-none underwriting

(B) best efforts underwriting

(C) standby underwriting

(D) firm commitment underwriting

25. Silversmith Securities is the lead underwriter for 2 million shares of HIJ common stock. Silversmith has entered into an agreement with HIJ to sell as many shares of their common stock as possible, but HIJ will cancel the offering if the entire 2 million shares are not sold. What type of offering is this?

(A) firm commitment

(B) all-or-none

(C) mini-max

(D) best efforts

26. Which of the following documents details the liabilities and responsibilities of each firm involved in the distribution of new securities?

(A) the registration statement

(B) the letter of intent

(C) the syndicate agreement

(D) the code of procedure

27. Which of the following information must be included in the registration statement to the SEC when registering new securities?

  1. the issuer’s name and description of its business
  2. what the proceeds of sale will be used for
  3. financial statements
  4. the company’s capitalization

(A) I and III

(B) I, II, and III

(C) I, III, and IV

(D) I, II, III, and IV

28. Which of the following is TRUE?

  1. The registrar is responsible for making sure that a corporation’s outstanding shares do not exceed the amount of authorized shares.
  2. The transfer agent is responsible for making sure that a corporation’s outstanding shares do not exceed the amount of authorized shares.
  3. The registrar maintains records of a corporation’s stock and bond owners plus mails and cancels old certificates as necessary.
  4. The transfer agent maintains records of a corporation’s stock and bond owners plus mails and cancels old certificates as necessary.

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

29. Which of the following securities is subject to the anti-fraud provision of the Securities Act of 1933?

(A) U.S. government securities

(B) common stock issued by any corporation

(C) private placements under Regulation D

(D) all of the above

30. SEC Rule 145 requires shareholder approval for which of the following events?

  1. new shares issued for a stock dividend
  2. new shares issued for a stock split
  3. an acquisition
  4. mergers or consolidations

(A) I and II

(B) III and IV

(C) I, III, and IV

(D) II and IV

31. One of your clients is interested in purchasing shares of a new issue of DIMM common stock. However, the demand for DIMM has exceeded the number of shares DIMM had intended to offer. You should look to see whether there is a

(A) Rule 144 exemption

(B) Rule 145 exemption

(C) green shoe provision

(D) way of purchasing the shares privately

32. The main function of an investment banker is to

(A) advise an issuer on how to raise capital

(B) raise capital for issuers by selling securities

(C) help issuers comply with the laws of the Securities Act of 1933

(D) all of the above

33. Which of the following is NOT determined by the syndicate manager?

(A) the effective date

(B) allocation of orders

(C) syndicate member allotment

(D) public offering price

34. Which of the following documents would contain the allocation of orders?

(A) official statement

(B) trust indenture

(C) syndicate agreement

(D) preliminary prospectus

35–44 Distribution of Profits

35. Place the following in order from largest compensation to smallest compensation in an underwriting spread.

  1. concession
  2. manager’s fee
  3. reallowance
  4. takedown

(A) IV, I, III, II

(B) II, III, I, IV

(C) I, II, III, IV

(D) III, II, I, IV

36. The public offering price to purchase a new issue of DEF Corporate bonds is $1,000. However, the issuer receives only $989 per bond. What is the $11 difference called?

(A) the takedown

(B) the underwriting spread

(C) the additional takedown

(D) the concession

37. Your firm is a syndicate member for an IPO offering of BCDE common stock. If you sell one of your customer’s BCDE stock, he will pay the public offering price

(A) plus a commission

(B) plus a markup

(C) without a markup or commission

(D) plus a manager’s fee

38. Armbar common stock is being sold to a syndicate during an underwriting for $13.50 per share. The public offering price is $15.00 per share, and the manager’s fee is $0.25 per share. If the concession is $0.80 per share, what is the additional takedown?

(A) $0.45 per share

(B) $1.15 per share

(C) $1.25 per share

(D) $1.50 per share

39. Liddell Securities is part of a syndicate that is offering new shares of SLAM Corporation common stock to the public. There are 8 million shares being offered to the public, and Liddell Securities is allocated 1 million shares. After selling its allotment, 800,000 shares remain unsold by other members. How much of the remaining shares would Liddell Securities be responsible for?

  1. 100,000 shares if the offering was on an Eastern account basis
  2. 100,000 shares if the offering was on a Western account basis
  3. 0 shares if the offering was on an Eastern account basis
  4. 0 shares if the offering was on a Western account basis

(A) I and IV

(B) II and III

(C) I and II

(D) III and IV

40. Faber Hughes Corporation is offering 2 million new shares to the public. The shares are being sold to a syndicate for $8 and are being reoffered to the public at $9. The takedown for each share sold is $0.85. The concession is $0.55 a share, and the managing underwriter retains $0.15 in fees for each share sold by anybody. The selling group will assist in selling 500,000 of the 2 million shares offered. If the selling group sells its entire allotment, how much does it make in profits?

(A) $425,000

(B) $150,000

(C) $350,000

(D) $275,000

41. A syndicate is offering 10 million new shares to the public on an Eastern account basis. A member of the syndicate is responsible for selling 2.5 million shares. After selling its entire allotment, 1 million shares are left unsold by other members. How many additional shares is the firm responsible for selling to the public?

(A) 0

(B) 100,000

(C) 250,000

(D) 1 million

42. TUV Corp. is offering 6 million new shares to the public. The shares are being sold to a syndicate for $15 and are being reoffered to the public at $16. The compensation to the underwriters for each share sold is $0.75. The selling group receives $0.30 a share for each share it sells, and the managing underwriter retains $0.25 in fees for each share sold by anybody. The selling group will assist in selling 1 million of the 6 million shares offered. If the selling group sells its entire allotment, how much does the syndicate make on shares sold by the selling group?

(A) $200,000

(B) $300,000

(C) $450,000

(D) $750,000

43. The smallest portion of a corporate underwriting spread is the

(A) concession

(B) takedown

(C) reallowance

(D) manager’s fee

44. What is the profit syndicate members make when selling shares of a new issue?

(A) the concession

(B) the takedown

(C) the reallowance

(D) the spread

45–49 Types of Offerings

45. A municipality is offering $20 million of new bonds through a syndicate in a negotiated offering. A firm in a syndicate that is established as a Western account is responsible for selling $2 million of the bonds. After the firm sells $1.8 million of the firm’s allotment, the manager of the syndicate determines that there are $4 million of bonds left unsold. How much of the unsold bonds is the firm responsible for selling?

(A) 0

(B) 200,000

(C) 400,000

(D) 600,000

46. A corporation is offering 1 million shares of its common stock to the public. Of those shares, 600,000 are authorized but previously unissued, while insiders of the company are selling the other 400,000 shares. What type of offering is this?

(A) IPO

(B) primary

(C) secondary

(D) combined

47. WXY Corporation is offering a large block of treasury stock. What type of offering is this?

(A) IPO

(B) primary

(C) secondary

(D) split

48. The first time a corporation issues stock is called a(n)

(A) primary offering

(B) secondary offering

(C) split offering

(D) initial public offering

49. SEC Rule 415 outlines rules for

(A) primary offerings

(B) shelf offerings

(C) secondary offerings

(D) IPOs

50–64 Exempt Securities and Transactions

50. Which of the following Securities Act of 1933 exemptions may be used for an initial offering of securities?

  1. Rule 144
  2. Rule 147
  3. Regulation D
  4. Regulation S

(A) I, II, and III

(B) II and IV

(C) III and IV

(D) II, III, and IV

51. One of your clients purchased unregistered securities overseas from a U.S. corporation under Regulation S. Which of the following is TRUE?

  1. They are exempt transactions.
  2. They are exempt securities.
  3. The securities must be held for 270 days before they can be resold in the United States.
  4. The securities must be held for one year before they can be resold in the United States.

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

52. One of your clients wants to purchase a private placement. According to Regulation D, which of the following are the minimum standards for an accredited investor?

  1. a net worth exceeding $1 million excluding primary residence
  2. a net worth exceeding $300,000 excluding primary residence
  3. an annual income exceeding $100,000 in each of the two most recent years and a reasonable expectation of the same income level in the current year
  4. annual income exceeding $200,000 in each of the two most recent years and a reasonable expectation of the same income level in the current year

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

53. Which of the following securities are exempt from the full registration requirements of the Securities Act of 1933?

(A) corporate convertible bonds

(B) closed-end funds

(C) real estate limited partnerships

(D) commercial paper

54. A Regulation D private placement is

(A) an offering of securities to no more than 35 unaccredited investors in a 12-month period

(B) an intrastate offering

(C) an offering of securities worth no more than $5 million in a 12-month period

(D) a large offering of commercial paper

55. A Regulation S exemption under the Securities Act of 1933 is for

(A) a non-U.S. issuer issuing new securities to U.S. investors

(B) a U.S. issuer issuing new securities to non-U.S. investors

(C) a U.S. issuer issuing new securities to U.S. investors

(D) a non-U.S. issuer issuing new securities to non-U.S. investors

56. Which of the following are non-exempt securities?

  1. municipal GO bonds
  2. treasury notes
  3. blue chip stocks
  4. variable annuities

(A) I and II

(B) II and III

(C) III and IV

(D) I and IV

57. Which of the following is TRUE of Regulation A offerings?

(A) They are limited to 35 unaccredited investors each year.

(B) They are issued without using a prospectus.

(C) They are limited to raising up to $10 million per year.

(D) They are also known as private placements.

58. A Rule 147 offering is

(A) an offering of securities only within the issuer’s home state

(B) an offering of securities worth no more than $5 million within a one-year period

(C) an offering of securities to no more than 35 unaccredited investors within a one-year period

(D) also known as an interstate offering

59. Sig Hillstrand has held shares of Greenhorn restricted stock for more than one year. Greenhorn has 4 million shares outstanding. The most recently reported weekly trading volumes for Greenhorn are as follows:

9781118885741-fg0101.tif

What is the maximum number of shares that Sig can sell under Rule 144?

(A) 35,000

(B) 46,250

(C) 44,000

(D) 42,500

60. Which of the following securities is NOT exempt from SEC registration?

(A) limited partnership public offerings

(B) treasury notes sold at auction

(C) Rule 147 offerings

(D) private placements

61. Derrick Diamond has held restricted stock for six months. When must Derrick file a Form 144 with the SEC to sell the stock publicly?

(A) at the time of sale

(B) 30 days after the sale

(C) 60 days after the sale

(D) 90 days after the sale

62. Which of the following are exempt transactions?

  1. private placements
  2. securities issued by the U.S. government
  3. municipal bonds
  4. intrastate offerings

(A) II and III

(B) II, III, and IV

(C) I and IV

(D) I, II, III, and IV

63. Mike Steelhead and his wife, Mary, would like to open a joint account at your firm. They are interested in purchasing a private placement under Regulation D. You should inform them that to be considered accredited investors, they must have a combined annual income of at least

(A) $200,000

(B) $300,000

(C) $500,000

(D) $1 million

64. All of the following are exempt securities under the Act of 1933 EXCEPT

(A) treasury bonds

(B) municipal general obligation bonds

(C) REITs

(D) public utility stocks

Chapter 2

Equity Securities

To be a corporation, you must have stockholders. Both common and preferred stock are considered equity securities because they represent ownership of the corporation. A majority of most registered representatives’ commission is earned by selling equity securities because, historically, equity securities have outpaced inflation.

Although this isn’t the largest section on the Series 7 exam, it does relate to many other chapters, such as packaged securities and options.

The Problems You’ll Work On

In this chapter, you’re expected to understand and calculate questions regarding the following:

  • The specifics of common stock
  • How stock splits and dividends affect stockholders
  • The difference between common stock and preferred stock
  • The reason for American depositary receipts (ADRs)
  • What rights and warrants are

What to Watch Out For

Read the questions and answer choices carefully, and be sure you

  • Don’t assume an answer without reading each question and answer choice completely (twice if necessary).
  • Watch out for key words that can change the answer (EXCEPT, NOT, and so on).
  • Eliminate any incorrect answer choice that you can.
  • Look at questions from the corporation’s or the investor’s point of view depending on how the question is worded.

65–77 Common Stock

65. Which of the following would be owners of a corporation?

  1. common stockholders
  2. debenture holders
  3. participation preferred stockholders
  4. equipment trust bondholders

(A) I and III

(B) II and IV

(C) I, III, and IV

(D) II, III, and IV

66. Which of the following does NOT describe treasury stock?

(A) It has no voting rights.

(B) It is stock that was previously authorized but still unissued.

(C) It is issued stock that has been repurchased by the company.

(D) It has no dividends.

67. Common stockholders have the right to vote for all of the following EXCEPT

  1. cash dividends
  2. stock dividends
  3. stock splits
  4. members of the board of directors

(A) I, II, and III

(B) III and IV

(C) I and II

(D) IV only

68. An individual owns 2,000 shares of TUV common stock. TUV has four vacancies on the board of directors. If the voting is cumulative, the investor may vote in any of the following ways EXCEPT

(A) 4,000 votes for two candidates each

(B) 5,000 votes for one candidate and 3,000 votes for another candidate

(C) 3,000 votes each for three candidates

(D) 2,000 votes for four candidates each

69. You have a new client who is new to investing. She is concerned about taking too much risk. Which of the following investments could you tell her is the riskiest?

(A) common stock

(B) preferred stock

(C) debentures

(D) GO bonds

70. Macrohard Corp. was authorized to issue 2 million shares of common stock. Macrohard issued 1.1 million shares and subsequently repurchased 150,000 shares. How many of Macrohard’s shares remain outstanding?

(A) 150,000

(B) 900,000

(C) 950,000

(D) 1.85 million

71. Treasury stock is

(A) U.S. government stock

(B) local government stock

(C) authorized but unissued stock

(D) repurchased stock

72. WHY Corporation has an EPS of $6.10 and pays an annual dividend of $2.10. At a market price of $42.00, what is the current yield?

(A) 5.0%

(B) 9.2%

(C) 14.5%

(D) 34.4%

73. Common stockholders have which of the following rights and privileges?

  1. the right to receive monthly audited financial reports
  2. the right to vote for cash dividends
  3. the right to vote for stock splits
  4. a residual claim to assets at dissolution

(A) I and II

(B) III and IV

(C) I, III, and IV

(D) II, III, and IV

74. KO Corp., a new company, has held back some of its shares for later use. According to shelf distribution rules, KO can sell the shares over the course of the next __________ without having to reregister the shares.

(A) 180 days

(B) 270 days

(C) 1 year

(D) 3 years

75. Cain Weidman owns 1,000 shares of HIT Corp. HIT issues stock with cumulative voting. What is the maximum number of votes that Cain can cast for one candidate if the board of directors of HIT has four vacancies?

(A) 100

(B) 250

(C) 1,000

(D) 4,000

76. The par value of a common stock is

  1. used for bookkeeping purposes
  2. one dollar
  3. adjusted for stock splits
  4. the amount investors receive at maturity

(A) I and III

(B) I, II, and III

(C) II, III, and IV

(D) I, II, III, and IV

77. Which of the following investments exposes an investor to the greatest risk?

(A) TUV subordinated debentures

(B) TUV mortgage bonds

(C) TUV common stock

(D) TUV preferred stock

78–89 Stock Splits and Dividends

78. JKLM common stock has an EPS of $2 and pays a $0.20 quarterly dividend. If JKLM’s market price is $32, what is the current yield?

(A) 0.67%

(B) 2.5%

(C) 5.0%

(D) 10%

79. Which of the following changes the par value of a stock?

(A) a rights offering

(B) the issuer repurchasing some of its outstanding stock

(C) a stock split

(D) a cash dividend

80. Dana Black, an investor, purchased 1,000 shares of ABC at $40. If ABC announces a 5-for-4 split, what is Dana’s position after the split?

(A) 800 ABC at $50

(B) 1,250 ABC at $32

(C) 1,250 ABC at $50

(D) 800 ABC at $32

81. How much is the price of a stock reduced for a 4-for-3 split?

(A) 10%

(B) 20%

(C) 25%

(D) 33%

82. A listed stock closed at $24.95 on the business day prior to the ex-dividend date. If the company previously announced a $0.30 dividend, what will be the opening price on the next business day?

(A) $24.35

(B) $24.65

(C) $24.95

(D) $25.25

83. ABC splits its stock 3 for 1. An investor who owns 100 shares would receive

(A) another certificate representing 200 shares of ABC

(B) a sticker to be placed on his existing certificate notifying purchasers that the stock was split

(C) a notice to send back the existing certificate so that it can be replaced with a new one representing 300 shares

(D) another certificate representing 300 shares of ABC and a notice to destroy the existing certificate

84. A corporation would announce all of the following dates EXCEPT

(A) the declaration date

(B) the ex-dividend date

(C) the record date

(D) the payment date

85. The ex-dividend date as related to cash dividends is

  1. the date that the stock price is reduced by the dividend amount
  2. the date that the stock price is increased by the dividend amount
  3. two business days before the record date
  4. two business days after the trade date

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

86. A corporation announces a dividend with a record date of Monday, February 16. When is the last day an investor can buy the stock the regular way and receive the dividend?

(A) February 11

(B) February 12

(C) February 13

(D) February 15

87. One of your customers owns 1,000 shares of DIM common stock at $24. DIM declares a 20% stock dividend. On the ex-dividend date, your customer will own

  1. 1,000 shares
  2. 1,200 shares
  3. stock at $20 per share
  4. stock at $24 per share

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

88. What is the main reason a corporation would split its stock?

(A) to bring in additional funds

(B) to increase the overall market value of its stock

(C) to decrease the amount of dividend paid per share

(D) to increase the demand for its stock

89. ABC undergoes a 1-for-4 reverse stock split; which TWO of the following increases?

  1. EPS
  2. the market capitalization of ABC
  3. the market price of ABC
  4. the number of shares outstanding

(A) I and II

(B) I and III

(C) III and IV

(D) II and IV

90–104 Preferred Stock

90. EYEBM Corp. shares are trading at $55 per share when it declares a 5% stock dividend. After EYEBM pays the dividend, one of your clients who owned 500 shares now owns

(A) 500 shares valued at $57.73 per share

(B) 525 shares valued at $55.00 per share

(C) 550 shares valued at $55.00 per share

(D) 525 shares valued at $52.38 per share

91. TUV Corporation declares a 4-for-3 stock split; an investor who owns 600 shares would receive __________ additional shares.

(A) 100

(B) 200

(C) 400

(D) 600

92. Interest rates have just increased. Investors would expect that the prices of their straight preferred stock would

(A) increase

(B) decrease

(C) remain the same

(D) first increase then decrease

93. The dividend rate on adjustable-rate preferred stock will vary depending on the

(A) Treasury bill rate

(B) Treasury note rate

(C) Treasury bond rate

(D) CPI

94. Which of the following are advantages of holding straight preferred stock over common stock?

  1. a fixed dividend
  2. more voting power
  3. preference in the event of issuer bankruptcy
  4. the ability to receive par value at maturity

(A) I and II

(B) II and IV

(C) I and III

(D) I, III, and IV

95. An investor purchases a DEF 4% convertible preferred stock at $90. The conversion price is $25. If the common stock is trading one point below parity, what is the price of DEF common stock?

(A) $21.50

(B) $22.50

(C) $24.00

(D) $26.00

96. What is the advantage to a corporation issuing callable preferred stock as compared to non-callable preferred stock?

(A) It allows the issuer to take advantage of high interest rates.

(B) The dividend rate on callable preferred stock is lower than that of non-callable preferred stock.

(C) It allows the issuer to issue preferred stock with a lower fixed dividend after the call date.

(D) Callable preferred stock usually has a longer maturity date.

97. Which TWO of the following are TRUE of preferred stock?

  1. Holders have voting rights.
  2. Holders do not have voting rights.
  3. In the event of corporate bankruptcy, preferred stock is senior to common stock.
  4. In the event of corporate bankruptcy, preferred stock is junior to common stock.

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

98. A company has previously issued 4% of $100 par cumulative preferred stock. Over the first three years, the company paid out $9 in dividends. If the company announces a common dividend in the following year, how much does it owe preferred stockholders?

(A) $3

(B) $4

(C) $7

(D) $16

99. One of your customers wants to purchase preferred stock that would help him reduce inflation risk. Which of the following types of preferred stock would you recommend?

(A) participating

(B) convertible

(C) cumulative

(D) noncumulative

100. Preferred dividends may be paid in the form of

  1. cash
  2. stock
  3. product

(A) I only

(B) I and II

(C) I and III

(D) I, II, and III

101. Callable preferred stock is most advantageous to the issuer because

(A) the issuer can issue high-dividend stock

(B) the issuer can issue stock with a lower dividend

(C) the issuer can call in the stock at a price less than par value

(D) the issuer can replace stock with a higher dividend with stock with a lower dividend

102. Platinum Edge Corp. is offering 5% participating preferred stock. The 5% represents the

(A) minimum yearly dividend payment

(B) average yearly dividend payment

(C) maximum yearly dividend payment

(D) exact yearly dividend payment

103. With everything else being equal, a preferred stockholder would expect __________ preferred stock to pay the highest dividend.

(A) convertible

(B) straight

(C) callable

(D) cumulative

104. One of your clients wants to purchase preferred stock but wants to reduce the risk of inflation. You should recommend

(A) straight preferred stock

(B) callable preferred stock

(C) cumulative preferred stock

(D) convertible preferred stock

105–108 American Depositary Receipts

105. An ADR is

(A) a receipt for a foreign security trading in the U.S.

(B) a receipt for a foreign security trading in the U.S. and overseas

(C) a receipt for a U.S. security trading overseas

(D) a receipt for a U.S. security trading in the U.S. and overseas

106. All of the following are benefits of investing in ADRs EXCEPT

(A) the dividends are received in U.S. currency

(B) transactions are completed in U.S. currency

(C) it has low currency risk

(D) it allows U.S. investors to invest overseas

107. All of the following are characteristics of American depositary receipts EXCEPT

(A) they help U.S. companies gain access to foreign dollars

(B) investors do not receive the actual certificates

(C) investors can’t vote

(D) dividends are paid in U.S. dollars

108. Holders of American depositary receipts assume which of the following risks?

  1. liquidity risk
  2. foreign currency risk
  3. market risk
  4. political risk

(A) I, III, and IV

(B) II, III, and IV

(C) I, II, and III

(D) II and III

109–118 Rights and Warrants

109. All of the following are TRUE of warrants EXCEPT

  1. they pay dividends quarterly
  2. they are equity securities
  3. they are used to buy common stock at a fixed price
  4. they give the holder a leveraged position

(A) I and II

(B) II and III

(C) II, III, and IV

(D) III and IV

110. Which of the following is NOT TRUE regarding warrants?

(A) They are marketable securities.

(B) They offer investors a long-term right to buy stock at a fixed price.

(C) They have voting rights.

(D) Investors do not receive dividends.

111. The Hanson Hilstrand Corp. is issuing new stock through a rights offering. If the stock trades at $30 and it costs $24 plus two rights to buy a new share, what is the theoretical value of a right cum-rights (prior to ex-rights)?

(A) $0.50

(B) $0.75

(C) $1.00

(D) $2.00

112. One of your clients owns 80 shares of common stock of a company issuing new shares in a rights offering. The stock trades at $12 per share. The company requires that investors must submit nine rights plus $10 to purchase a new share of stock. Fractional shares automatically become whole shares. How many additional shares may your client purchase, and what is the amount of money that needs to be paid for the new shares?

  1. 8 shares
  2. 9 shares
  3. $80 paid
  4. $90 paid

(A) I and III

(B) I and IV

(C) II and III

(D) II and IV

113. All of the following are true of warrants EXCEPT

(A) they have a longer life than rights

(B) they are non-marketable securities

(C) they are typically issued in units

(D) the exercise price is above the current market price of the common stock when issued

114. Which of the following are TRUE regarding warrants?

  1. Warrants are often issued with a corporation’s other securities to make an offering more attractive to investors.
  2. Warrants provide a perpetual interest in an issuer’s common stock.
  3. Holders of warrants have no voting rights.

(A) I and II

(B) I and III

(C) II and III

(D) I, II, and III

115. Global International World Corporation is proposing an additional public offering of its common stock. According to the terms of its rights offering, current shareholders can purchase the stock for $35 per share plus five rights. If the market price of Global International is $45 after the ex-right date, what is the value of one right?

(A) $1.00

(B) $1.50

(C) $2.00

(D) $5.00

116. All of the following are TRUE about rights offerings EXCEPT

(A) they are short-term

(B) each share of outstanding common stock receives one right

(C) they typically have a standby underwriter

(D) rights are automatically received by preferred stockholders

117. HIJK Corp. wants to sell additional shares of common stock to its existing stockholders through a rights offering. Stockholders who want to subscribe to the rights offering must send the purchase amount with the rights certificate to the

(A) registrar

(B) transfer agent

(C) rights agent

(D) standby underwriter

118. A corporation needs to raise additional capital. Which of the following would help the corporation meet its goal?

(A) declaring a stock dividend to existing shareholders

(B) a rights distribution to existing shareholders

(C) calling in their convertible bonds

(D) splitting their stock 2 for 1