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Series 7 exam
Chapter 1 equities
67
Finance
Professional
12/13/2012

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Term
COMMON STOCK
Definition
Every corporation must issue
Term
ISSUED STOCK
Definition
is authorized stock that has been issued to shareholders in either private placements or public offerings.
Term
OUTSTANDING STOCK
Definition
is shares of the company that are owned by investors
Term
TREASURY STOCK
Definition
is shares of stock that the corporation issues and later repurchases.
Term
A company may buy back stock for any of the following reasons:
Definition

To distribute for stock option plans

For use in takeovers

To increase the market value of the outstanding stock

To alter the debt-equity ratio by issuing bonds to purchase shares
Term
PAR VALUE
Definition
is a bookkeeping term used to show the dollar value assigned to the issued and outstanding common and preferred stock on the balance sheet.
Term
A company is defined as being CLOSELY HELD
Definition
when only a few people hold a majority of the stock.
Term
Stock that allows few public shareholders is referred to as
Definition
THINLY TRADED STOCK.
Term
PREFERRED STOCK differs from common stock in four major ways:
Definition
In the case of liquidation, preferred stockholders are always paid off before common stockholders.
Preferred stockholders are paid dividends before common stockholders.
Term
PREFERRED STOCK differs from common stock in four major ways:
Definition
Different types of preferred stock may provide additional rights to the preferred stockholders.Preferred stockholders have limited voting rights.
Term
The best way to remember the preferred amount: The amount you see, whether percent or dollar, is the amount paid.

5% = $5 and 6% = $6
Definition
The best way to remember the preferred amount: The amount you see, whether percent or dollar, is the amount paid.

5% = $5 and 6% = $6
Term
CUMULATIVE PREFERRED STOCK
Definition
is the only preferred stock that will receive past dividends that have been missed.
Term
CONVERTIBLE PREFERRED STOCK
Definition
can be converted (changed) into shares of common stock if requested by the holder of the preferred stock.
Term
CALLABLE PREFERRED STOCK
Definition
is preferred stock that gives the company the option (provision) to call the stock back at any time.
Term
No dividends can ever be paid to common stockholders until cumulative preferred stock is completely paid up on all past and current dividends.
Definition
No dividends can ever be paid to common stockholders until cumulative preferred stock is completely paid up on all past and current dividends.
Term
A CASH DIVIDEND
Definition
is a monetary distribution that is usually a portion of the earnings.
Term
EARNINGS
Definition
are the profits of a corporation after taxes are paid.
Term
A STOCK DIVIDEND
Definition
is the distribution of more shares of stock to current shareholders rather than a cash dividend.
Term
STOCK SPLITS
Definition
like stock dividends, increase the number of shares outstanding without affecting earnings, but the price of the underlying stock in the market is still reduced.
When cash or stock dividends are distributed to shareholders, the price of the shares is reduced in the open market.
Term
CURRENT YIELD
Definition
is the percentage of return an investor receives on the current market price based upon dividends received divided by the current market price.
Term
Example
If a 6% preferred dividend was not paid by the corporation last year, the corporation must pay $12 (6% of $100, or $6 for the last year and $6 for this year) to cumulative preferred stockholders before they can pay any dividend to holders of common stock.
Definition
Example
An investor has a 6% preferred stock (par $100), convertible at $20. The conversion ratio is 5-to-1, or 5 shares of common stock per share of preferred stock ($100 ÷ $20).
Term
Example
If the preferred stock (in the above example) were selling at $120, the parity price of the common stock would be $24 ($120 ÷ 5).
Definition
Example
If the common stock (in the above example) were selling at $15, the parity price of the preferred stock would be $75 ($15 times the conversion ratio of 5). The actual market value of the preferred may be higher than $75 depending on its value as an income-bearing investment.
The preferred stock is selling for less than the par value because the price of the convertible preferred stock will fluctuate with the movement of the underlying common stock, not on its own merits.
Term
Example
If the holders of preferred stock receive their stated dividend, the common stockholders may not receive any dividend at all. Alternatively, if the common stockholders receive a dividend, the participating preferred stockholders will receive a fixed amount plus a percentage of the amount paid out to the common stockholders.
Definition
Example
If an investor owns 200 shares of stock and the board of directors declares and pays a $0.22 per share dividend, the investor will receive a check for $44 (200 × $0.22).
If the investor had been paid quarterly dividends of $0.22 per share over the last year, then the investor will have received $176 in annual dividends ($44 × 4 quarterly payments).
Term
Example
If an investor owns 400 shares of stock and the board of directors declares and pays a 100% stock dividend, the investor will receive 400 more shares and will now own 800 shares of stock in that company. If the stock was selling for $60, the new price will be $30. The investor did have 400 shares at $60, for a total value of $24,000. The investor now has 800 shares at $30, still totaling $24,000; however, since more people can now buy the stock, it will probably go up in value.
Definition
Examples
100% stock dividend = 2-for-1 stock split
If an investor had 300 shares of stock and a 100% stock dividend is declared, the investor would own 600 shares, but the price per share would be cut in half. The total value of the investor’s holdings would remain the same.
25% stock dividend = 5-for-4 stock split
To calculate this, start by using 100 shares: 25% of 100 shares is 25 more shares. Add those 25 to the original 100 owned and the investor now has 125 shares versus 100 previously owned shares. Another way of looking at this increase is to divide the new number of shares by the old number of shares, or 125/100. This fraction reduces to the ratio of 5/4.
If an investor owned 400 shares and the board granted a 25% stock dividend (or 5-for-4 stock split), the investor would now own 500 shares:
400 × 5 ÷ 4
= 2,000 ÷ 4
= 500
Term
CURRENT YIELD is the percentage of return an investor receives based upon the dividends received divided by the current market price.
Definition
Example
If a corporation’s common stock is currently trading at $20 and stockholders are paid an annual dividend of $1, the current yield would be 5%. Current yield is the annual dividend divided by the current market price. $1 ÷ $20 = 5%.
Term
STATUTORY VOTING
Definition
allows a stockholder to cast one vote per share for each director spot to be elected: If 5 director then 100 shares voted for each director spot to be elected.
Term
CUMULATIVE VOTING
Definition
allows stockholders to combine all their votes and vote in any manner.

This allows the minority shareholders to get better representation on the board of directors because they can band together and cast all their votes for one director.
Term
A PROXY SOLICITATION
Definition
is a process that allows all absentee voting owners of a corporation (the stockholders) to vote for the board of directors.
Term
PREEMPTIVE RIGHTS
Definition
allow stockholders to maintain their proportion of ownership in the event that the company issues new shares of common stock.
Term
PREEMPTIVE RIGHTS are one right for every share of stock held.
Definition
1 share of stock = 1 right in a rights offering
Term
PREEMPTIVE RIGHTS are one right for every share of stock held.
Definition
The rights offering allows the investor to maintain proportionate interest in the company.
Term
WARRANTS
Definition
are the privilege of buying common stock at a preset price for a period of years or an indefinite period of time.
Term
WARRANTS
Definition
make the bonds they are attached to more marketable because they may be used to purchase stock at a discount in the future.
Term
WARRANTS
Definition
have no right to dividends declared by the board, nor do they have voting rights or preemptive rights.
Term
The formula for the P/E ratio is:
Definition
PRICE/EARNINGS RATIO = MARKET VALUE PER SHARE EARNINGS PER SHARE
Term
Stocks traded in the secondary market
Definition
are priced and traded at prices set in dollars and cents.
Term
creditors come before stockholders
Definition
When a company goes bankrupt.
Term
A small company can break-off from the large corporation in two ways:
Definition
A) The large company spins-off the smaller company.
Term
A small company can break-off from the large corporation in two ways:
Definition
The small company buys itself out from the large corporation, through issuing shares of the new company and issuing bonds with the company’s assets as collateral in a leveraged buy-out.
Term
American Depositary Receipts (ADRs)
Definition
are used to “facilitate the trade of foreign securities in American markets.
Term
ADRs are negotiable receipts issued by U.S. banks,
Definition
which certify that a foreign bank is holding the actual stock shares of a foreign corporation.
Term
The holders of the ADRs have all the rights of a regular stockholder.
Definition
except for preemptive rights and voting rights.
Term
ADR ratio is determined by the issuing bank.
Definition
ADRs have a specific ratio of shares of underlying stock per ADR
Term
foreign company declares a dividend, it will be declared in the foreign currency of that country
Definition
however, the holding bank will convert the dividend into U.S. dollars, and the holder of the ADR will be paid in U.S. dollars.
Term
BLUE CHIP STOCK
Definition
is stock of well-established companies with large market capitalization.
Term
GROWTH STOCK
Definition
is stock issued by a fast-growing company. It is likely to be found where industries are expanding, new products are being developed, and overall employment is increasing.
Term
Growth stock companies can be divided into three major categories:
Definition
EMERGING GROWTH COMPANIES have just gone public.
Term
Growth stock companies can be divided into three major categories:
Definition
AGGRESSIVE GROWTH COMPANIES have been in business long enough to be stable, but their earnings are growing faster than other businesses in general.
Term
Growth stock companies can be divided into three major categories:
Definition
GROWTH COMPANIES
have been in business more than two years, are more likely to do well, and are growing faster than other companies in their industry. COPYRIGHT
Term
CYCLICAL STOCK
Definition
stocks whose prices fluctuate in response to business cycles. EX: EPRT Expansion, Peak, Recession, Trough.
Term
DEFENSIVE STOCKS
Definition
are stocks whose prices decline less in recessionary periods. Shares of utilities, food, and tobacco are common examples.
Term
A CONSERVATIVE COMPANY
Definition
refrains from borrowing too much money because the company’s management does not want to burden the company with too much debt.
Term
A LEVERAGED COMPANY
Definition
uses borrowed funds (usually through bonds) to attempt to make more money than what it costs in interest charges for the borrowed money.
With the exception of the utility companies, a highly leveraged company is considered to be a speculative investment, because the company is gambling that increased borrowing
Term
A corporation is funded by two forms of capitalization:
Definition
Equities —better known as stock
– Debt — better known as bonds
Term
MSFT has issued a 4% cumulative preferred. The dividends
paid to the preferred were $2 in 2000 and $3 in 2001. In
2002, the company wants to pay a $.05 cash dividend to the
common stockholders. What must the company pay the
cumulative preferred stockholders?
Definition
Answer: $7
This is a 4% preferred, meaning the company pays $4 per year. The
company missed paying the preferred $2 in 2000 and $1 in 2001.
Since this is cumulative preferred stock, missed dividends must be
paid. Therefore, the company must pay the $4 for 2002 and the $2 for
2000 and the $1 for 2001.
Term
A $5 convertible preferred can be redeemed for $70. The
preferred is convertible into 1/2 share of common stock.
The common stock is selling for $138. Which is better for
the preferred stockholder to do if the issuer is going to call
the preferred stock?
A. Convert the preferred into common stock
B. Redeem the preferred stock
Definition
Answer: Redeem the preferred stock
It takes 2 shares of preferred to make one share of common stock
because the preferred is convertible into 1/2 share of common.
$70 × 2 = $140 for redeeming the preferred
vs. $138 for the common stock
Term
A $5 convertible preferred can be redeemed for $50. The
preferred is convertible into 1/2 share of common stock.
The common stock is selling for $103. Which is better for
the preferred stockholder to do if the issuer is going to call
the preferred stock?
A. Convert the preferred into common stock
B. Redeem the preferred stock
Definition
Answer: Convert the preferred into common stock
It takes 2 shares of preferred to make one share of common stock
because the preferred is convertible into 1/2 share of common.
$50 × 2 = $100 for converting into common
vs. $103 for the common stock
Term
100% stock dividend = 2/1 stock split
Definition
The holder of 300 shares receives 300 more shares for both a 100%
stock dividend and a 2/1 stock split
Term
• The value of both rights and warrants go up and down
with the market price of the stock
Definition
• The value of both rights and warrants go up and down
with the market price of the stock
Term
Pre-emptive rights
Definition
are a short-term opportunity to buy
stock at a set price from the company
Term
Pre-emptive rights
Definition
Example:
A person owns 500,000 shares. A company has 5,000,000
shares outstanding. This person owns 10% of the company.
500,000 ÷ 5,000,000 = .10 = 10%
Term
Example:
A company has 4 million shares outstanding. A stockholder
owns 400,000 shares. If the company wants to issue 2 million
more shares, how many rights does the stockholder have and
how many new shares can they buy?
Definition
Answer: 400,000 rights and 200,000 new shares
– Since the stockholder owns 400,000 shares, they have 400,000
rights
– Since they own 10% of the company, they can buy 10% more of
the new shares with the rights
Term
CUMULATIVE PREFERRED must pay all missed
dividends prior to paying any dividend to the common
stockholders
Definition
– If a company wants to pay the common stockholders a
dividend after missing two years of dividends to both
common and preferred stockholders, the company is
required to pay the two years' missed dividends to preferred
stockholders first.
Term
TREASURY STOCK
Definition
has NO voting rights, NO rights to
declared dividends, and NO pre-emptive rights
Term
Issued stock
Definition
stock that has been sold to the public
Term
outstanding stock
Definition
If the stock is still in the hands of investors
Term
Stock repurchased by the company is called
Definition
Treasury
stock
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