Evaluate Equity Features - Securities Industry Essentials SIE

1. What is noncumulative preferred stock regarding missed dividends?

   Missed dividends do not accrue and are not owed later. Noncumulative stock forfeits missed dividends, simplifying issuer obligations and reducing accumulation of arrears.

2. In liquidation, which equity class is paid first: common or preferred?

   Preferred stock is paid before common stock. Preferred stock holds seniority in liquidation, receiving assets after creditors but before common to protect investment value.

3. What is a proxy in the context of shareholder voting?

   Written authorization to vote shares on a shareholder's behalf. A proxy enables shareholders to delegate voting authority, facilitating participation in meetings without physical attendance.

4. Which option best describes voting rights for most preferred stock issues?

   Typically nonvoting unless a specified condition is triggered. Preferred stock usually lacks voting rights to prioritize dividend payments, but may gain them under specific conditions like dividend arrears.

5. Calculate conversion parity if the ratio is $20$ and common is $48.

   $20 \times \$48 = \$960$ parity value. Parity is computed by multiplying the conversion ratio by the current common stock price to evaluate conversion value.

6. What does cumulative preferred stock require regarding unpaid dividends?

   Unpaid dividends accrue and must be paid before common dividends. Cumulative provisions accumulate unpaid dividends, requiring payment in full before any distributions to common stockholders.

7. What is conversion parity for a convertible security?

   Value of common received if converted at the current common price. Conversion parity reflects the equivalent value in common stock, aiding in assessing the attractiveness of conversion.

8. Which option best describes dilution that preemptive rights are designed to reduce?

   Equity dilution of ownership percentage from new share issuance. Preemptive rights mitigate the reduction in ownership percentage caused by issuing additional shares to new investors.

9. Which voting method generally increases minority shareholders' ability to elect a director?

   Cumulative voting. Cumulative voting empowers minority shareholders by allowing vote pooling, unlike statutory voting which disperses votes evenly.

10. What is liquidation preference for preferred stock?

    Priority claim over common on assets in liquidation up to stated amount. Liquidation preference ensures preferred stockholders recover a fixed amount before common stockholders in asset distribution.

11. Identify the formula for total votes under cumulative voting for 100 shares and 3 seats.

    $100 \times 3 = 300$ total votes. Cumulative voting multiplies shares by seats to determine total votes, enabling strategic allocation across candidates.

12. Find the conversion price for $\$1{,}000$ par and a $20$-to-$1$ conversion ratio.

    $\frac{\$1{,}000}{20} = \$50$ per share. The formula derives the price per share at which conversion occurs, based on the security's par value and exchange ratio.

13. What is a proxy fight?

    A contest to win shareholder votes to influence corporate control. Proxy fights arise when opposing groups solicit proxies to gain control over corporate decisions through shareholder votes.

14. What is cumulative voting in a corporate election?

    Votes equal shares times seats, allocable among candidates. Cumulative voting allows shareholders to concentrate votes on fewer candidates, enhancing minority influence in board elections.

15. What is a shareholder's preemptive right?

    Right to maintain ownership percentage by buying new shares first. Preemptive rights protect existing shareholders from dilution by offering them priority to purchase new shares proportional to their holdings.

16. What is participating preferred stock?

    Preferred that may receive extra dividends beyond the stated rate. Participating preferred allows sharing in additional dividends with common stockholders after fixed rates are met.

17. What is the conversion ratio for a convertible security?

    Number of common shares received per convertible share or bond. The conversion ratio specifies the exchange rate, determining how many common shares are obtained per convertible security.

18. What is the formula for conversion price using par value and conversion ratio?

    Conversion price $= \frac{\text{par value}}{\text{conversion ratio}}$. Conversion price calculates the effective cost per common share by dividing the par value by the conversion ratio.

19. What does convertible preferred stock allow the holder to do?

    Exchange preferred shares for a specified number of common shares. Convertible preferred stock provides the option to convert into common stock, allowing holders to benefit from potential equity appreciation.

20. Which statement correctly ranks claims in liquidation from highest to lowest?

    Creditors, preferred stockholders, then common stockholders. Liquidation prioritizes creditors first, then preferred stockholders up to their preference, with common receiving any remainder.

21. Identify the key difference between callable preferred and convertible preferred.

    Callable: issuer may redeem; convertible: holder may exchange for common. Callable preferred gives issuers redemption control, while convertible empowers holders with conversion options for flexibility.

22. What is the primary shareholder right created by common stock voting rights?

    Elect the board of directors (and vote on major corporate actions). Common stock grants shareholders voting rights to influence corporate governance by electing directors and approving significant decisions.

23. Which option best describes when conversion is economically favorable based on parity?

    When parity value exceeds the convertible's market price. Conversion becomes advantageous when the value of the underlying common exceeds the convertible's price, indicating potential profit.

24. What is statutory (straight) voting for directors?

    One vote per share per seat; votes cannot be pooled. Statutory voting limits votes to one per share per director seat, preventing concentration and favoring majority shareholders.

25. What is a call feature in a convertible preferred stock, and why is it used?

    Issuer redemption right; often used to force conversion. The call feature allows issuers to redeem shares, often to compel conversion when common stock value makes it beneficial for holders.

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