- The document that a company sends to shareholders to provide information on matters to be decided at a stockholder meeting and to solicit their votes is called a
Answer: proxy statement.
A proxy statement is a document containing the information the SEC requires companies to provide to shareholders to enable them to make informed decisions about matters that will be brought up at an annual or special stockholder meeting, and to solicit their vote via a proxy card.
- When a parent company divests a division into a new, independent public company and distributes shares of the new company to its existing shareholders, this action is known as a
Answer: spinoff.
A spinoff is a type of corporate divestiture where a company creates a new, independent entity from one of its existing divisions. Shares of this new company are distributed to the parent company's shareholders, who then own stock in both separate companies.
- An investor owns 400 shares of stock trading at $30 per share. The company declares a 5-for-4 stock split. After the split, the investor will own
Answer: 500 shares at $24.00 per share.
In a 5-for-4 split, for every 4 shares owned, the investor receives 5. The new number of shares is 400 (5/4) = 500 shares. The total value before the split was 400 $30 = $12,000. To maintain this value, the new price per share will be $12,000 / 500 shares = $24.00.
- Following a tax-free spinoff, how is an investor's cost basis in the original parent company stock typically treated?
Answer: It is allocated between the shares of the parent company and the new spun-off company.
In a spinoff, the investor's original total cost basis is not lost or changed. Instead, it must be allocated between the original parent company shares and the new spinoff shares. The company provides a formula for this allocation, which is typically based on the relative market values of the two entities immediately after the transaction.
- A shareholder receives a proxy for an upcoming annual meeting but does not return the signed ballot. If the shareholder does not attend the meeting, their shares will
Answer: not be voted.
For shares to be voted, the shareholder must either attend the meeting in person or return a signed proxy ballot authorizing someone else (the proxy) to vote on their behalf. If they do neither, their shares are not voted and do not count towards the quorum or the vote totals for any proposals.
- A corporation declares a 3-for-1 stock split. If an investor owns 100 shares at $60 per share before the split, what will their position be after the split?
Answer: 300 shares at $20 per share
In a 3-for-1 forward stock split, the number of shares held is multiplied by 3 (100 shares * 3 = 300 shares), and the market price per share is divided by 3 ($60 / 3 = $20 per share). The total value of the investor's holding remains unchanged at $6,000.
- An investor who receives stock rights in a rights offering has all of the following choices EXCEPT
Answer: holding the rights indefinitely until the stock price increases.
Stock rights are short-term securities with a set expiration date, typically lasting only a few weeks. An investor cannot hold them indefinitely. Their options are to exercise the rights, sell them in the market, or let them expire.
- What is the expected impact on a company's stock price when it announces a significant share repurchase plan?
Answer: It will likely increase due to reduced supply and positive market signal.
Share buybacks reduce the supply of stock available for trading and signal that management believes the stock is undervalued. This combination of reduced supply and positive market sentiment typically leads to an increase in the stock's market price.
- In a rights offering, the subscription price at which existing shareholders can purchase new shares is typically set
Answer: below the current market price to incentivize participation.
To make the rights valuable and encourage existing shareholders to exercise them, the company sets the subscription price at a discount to the stock's current market price. This incentive is necessary for the company to successfully raise the desired capital through the offering.
- An investor owns 500 shares of a stock with a cost basis of $22 per share. If the company declares a 10% stock dividend, what is the investor's adjusted cost basis per share?
Answer: $20.00
The investor's total cost basis is 500 shares $22 = $11,000. A 10% stock dividend increases the number of shares by 10% (500 0.10 = 50 additional shares), for a new total of 550 shares. The total cost basis remains $11,000. The new cost basis per share is calculated as $11,000 / 550 shares = $20.00.
- A key difference between a tender offer and an open-market share buyback is that a tender offer
Answer: is a formal offer to all shareholders to purchase shares at a specified price.
A tender offer is a formal, public offer to all shareholders to purchase their stock at a specific price (usually a premium) during a specific time frame. In contrast, an open-market buyback involves the company purchasing its own shares on an exchange over time at prevailing market prices, much like any other investor.
- An investor owns shares of a company that is being acquired by another firm for $75 cash per share. If the investor's cost basis is $60 per share, the acquisition will result in
Answer: a realized capital gain.
When an investor receives cash for their shares in an acquisition, it is treated as a sale of the security. This forces the recognition of any capital gain or loss for tax purposes. In this scenario, the investor has a realized capital gain of $15 per share ($75 sale price - $60 cost basis).
- ABC Corp. announces a 1-for-10 reverse stock split. An investor holding 1,000 shares at $2 per share before the split will have what position after the split?
Answer: 100 shares at $20 per share
In a 1-for-10 reverse split, the number of shares is divided by 10 (1,000 / 10 = 100 shares), and the price per share is multiplied by 10 ($2 * 10 = $20 per share). This action consolidates shares to increase the stock price, while the total value of the holding remains the same.
- Company A acquires Company B in a stock-for-stock merger. The terms state that each share of Company B will be exchanged for 0.5 shares of Company A. An investor holds 200 shares of Company B. What is their position after the merger is completed?
Answer: 100 shares of Company A
In this merger, the investor's shares of Company B are exchanged for shares of Company A based on the agreed-upon ratio. The investor's 200 shares of Company B will be converted into 200 * 0.5 = 100 shares of Company A. The Company B shares will cease to exist after the merger.
- A corporation makes a formal offer directly to its shareholders to buy back a specific number of shares at a premium to the current market price. This corporate action is known as a
Answer: tender offer.
A tender offer is a formal proposal made by a company (or a third party) to purchase shares directly from existing shareholders. It typically specifies the number of shares, a price (usually at a premium), and a limited time frame for shareholders to accept.
- An investor purchased 200 shares of XYZ Corp. at $50 per share. The company later executed a 5-for-4 stock split. What is the investor's new cost basis per share after this corporate action?
Answer: $40.00
The investor's total cost basis is 200 shares $50/share = $10,000. A 5-for-4 split increases the number of shares to 200 (5/4) = 250 shares. The total cost basis remains $10,000, so the new cost basis per share is $10,000 / 250 shares = $40.00.
- On the ex-dividend date for a cash dividend, the market price of a stock is typically reduced by approximately the amount of the
Answer: dividend per share.
The ex-dividend date is the first day a stock trades without the right to receive the upcoming dividend. To reflect the fact that buyers on this date will not receive the payment, the market price of the stock is expected to drop by the amount of the per-share dividend on the morning of the ex-date.
- When a company's management seeks to obtain authority from shareholders to vote on their behalf at an annual meeting, this process is known as
Answer: a proxy solicitation.
Proxy solicitation is the process of seeking votes (proxies) from shareholders for a particular proposal or slate of directors. Management sends proxy materials to solicit votes in favor of its proposals. Dissident shareholders may also engage in proxy solicitation to vote against management.
- A company is conducting a rights offering primarily to
Answer: allow existing shareholders to maintain their ownership percentage in a new share issuance.
A rights offering gives current shareholders the preemptive right to purchase newly issued shares, usually at a discount, before they are offered to the public. This allows them to avoid the dilution of their ownership stake that would otherwise occur from the new issuance.
- When a company repurchases its own shares in the open market, what is the most likely effect on its earnings per share (EPS), assuming net income remains constant?
Answer: EPS will increase.
Earnings per share (EPS) is calculated as Net Income divided by the number of Shares Outstanding. By repurchasing shares, a company reduces the number of shares outstanding. With a lower denominator and the same numerator (net income), the resulting EPS increases.
