- Which of the following statements regarding a 2-for-1 stock split is true?
Answer: A shareholder's aggregate cost basis remains the same, and the cost basis per share is reduced by one-half.
A 2-for-1 stock split doubles the number of shares outstanding and reduces the price per share proportionately. The shareholder's aggregate cost basis is unchanged, so the per-share cost basis is halved. The market value of the position does not double merely because of the split. A stock split does not reduce retained earnings; that result is associated with a large stock dividend. Par value per share is halved in a 2-for-1 split, and total stockholders' equity is not increased by the split.
- A corporation has 50,000 shares of 5%, $100 par cumulative preferred stock outstanding and 200,000 shares of common stock. The preferred dividend has not been paid for the past two years. In the current year, the board declares total cash dividends of $1,500,000. How much will the common shareholders receive in total?
Answer: $750,000
The preferred dividend is $250,000 per year (50,000 × $100 × 5%). Because the preferred stock is cumulative, the two omitted years ($500,000) and the current year's dividend ($250,000) must be paid before any common dividend. Preferred shareholders therefore receive $750,000, leaving $750,000 for common shareholders. The $1,000,000 figure ignores the current year's preferred dividend. The $1,250,000 figure ignores the accumulated arrears. The $1,500,000 figure ignores the preferred claim entirely.
- At a corporation's annual meeting, the six-member board of directors is to be elected. The corporation has 60,000 shares outstanding, all of which will be voted, and its bylaws provide for cumulative voting. A shareholder owns 10,000 shares and wants to guarantee the election of one candidate. What is the minimum number of the shareholder's shares that must be voted for that candidate?
Answer: 8,572 shares
Under cumulative voting, each share gets one vote per board seat, so 60,000 shares × 6 seats = 360,000 total votes. To guarantee one of six seats, the shareholder's candidate needs more than 360,000 ÷ 7 ≈ 51,428.57 votes, i.e., at least 51,429 votes. To minimize the number of shares used for that candidate, the shareholder casts all six votes of each such share for the candidate. 8,571 shares would supply only 51,426 votes—3 votes short of 51,429—while 8,572 shares supply 51,432 votes and guarantee the seat. The 10,000-share figure also guarantees the seat but is not the minimum, and 51,429 is the required vote count, not the number of shares.
- Crestline Corp's common stock trades at $30 per share. In a rights offering, each shareholder receives one right for each share owned, and five rights plus $25 are required to subscribe to one new share. What is the approximate value of one right while the stock is trading rights-on?
Answer: $0.83
The theoretical ex-rights price is (5 × $30 + $25) ÷ 6 = $29.17. Five rights are therefore worth $29.17 − $25 = $4.17, so one right is worth $0.83. The $1.00 figure treats the $5 subscription discount as if it were spread over five rights without accounting for the new share created by the offering. The $4.17 figure is the value of all five rights, not one right. The $5.00 figure is simply the discount on the new share.
- An investor owns 1,000 shares of Mason common stock purchased more than one year ago at $40 per share. Mason declares and distributes a 10% stock dividend. After receiving the additional shares, the investor sells all of the shares for $45 per share. What is the investor's capital gain or loss for federal income tax purposes?
Answer: $9,500 capital gain
A stock dividend of common stock on common stock is generally not taxable income. The investor's $40,000 aggregate basis is reallocated over all 1,100 shares, about $36.36 per share, and the sale proceeds are 1,100 × $45 = $49,500. The capital gain is therefore $49,500 − $40,000 = $9,500; because the shares were held more than one year, it is long-term. The $5,000 figure results from computing proceeds as 1,000 × $45 and subtracting the original $40,000 basis, ignoring the 100 additional shares. The $5,500 figure applies the old $40 per-share basis to all 1,100 shares, failing to reduce the per-share basis after the stock dividend. The $4,500 figure is simply the market value of the 100 dividend shares (100 × $45); the dividend shares are not separate taxable income and take a proportionate share of the original $40,000 basis.
- At liquidation, Ralston Corp has assets of $12 million and liabilities of $4 million. It also has 200,000 shares of preferred stock with a $25 per-share liquidation preference and 1,000,000 shares of common stock. Claims are paid in legal order. How much will common shareholders receive in total?
Answer: $3,000,000
In liquidation, claims are paid in order: creditors, then preferred stockholders, then common stockholders. After the $4 million of liabilities, $8 million remains. After the $5 million preferred liquidation preference (200,000 × $25), $3 million remains for common shareholders. The $5 million figure is the preferred distribution. The $8 million figure ignores the preferred claim. The $12 million figure ignores both liabilities and the preferred claim.
- Greenway Corp has 1,000,000 shares authorized, 800,000 shares issued, and 50,000 shares held in treasury. The board declares a $0.50 per-share cash dividend on its common stock. What total amount of cash will Greenway pay?
Answer: $375,000
Only outstanding shares receive dividends. Outstanding shares are issued shares minus treasury shares: 800,000 − 50,000 = 750,000. The dividend is 750,000 × $0.50 = $375,000. The $400,000 figure uses issued shares and ignores treasury shares. The $475,000 figure subtracts treasury shares from authorized shares rather than from issued shares. The $500,000 figure uses authorized shares, including shares that were never issued.
- Keller Corp's balance sheet reports common stock of $10 par value with 1,000,000 shares issued and outstanding. The board declares a 2-for-1 stock split. Immediately after the split, which of the following is correct?
Answer: The number of shares outstanding doubles, par value per share is reduced to $5, and total shareholders' equity is unchanged.
A 2-for-1 stock split doubles the number of shares outstanding and halves the par value from $10 to $5. Total par value, retained earnings, and total shareholders' equity are unchanged because no assets or liabilities change. Keeping par value at $10 is incorrect because par must be adjusted proportionally. Increasing shareholders' equity is incorrect because a split creates no new capital. Reducing retained earnings by the fair value of the additional shares describes a stock dividend, not a split.
- Which of the following statements regarding cumulative voting for the election of corporate directors is true?
Answer: In an election for five directors, a shareholder must own more than one-sixth of the outstanding shares to guarantee the election of one director.
Under cumulative voting, a shareholder multiplies shares owned by the number of directors being elected and may concentrate those votes on one candidate. To guarantee one seat out of five, the shareholder needs more than one-sixth of the outstanding shares, because the required position is total shares divided by (5 + 1), plus one share. The statement that votes must be spread evenly is wrong; concentration is the defining feature of cumulative voting. The statement that a shareholder gets one vote per share for each seat describes statutory or straight voting, not cumulative voting. The statement that the shareholder divides shares by the number of directors misstates the vote calculation.
- Which of the following statements regarding preemptive rights is true?
Answer: When provided in the articles, preemptive rights let common shareholders buy newly issued common stock in proportion to their holdings before the public offering, and the right may be limited or waived.
Preemptive rights arise under state corporate law, not federal securities law, and only to the extent the articles of incorporation so provide. They allow existing common shareholders to buy newly issued common stock in proportion to their current holdings before the shares are offered to the public, protecting percentage ownership, and the articles may limit or waive the right. The statement that preemptive rights allow shareholders to require the corporation to repurchase their shares describes a put-like right, not a preemptive right. The statement that federal securities law grants preemptive rights to all common shareholders and applies them to every new issuance is wrong because the right is a state corporate-law matter and generally does not apply to stock dividends. The statement that preemptive rights create dividend priority over preferred shareholders and bondholders confuses preemptive rights with dividend preferences.
- A publicly traded company grants an employee 1,000 nonqualified stock options with an exercise price of $10 per share. The options vest after three years. At exercise, the market price is $40 per share, and the employee sells all of the shares the same day. Which of the following best describes the federal income tax result?
Answer: The employee recognizes $30,000 of ordinary income at exercise and no capital gain or loss on the immediate sale.
Under the rules for nonqualified stock options, the employee has no income at grant. At exercise, the bargain element is ordinary compensation income: 1,000 × ($40 − $10) = $30,000. Because the shares are sold the same day at $40, the stock's basis equals the sale price and there is no additional capital gain. Treating the $30,000 as long-term capital gain confuses nonqualified options with incentive stock options. Adding a $30,000 capital gain on the sale double-counts the same bargain element. Deferring all income until the sale also applies the wrong tax treatment.
- A corporation's board declares a $0.80 per-share cash dividend, payable June 30, 2026, to shareholders of record on Friday, June 12, 2026. All trades are regular-way and settle T+1. An investor who owned no shares buys 1,000 shares on Wednesday, June 10, 500 shares on Thursday, June 11, and 300 shares on Friday, June 12, and then sells all 1,800 shares on Monday, June 15. What amount of the dividend will the investor receive?
Answer: $1,200
SEC Rule 15c6-1 makes regular-way settlement T+1, and under T+1 the ex-dividend date is the same business day as the record date. A buyer is entitled to the dividend only if the purchase settles by the record date, so a purchase on the ex-dividend date (here June 12) does not carry the dividend, and a sale on or after that date does not give it up. The June 10 and June 11 purchases settle by June 12, so the investor is the holder of record for 1,500 shares and receives $1,200 (1,500 x $0.80); the June 12 purchase settles after the record date. Receiving nothing assumes a shareholder must still own the shares on the payable date, but entitlement is fixed on the record date. The $800 figure applies the superseded T+2 convention, placing the ex-dividend date one business day before the record date and so excluding the June 11 purchase. The $1,440 figure counts the 300 shares bought on the record date, as if a trade on that date settled in time.
- Which of the following statements regarding stock rights and stock warrants is true?
Answer: Stock rights generally have a short exercise period and are issued to existing shareholders, whereas warrants typically have longer exercise periods and are often attached to bonds or preferred stock.
Stock rights are short-lived privileges issued to existing shareholders, usually through a rights offering, allowing them to buy new shares at a subscription price. Warrants are longer-term instruments, often attached to bonds or preferred stock, that give the holder the right to buy shares at a stated exercise price. The option reversing the two instruments is wrong: warrants are not short-term rights issued pro rata to existing shareholders, and rights are not the longer-term instruments. The option that says rights and warrants allow the holder to buy shares at a fixed price but taxes any gain at exercise as a dividend is wrong: exercise is not a dividend event, and the exercise price generally becomes part of the holder's cost basis in the acquired shares. The option that says rights and warrants pay dividends is wrong: neither pays interest or dividends; each is an option to acquire shares.
- Which of the following statements regarding cash dividends on publicly traded common stock is true?
Answer: A shareholder who sells the stock on or after the ex-dividend date remains entitled to receive the declared dividend.
In dividend mechanics, the board creates the dividend obligation on the declaration date, the record date identifies the shareholder entitled to the dividend, and the ex-dividend date is the first date the stock trades without the dividend. Under T+1 settlement (since May 28, 2024), the ex-dividend date is the same business day as the record date. A seller on or after the ex-dividend date keeps the dividend because the buyer's trade settles after the record date, so the seller is the holder of record. Selling after the record date does not forfeit the dividend because the seller was the holder of record. The statement that the ex-dividend date falls one business day before the record date applies the old T+2 convention, and the liability is recorded on the declaration date, not the record date.
- Which of the following statements regarding employee stock options is true?
Answer: With a nonqualified stock option, the employee generally has ordinary income at exercise equal to the bargain element, and the employer generally receives a corresponding deduction.
Under federal tax rules for employee stock options, a nonqualified stock option generally produces ordinary income at exercise equal to the excess of fair market value over the exercise price, and the employer receives a corresponding deduction. An incentive stock option is not taxed that way at exercise; a qualifying later sale receives capital gain treatment and the employer receives no deduction. The two types of options are not taxed identically, and receipt of an employee stock option does not always create immediate ordinary income.
