Evaluate Equity Securities - Series 7

1. If a stock is $2$-for-$1$ split and was $60 before the split, what is the approximate price immediately after?

   $30 per share. Splits adjust price proportionally to the ratio, halving it in a 2-for-1 to preserve market capitalization while improving accessibility.

2. What is a rights offering, and which existing shareholder right does it implement?

   Discounted purchase offer to existing holders; implements preemptive rights. Rights offerings provide existing shareholders discounted new shares to prevent dilution, directly upholding their preemptive rights to maintain ownership stakes.

3. What is the shareholder right to receive a proportional share of assets after creditors are paid?

   Residual claim. As equity owners, shareholders have the last claim on remaining assets after all debts are settled, reflecting their risk-bearing role in the capital structure.

4. What is participating preferred stock?

   Preferred that may share additionally in dividends beyond the stated rate. Participating rights allow preferred holders to receive extra dividends alongside common shareholders after fixed rates, potentially increasing returns in profitable years.

5. What is convertible preferred stock?

   Preferred stock that may be exchanged for a specified number of common shares. Convertibility provides optionality for holders to benefit from common stock appreciation if the company's value rises significantly.

6. What is callable preferred stock from the issuer's perspective?

   Issuer may redeem it at a stated call price, typically at a premium. Callability gives issuers flexibility to retire shares when advantageous, often including a premium to compensate holders for early redemption.

7. If an investor owns $200$ shares and receives a $10\%$ stock dividend, how many new shares are received?

   $20$ new shares. A 10% stock dividend issues shares equal to 10% of holdings, proportionally increasing total shares without cash outflow.

8. What is a stated (par) value on common stock used for in practice?

   A nominal legal/accounting value; not a market price indicator. Par value serves as a minimum issuance price for legal capital requirements and accounting purposes, but market value is determined by supply, demand, and company performance.

9. What is a stock dividend, and how is it typically expressed?

   A dividend paid in shares, typically as a percentage (for example, $10\%$). Stock dividends distribute additional shares instead of cash, expressed as a percentage of outstanding shares to retain capital within the company.

10. What is the tax advantage of common stock dividends to a corporate investor?

    Dividends may qualify for the dividends-received deduction (DRD). DRD reduces taxable income for corporations on inter-corporate dividends, encouraging investment and avoiding double taxation.

11. What is the difference between statutory voting and cumulative voting for directors?

    Statutory: $1$ vote per share per seat; cumulative: votes may be pooled. Statutory voting limits votes to one per share per director, while cumulative allows concentrating all votes on fewer candidates to aid minority representation.

12. What is the standard voting right attached to common stock at shareholder meetings?

    One vote per share (unless the charter provides otherwise). This right enables shareholders to influence corporate governance by voting on matters like director elections, with one vote per share as the default unless specified differently.

13. What is a typical reason an issuer calls preferred stock?

    To refinance at lower dividend rates (lower cost of capital). Calling allows issuers to replace high-dividend preferred with lower-cost financing when market rates decline, optimizing capital structure.

14. What is the cumulative voting formula for total votes a shareholder may cast in a director election?

    Total votes $=$ shares owned $\times$ number of directors to be elected. This formula enables shareholders to allocate votes strategically across candidates, enhancing minority shareholders' ability to elect directors.

15. What is the effect of a stock dividend on the shareholder's proportional ownership?

    No change; ownership percentage remains the same. Since all shareholders receive proportional shares, individual ownership fractions remain unchanged, merely redistributing equity without dilution.

16. What does it mean if preferred stock is noncumulative?

    Skipped dividends do not accrue; they are not owed later. Noncumulative features mean omitted dividends are forfeited, aligning with issuer flexibility but reducing investor income security.

17. What is a stock split, and what is its usual purpose?

    Increases shares outstanding and lowers price per share to improve liquidity. Splits proportionally increase shares to make them more affordable and attractive to retail investors, enhancing marketability without changing total value.

18. What is a reverse stock split, and what is the typical intent?

    Decreases shares outstanding and raises price per share to meet listing/optics. Reverse splits consolidate shares to elevate price, often to comply with exchange requirements or improve perceived prestige.

19. If a shareholder owns $100$ shares and the company declares a $2$-for-$1$ split, how many shares will the shareholder own?

    $200$ shares. A 2-for-1 split doubles shares owned by distributing one additional share per existing share, maintaining proportional ownership.

20. If a shareholder owns $300$ shares and a $1$-for-$3$ reverse split occurs, how many shares will the shareholder own?

    $100$ shares. A 1-for-3 reverse split combines every three shares into one, reducing total shares proportionally to increase per-share value.

21. Which shareholder right allows owners to maintain their proportionate ownership in new issues?

    Preemptive right. Preemptive rights protect existing shareholders from dilution by allowing them to purchase new shares proportionally before public offerings.

22. What is the key difference between common stock and preferred stock regarding dividends?

    Preferred has stated dividend priority; common dividends are discretionary. Preferred stock dividends are fixed and must be paid before common, providing income stability, while common dividends depend on board decisions and company profits.

23. What is the main market risk difference between preferred stock and common stock?

    Preferred has greater interest-rate sensitivity; common has greater growth volatility. Preferred stock behaves like fixed-income securities, fluctuating with interest rates, whereas common stock prices vary with earnings growth and market sentiment.

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