Series 65 Exam Prep, Over 1000
Questions And Answers, Verified
Solution
Name the equity securities
Preferred and Common stock
What is a security?
Instrument that is readily exchanged for value between parties and involves risk
Why are Whole and Term life insurance sand IRAs/retirement plans NOT
securities?
Not readily exchanged
Why are confirmations and prospectus not securities?
Do not have value
How does one become owner of a company?
buy shares in that company
What distinguishes stocks from options and bonds?
Stocks are perpetual. mo maturity date (bonds), and no strike price and date (options)
When can a company issue preferred stock?
After it issues common stock.
what is authorized stock?
Number of shares that a company is permitted to sell. It is arbitrarily decided at
incorporation, but can change with a shareholder vote.
What is issued stock?
Shares to be sold to the public, less than the number of authorized shares. It can be
sold as a lumpsum or in a series of sales.
If shares are bought back by the company, are they still considered issued?
Yes, because they have been in the public's hands. More specifically, they are called
treasury stock since they have been repurchased.
Why would a company sell additional authorized shares?
Pay dividend, Expand operations, Exchange common shares for convertible preferred
or convertible bond, Employee stock plans (PEEE)
What are outstanding shares?
Shares that are STILL in the public's hands.
Mocha Co. has 10M shares authorized. 5M were sold to the public. How many
shares issued? How many outstanding?
5M (issued and outstanding)
What is treasury stock?
shares repurchased by the Co. no voting rights or dividends.
Why would Co. buy back shares?
Control of Co., Employee stock plan funding, Earnings per share increase, Merger and
acquisition payment (CEEM)
,Latte Co. has 10M shares authorized. 5M was sold to the public. Latte
repurchased 3M. How many are outstanding? How many issued?
5M issued; 3M Treasury; 2M outstanding
How is common stock market value determined?
Supply and demand. Price may not have a relationship to the actual worth of the
company.
Co. book value formula
Tangible assets- liabilities
Book value per share formula
TA-L/# of outstanding shares
Common stock par value
Only accountants need to know to determine how much to credit to the balance sheet at
the initial sale of shares
Preemptive right
Right to maintain proportional interest in the company
When is preemptive right exercised?
During rights offering - 45 days to decide whether to exercise (buy shares at discount or
subscription price), or sell to other investor, or expire (if 45 days are up and stock is
trading below subscription price)
Murdock has 10K shares, or 10% interest, in Mocha Co. that issued 100K shares
(10k/100k x 100=10%). Mocha issued an additional 100K. How much should
Mocha offer Murdock?
100K new shares x 10%=10K offered during rights offering.
Rights offering - Exercised
Investor buys shares at rights offering at subscription price
Rights offering- sold
Shares sold to another investor when the original investor did not want the shares
Rights offering - expired
No investor wants the stock and/or 45 days have elapsed.
During rights offering, what happens to the stock?
Trades with the rights attached, or cum rights.
When rights offering expires, or on the ex date, what happens to the stock?
trades w/o the right, or ex-rights and adjusts down in value by the right that is no longer
attached.
How many rights are required to purchase an additional share if the stock trades
at $50/share and the subscription price is $48/share?
50-48=$2=2 rights. So you need $48 plus 2 rights to buy one additional share.
2 methods of voting avail to shareholders
statutory and cumulative.
How many votes is each shareholder entitled to?
1 share = 1 vote
Statutory voting
number of shares must be divided evenly among your candidates of choice or go all in if
it is only one candidate that you like
cumulative voting
,shareholder can go all in for their favorite candidate, or split unevenly or evenly among
their favorites
Trumpster owns 200 shares of Bull co. There are two spots available on the
board. Four candidates are gunning for the spots. Trumpster likes two
candidates, and since he owns so many shares, he is entitled to statutory voting.
How many votes can he place for his two favorite candidates?
200 x 2 spots = 400, must split evenly between the two candidates.
Gingrich owns 200 shares of Red, White, and Blue co. There are three spots avail
on the board. Four candidates are gunning for the spots. Gingrich likes only one
candidate. How many votes can he place for his favorite candidate using
cumulative voting?
200x3 spots=600 votes so 600 go to his favorite candidate
What is the stockholder's liability?
Just the amount invested in the company's stock.
Riboshu Co. bankrupted. During the liquidation process, what are the common
shareholders entitled to?
their proportional interest in whatever is left (residual remains) after creditors and
preferred shareholders got what is owed them.
Current or dividend yield
Current yield is a general term and can apply to bonds and stocks. With stocks, it is
called the dividend yield. Annual income/current price of the security x 100= #%
Flat Ab Co. pays $0.50 quarterly dividend. Stock is trading at $20/share. What is
its current yield?
0.50 QUARTERLY x 4= $2.00 ANNUAL/$20=1/10x100=10%
Trade Date
when your order actually executed. For market orders, it is immediately. Limit orders,
when the terms on the order are met.
Settlement date
when you become owner of the stock. For common and preferred shares as well as
corp and municipal bonds, it is two days after trade date (T+2). For options and
government bonds, it is 1 day after trade date (T+1)
Why some people like preferred shares?
Steady income via semi-annual dividend payments.
Par value for preferred stock? Bonds?
$100; $1000
How much will Bidu receive in ANNUAL income from investing 100 shares of TWT
9% preferred?
$100 x 0.09 = $9 x 100 shares = $900 annual income
Even though a company MUST issue common shares before preferred shares,
the opposite applies to dividends.
dividends on preferred shares MUST be paid before dividends on common shares.
Even though preferred shares are non-voting, when can a shareholder vote?
If you own cumulative preferred shares, you can voice your input if your preferred stock
has not paid you dividends yet.
Similar to bonds, preferred shares have inverse relationship with interest rates.
, When rates are up, value of preferred shares and bonds go down. When rates are
down, value of the above go up.
Name the different kinds of preferred stocks.
Callable, cumulative, convertible (3C), noncumulative, and participating
What is callable preferred stock?
Benefits the co. not investor. Corp can redeem the shares, and they do so at premium
(i.e. $100 par being bought back at $103)
why would a co. call back preferred shares?
remove the current fixed dividend payment, sell new shares with lower div.
When is a preferred stock typically called back?
When interest rates are down, and the value of preferred shares go up.
Convertible preferred
Stock can be converted to common shares at a fixed price (conversion price).
Flex Co. issued 4% convertible preferred stock that can be converted into
common shares at $20/share. How many common shares will an investor
receive?
PAR/Market price = $100/$20=5 common shares for every preferred share.
Cumulative preferred
Get paid semi annual div like the others, however, if Co. misses div pmt, it collects in
arrears. That means that before the Co can even pay their common shareholders, they
MUST pay off the years missed + this year's preferred dividends. Owners of cum
preferred can have voting rights.
Procras Co. has 8% cum preferred stock. It has not paid div this year or for the
prior three years. How much must the holders of Procras preferred stock be paid
per share before the common shareholders are paid?
this year and prior three years = 4 years. 8%x$100=$8 x 4 years = $32 per share
noncumulative/straight
Simple preferred - f you don't get paid div by the company, too bad.
Participating preferred
Get preferred dividends + the common share dividends. i.e. $8 preferred dividend per
share and $1 common dividend per share = $9 total dividends
What are the three types of dividends?
cash, stock, and property/product
Timeline for dividend distribution
Declaration date, ex-dividend date, record date, and payment date
Dividend declaration date
Co. BoD (Board of directors) declares that it will pay dividends and how much. It must
notify FINRA/Exchange at least 10 business days before record date.
Ex-Dividend date
Purchasers are no longer entitled to dividend on that date. Decided by
FINRA/exchange. Must be one business day prior to record date.
Record date
Decided by BoD. Investors with names recorded on that date are entitled to the
dividend.
Payment date
Investors get paid the dividend, usually four weeks after record date.
Questions And Answers, Verified
Solution
Name the equity securities
Preferred and Common stock
What is a security?
Instrument that is readily exchanged for value between parties and involves risk
Why are Whole and Term life insurance sand IRAs/retirement plans NOT
securities?
Not readily exchanged
Why are confirmations and prospectus not securities?
Do not have value
How does one become owner of a company?
buy shares in that company
What distinguishes stocks from options and bonds?
Stocks are perpetual. mo maturity date (bonds), and no strike price and date (options)
When can a company issue preferred stock?
After it issues common stock.
what is authorized stock?
Number of shares that a company is permitted to sell. It is arbitrarily decided at
incorporation, but can change with a shareholder vote.
What is issued stock?
Shares to be sold to the public, less than the number of authorized shares. It can be
sold as a lumpsum or in a series of sales.
If shares are bought back by the company, are they still considered issued?
Yes, because they have been in the public's hands. More specifically, they are called
treasury stock since they have been repurchased.
Why would a company sell additional authorized shares?
Pay dividend, Expand operations, Exchange common shares for convertible preferred
or convertible bond, Employee stock plans (PEEE)
What are outstanding shares?
Shares that are STILL in the public's hands.
Mocha Co. has 10M shares authorized. 5M were sold to the public. How many
shares issued? How many outstanding?
5M (issued and outstanding)
What is treasury stock?
shares repurchased by the Co. no voting rights or dividends.
Why would Co. buy back shares?
Control of Co., Employee stock plan funding, Earnings per share increase, Merger and
acquisition payment (CEEM)
,Latte Co. has 10M shares authorized. 5M was sold to the public. Latte
repurchased 3M. How many are outstanding? How many issued?
5M issued; 3M Treasury; 2M outstanding
How is common stock market value determined?
Supply and demand. Price may not have a relationship to the actual worth of the
company.
Co. book value formula
Tangible assets- liabilities
Book value per share formula
TA-L/# of outstanding shares
Common stock par value
Only accountants need to know to determine how much to credit to the balance sheet at
the initial sale of shares
Preemptive right
Right to maintain proportional interest in the company
When is preemptive right exercised?
During rights offering - 45 days to decide whether to exercise (buy shares at discount or
subscription price), or sell to other investor, or expire (if 45 days are up and stock is
trading below subscription price)
Murdock has 10K shares, or 10% interest, in Mocha Co. that issued 100K shares
(10k/100k x 100=10%). Mocha issued an additional 100K. How much should
Mocha offer Murdock?
100K new shares x 10%=10K offered during rights offering.
Rights offering - Exercised
Investor buys shares at rights offering at subscription price
Rights offering- sold
Shares sold to another investor when the original investor did not want the shares
Rights offering - expired
No investor wants the stock and/or 45 days have elapsed.
During rights offering, what happens to the stock?
Trades with the rights attached, or cum rights.
When rights offering expires, or on the ex date, what happens to the stock?
trades w/o the right, or ex-rights and adjusts down in value by the right that is no longer
attached.
How many rights are required to purchase an additional share if the stock trades
at $50/share and the subscription price is $48/share?
50-48=$2=2 rights. So you need $48 plus 2 rights to buy one additional share.
2 methods of voting avail to shareholders
statutory and cumulative.
How many votes is each shareholder entitled to?
1 share = 1 vote
Statutory voting
number of shares must be divided evenly among your candidates of choice or go all in if
it is only one candidate that you like
cumulative voting
,shareholder can go all in for their favorite candidate, or split unevenly or evenly among
their favorites
Trumpster owns 200 shares of Bull co. There are two spots available on the
board. Four candidates are gunning for the spots. Trumpster likes two
candidates, and since he owns so many shares, he is entitled to statutory voting.
How many votes can he place for his two favorite candidates?
200 x 2 spots = 400, must split evenly between the two candidates.
Gingrich owns 200 shares of Red, White, and Blue co. There are three spots avail
on the board. Four candidates are gunning for the spots. Gingrich likes only one
candidate. How many votes can he place for his favorite candidate using
cumulative voting?
200x3 spots=600 votes so 600 go to his favorite candidate
What is the stockholder's liability?
Just the amount invested in the company's stock.
Riboshu Co. bankrupted. During the liquidation process, what are the common
shareholders entitled to?
their proportional interest in whatever is left (residual remains) after creditors and
preferred shareholders got what is owed them.
Current or dividend yield
Current yield is a general term and can apply to bonds and stocks. With stocks, it is
called the dividend yield. Annual income/current price of the security x 100= #%
Flat Ab Co. pays $0.50 quarterly dividend. Stock is trading at $20/share. What is
its current yield?
0.50 QUARTERLY x 4= $2.00 ANNUAL/$20=1/10x100=10%
Trade Date
when your order actually executed. For market orders, it is immediately. Limit orders,
when the terms on the order are met.
Settlement date
when you become owner of the stock. For common and preferred shares as well as
corp and municipal bonds, it is two days after trade date (T+2). For options and
government bonds, it is 1 day after trade date (T+1)
Why some people like preferred shares?
Steady income via semi-annual dividend payments.
Par value for preferred stock? Bonds?
$100; $1000
How much will Bidu receive in ANNUAL income from investing 100 shares of TWT
9% preferred?
$100 x 0.09 = $9 x 100 shares = $900 annual income
Even though a company MUST issue common shares before preferred shares,
the opposite applies to dividends.
dividends on preferred shares MUST be paid before dividends on common shares.
Even though preferred shares are non-voting, when can a shareholder vote?
If you own cumulative preferred shares, you can voice your input if your preferred stock
has not paid you dividends yet.
Similar to bonds, preferred shares have inverse relationship with interest rates.
, When rates are up, value of preferred shares and bonds go down. When rates are
down, value of the above go up.
Name the different kinds of preferred stocks.
Callable, cumulative, convertible (3C), noncumulative, and participating
What is callable preferred stock?
Benefits the co. not investor. Corp can redeem the shares, and they do so at premium
(i.e. $100 par being bought back at $103)
why would a co. call back preferred shares?
remove the current fixed dividend payment, sell new shares with lower div.
When is a preferred stock typically called back?
When interest rates are down, and the value of preferred shares go up.
Convertible preferred
Stock can be converted to common shares at a fixed price (conversion price).
Flex Co. issued 4% convertible preferred stock that can be converted into
common shares at $20/share. How many common shares will an investor
receive?
PAR/Market price = $100/$20=5 common shares for every preferred share.
Cumulative preferred
Get paid semi annual div like the others, however, if Co. misses div pmt, it collects in
arrears. That means that before the Co can even pay their common shareholders, they
MUST pay off the years missed + this year's preferred dividends. Owners of cum
preferred can have voting rights.
Procras Co. has 8% cum preferred stock. It has not paid div this year or for the
prior three years. How much must the holders of Procras preferred stock be paid
per share before the common shareholders are paid?
this year and prior three years = 4 years. 8%x$100=$8 x 4 years = $32 per share
noncumulative/straight
Simple preferred - f you don't get paid div by the company, too bad.
Participating preferred
Get preferred dividends + the common share dividends. i.e. $8 preferred dividend per
share and $1 common dividend per share = $9 total dividends
What are the three types of dividends?
cash, stock, and property/product
Timeline for dividend distribution
Declaration date, ex-dividend date, record date, and payment date
Dividend declaration date
Co. BoD (Board of directors) declares that it will pay dividends and how much. It must
notify FINRA/Exchange at least 10 business days before record date.
Ex-Dividend date
Purchasers are no longer entitled to dividend on that date. Decided by
FINRA/exchange. Must be one business day prior to record date.
Record date
Decided by BoD. Investors with names recorded on that date are entitled to the
dividend.
Payment date
Investors get paid the dividend, usually four weeks after record date.
