1
Q
What are retained earnings?
A
Profits retained by a company are often used to expand. and reinforce business operations.
Earnings not paid to investors by dividends
2
Q
Three things that impact the market price of common stock
A
- Demand for stock in the market
- Future expectations of the company
- Future dividend payments
3
Q
Three ways profits are utilized?
A
- Retain profit
- Pay profit to shareholders
- Both
4
Q
Four actions BODs can take to guide the company?
A
- Hiring and/or firing senior-level employees
- Managing senior level employee compensation
- Creating and implementing general company policies
- Approving dividend payouts to investors
5
Q
What positions do common stockholders have the right to vote for?
A
Only BOD
6
Q
What are two ongoing reports. companies must file?
A
- 10 - K annual audited financial report
- 10-Q unaudited financial report
7
Q
What are 5 types of securities?
A
- stocks
- bonds
- mutual funds
- options
- ETFs
8
Q
What is a preemptive right?
A
The ability to buy newly-issued shares before they’re publicly offered
9
Q
What do rights allow investors to do?
A
Purchase new shares at a lower price than its market value
9
Q
What are the three paths an investor can take with rights?
A
- Exercise
- Sell
- Expire
10
Q
What is a benefit to a company of offering rights?
A
They don’t need to hire an underwriter
10
Q
Three paths investor can take with warrants?
A
- Exercise
- Trade
- Expire
11
Q
Four characteristics of Rights
A
- Right to purchase new shares at fixed price
- Intrinsic value at issuance
- Little time value
- Short term
12
Q
Four characteristics of warrants?
A
- Right to purchase new shares at fixed price
- No intrinsic value at issuance
- Long term
- Time value exists
13
Q
What is a bond?
A
A. bond is a debt security that allows investors to loan funds to organizations in return for interest
14
Q
A
15
Q
What must companies do before performing dilutive actions?
A
Get majority of shareholder approval
16
Q
Why is issuing convertible securities a dilutive action?
A
Because you are giving new common shares to only some stockholders
17
Q
A
18
Q
What are three types of dilutive actions?
A
- Private placements
- Issuing Convertible stock
- Options to employees
19
Q
What type of investor are pre-emptive rights issued to?
A
Common stockholders
20
Q
When would a company do a forward stock split?
A
When they feel their stock price is too expensive for the average investor
21
Q
What is a legal method for issuers to manipulate stock prices?
A
Stock splits
22
Q
What requires approval from the BOD but not shareholders?
A
Dividends of any form
23
Who must approve stock splits?
Sharehoolders by majority
24
What is a liquidation of assets?
The sale of all company assets
25
What is the order of payout during liquidation?
1. Unpaid wages
2. Unpaid taxes
3.. Secured creditors
4. Unsecured creditors
5. Junior unsecured creditors
6. Preferred stockholders
7. Common stockholders
26
When do secured creditors have first rights vs. Unpaid wages and taxes?
Secured creditors have first right to the collateral backing the loan while unpaid wages and taxes are first if the collateral backing the loan is liquidated and does not cover the loan balance
27
When will the liquidation go to the secured creditor first instead of the unpaid wages and taxes?
If the collateral backing the loan is liquidated and does not cover the loan balance
28
What is a lien for secured creditors?
The right to a property if a loan cannot be repaid
29
What is senior debt?
Debt that maintains priority over general and junior debt in the event of liquidation
30
What are 5 things a transfer agent is responsible for?
1. Transfer ownership of sellers to buyers
2. Maintain book of stockholders
3. Make dividend payments to stockholders
4. Distribute proxies to stockholders
5. Keep an accurate count of shares outstanding
31
What are the three specific steps for transfer agents?
1. Redeem the seller's shares
2. Adds the buyer to the list of stockholders
3. Electronically issue shares to the buyer
32
What registration format are securities registered?
Book entry format
33
When a stock split occurs, who is responsible for accurate track of outstanding shares and ownership?
Transfer agent
34
Difference between negotiable and redeemable securities?
Negotiable trade between investors, redeemable bought and sold with the issuer
35
Two prominent redeemable securities
1. Mutual funds
2. Unit investment trusts
36
At what price does investor purchase redeemable securities from issuer?
at the NAV
37
What is the public offering price for redeemable securities?
Public offering price + sales charge
38
Equation for net asset values?
(Assets - liabilities)/Outstanding shares
39
What is a redemption request?
Investor cashing out mutual funds from issuer at NAV price
40
What two examples of secondary distributions?
1. When an employee sells a large part of the shares they've acquired
2. Investors liquidate their private placements
41
What secondary market do listed stocks trade in?
Third market
42
What happens in the fourth market?
Large institutions trade without brokers
43
Where does the fourth market operate?
ECN
44
How do ECN agencies make money?
Commissions
45
What are 5 roles in the completement of financial transaction?
1. Broker dealers
2. Introducing broker dealers
3. Clearing brokers
4. Clearinghouses
5. Transfer agents
46
What are two differences between introducing brokers and clearing brokers?
1. Introducing brokers don't maintain custody of ustomer assets, clearing brokers do.
2. Introducing brokers do not process trades, they outsource to CB
47
What four things do clearing brokers do?
1. Maintain custody
2. Process orders
3. Clearing services between investors and clearinghouse
4. Facilitating trades
48
What does "Best execution mean"?
Obtaining the best possible price
49
What is the confirmation flow for a trade?
Clearing broker sends a trade confirmation to the introducing broker who then informs customer
50
What do transfer agents do?
They work on behalf of issuers to keep track of investors that own securities
51
What is the cutoff time for cash settlement trades?
2:30pm ET
52
Three roles of clearing house
1. Organization responsible for clearing trades
2. Ensures buyers deliver cash
3. Ensures seller delivers securities
53
What are settlement rules for common stock regular way and cash settlement?
1. Regular way - T+2
2. Cash settlement - same day if by 2:30pm
54
When is the ex-date for a stock split?
The day after the payable date
55
Who determines the ex-dividend rate for NYSE?
The NYSE
56
Who determines the ex-date for OTC trades?
FINRA
57
When is the cash settlement ex-date?
The day after the record date
58
What kind of account must you open before selling short?
Open a margin account
59
What is leverage?
investing with borrowed funds
60
What are the consequences of investing borrowed funds?
Amplification of gain and losses
61
what must you do to be eligible to lend securities?
Sign the loan consent form
62
Why is investor responsibility in paying a loaned dividend payment usually a wash?
Because the stock usually drops in price transiently when the dividend is paid, so they recoup the dividend value.
63
Who has to pay dividends on shares held short?
The short seller (investor) to the lender
64
Who creates the ADR?
Domestic financial firms with foreign branches
65
Four steps of companies creating ADFs?
1. JP Morgan purchases large amounts of foreign stock with high US demand
2. Stocks are placed into a trust account
3. Account is sliced into receipts
4. Receipts are registered with the SEC and sold to American investors
66
3 Disadvantages of ADR
1. No voting rights
2. No preemptive rights
3. foreign currency exchange risk
67
What happens if the foreign government witholds part of the dividend for tax purposes?
IRS provides a tax credit to investors
68
What are the two currency exchange risks in ADR?
1. If currency being exchanged out of weekends
2. Currency being exchanged into strengthtnes
69
What is an ADR?
Us- registered receipt for foreign investments
70
What happens when foreign issuers issue rights?
The rights will be sold with proceeds distributed to ADR holders
71
What are tender offers?
Direct proposals to purchase stock from current investors at premium prices
72
Why would investors try a tender offer rather than buy shares from the market?
Because buying shares would market would flood it with demand and drive up the stock price
73
What are the two time regulations for tender offers?
1. Investors must. be provided 20+ business days to make decision
2. If tender offer changes, extended by 10 days
74
Why would a company do a stock buybsck?
With fewer outstanding shares, the issuer will report higher EPS even if the revenue stays flat
75
Three steps to hostile takeover
1. Purchasing significant stock positions
2. Instilling hand picked BOD
3. New BOD bending at will of outsider
76
What is the result of a stock buyback?
Issuer repurchases shares and EPS increases with fewer outstanding shares
77
5 Requirements for tender offer
1. Proposal to purchase security from current investors
2. Offered at premium to market price
3. participants must be long the security
2. Must be available for at least 20 business days
5. Additional 10 if change
78
Two types of systematic risk?
1. Market Risk
2. Inflation risk
79
What is a stock index?
Basket of stocks whose performance is averaged to determine performane of market
80
What two types of risk does diversification not help reduce?
1. Market Risk
2. Inflation risk
81
Why are high inflation levels a short term problem for common stock?
Because market values will fall
82
What type of risk does diversification protect against?
Non-systematic risk
83
6 types of non-systematic risk?
1. Financial risk
2. BUsiness risk
3. Regulatory risk
4. Legislative risk
5. Political risk
6. Liquidity risk
84
What condition make stocks subject to financial risk?
Companies have borrowed too much money and owes too much interest
85
When does business risk occur?
Products in low demand due to competition or mismanagement
86
When does a company face regulatory risk?
Potential or current governmental regulation negatively affects an investment
87
Legislative risk?
When a law or regulation negatively affects an investment
88
What. is the difference between legislative and regulatory risk?
Regulatory risk when government agency regulates a company, legislative risk when a new law signed by the president impacts an investment
89
When does political risk occur?
When there is political instabilities like military coups or threats of war
90
What type of security does political risk most likely affect?
Foreign securities from countries with unstable governments
91
When does an investor face liquidity risk?
When they have trouble turning their stock into cash
92
When would there be liquidity risk?
For stocks that are not listed on exchanges have less trading volume and participants
93
What is the result of liquidity risk?
Investor may have to substantially drop their asking price due to no demand
94
What size stocks are less risky?
Larger cap stocks
95
Three characteristics of unrealized capital gain?
1. Current gain on investment
2. Hasn't been sold
3. Gainst at risk if market declines
96
Three characteristics of realized capital gain?
1. Locked in gain on investment
2. Investment sold
3. No risk on gain
97
What is inflation risk also known as?
Purchasing power risk
98
What. isthe best type of security. tohedge against inflation?
common stock
99
Three things diversification can result in
1. Portfolio with a low correlation
2. Reduction of non-systematic risks
3. Reduction in portfolio volatility
100
What does the term "current" translate to in assets and liabilities?
Short term
101
What counts as current assets?
Any cash and any item expected to be turned into cash easily within one year
102
5 examples of current assets
1. Cash
2. Cash equivalents
3. Accounts receivable
4. Inventory
5. Prepaid expenses
103
What are accounts receivable?
Money owed to the company by third parties within one year
104
5 examples of current liabilities?
1. Accounts payable
2. Wages payable
3. Taxes payable
4. Interest payable
5. Principal payable (within one year)
105
What does accounts payable mean?
General term for money owed by the company to third parties within one year
106
When are bonds considered a liability?
Only if their principal payoff date is within. 1year
107
What are physical assets?
Long term physical assets expected. to be utilized for at least one year
108
Intangible assets?
Various forms of intellectual property to be utilized for one year
109
What are long term liabilities?
Bills, loans, or payments due to third parties in more than one year
110
Four examples of long term liabilities?
1. Bonds and notes > 1 year
2. Mortgages
3. Pensions
4. Long term outstanding loans
111
Three examples of stockholder's equity?
1. Par value of outstanding stock
2. Capital in excess of par
3. Retained earnings
112
What are retained earnings?
Earnings business profits that are not distributed to stockholders
113
What are Price to Earnings ratio used for?
To determine if a company is overvalued or undervalued
114
What is the PE ratio formula?
Market price/earnings. pershare
115
When is a company overvalued?
When the PE ratio. ishigh
116
What type of companies maintain higher PE ratios
Growth companies
117
What are companies with lower PE ratios called?
Value companies
118
Why are value companies PE ratios low?
Significant future growth isn't worth betting on so investors aren't willing to overpay
119
What two things does a company balance sheet indicate?
1. Compares assets vs. liabilities
2. Company's net worth
120
Two High PE ratio characterizations
1. May indicate overpriced investment
2. Typical for growth companies
121
Two Low PE ratio characterizations?
1. Underpriced investment
2. Typical of value companies
122
When. isa form 13D filled out?
WHen an investor obtains 5% or more of ownership
123
When is form 8K filled out?
To report significant corporate events
124
What statement DOES NOT report cash flow?
Balance sheet
125
What does the balance sheet report?
Assets. andliabilities
Unit 2
flashcards
Decks in class (18)
# Cards
-
Unit 2125
-
One127
-
Unit 251
-
options60
-
Bonds66
-
investment companies Part 1136
-
Corporate bonds97
-
Municipal Debt82
-
US gov debt146
-
Taxes43
-
Brokerage Accounts224
-
SIPC insurance12
-
Retirement171
-
Education14
-
Investment Companies Part 2116
-
Alternative Pooled Investments67
-
Education and Other Plans21
-
Rules and Ethics2
