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Knopman: SIE Class Summary Questions with Correct Answers
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Knopman: SIE Class Summary Questions with Correct Answers
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Knopman: SIE Class Summary Questions withCorrect Answers
Treasury Stock Correct Answer-Treasury stock is authorized stock that
was previously sold to the public but was repurchased by the issuer.
Because it is no longer outstanding, the company's share count will fall,
and the shares no longer receive dividends or have voting rights.
Treasury shares may be held by the company, reissued to the public, or
cancelled.
Company Repurchases Correct Answer-A company that believes its
stock is undervalued may repurchase shares in the open market (creating
treasury stock).
Voting Rights Correct Answer-Holders of common stock have voting
rights, which allow them to exercise control by electing the board of
directors and voting on corporate policy. This contrasts with holders of
preferred stock, who typically do not have voting rights.
Statutory versus Cumulative Voting Correct Answer-Voting by common
stockholders can be carried out by one of two methods.
Statutory Voting: Allows a shareholder to vote one time per share for
each seat on the board of directors.
,For example, if an investor owns 100 shares of common stock and there
are three board seats to be filled, they can cast up to 100 votes for each
of the three seats.
Cumulative Voting: Allows the shareholder to pool their votes together
and allocate them as desired. For example, the shareholder above can
aggregate all of their votes - 300 total (100 votes x 3 seats) and allocate
them however they choose.
10-K Correct Answer-Public companies must file annual financial
reports (which include financial statements) called 10-ks with the SEC
within 90 days of year-end.
Pre-emptive Rights Correct Answer-Pre-emptive rights allow a current
shareholder to maintain their proportionate ownership interest and avoid
dilution when a company issues additional shares.
Warrants Correct Answer-Warrants are typically issued by a company in
conjunction with another security to make that other security more
attractive to investors.
For example, a company might use a warrant as a sweetner for investors
as part of a debt deal. Unlike pre-emptive rights, warrants do not prevent
dilution.
,Warrants as Equity Securities Correct Answer-Warrants are considered
as equity securities (not debt securities) because if the warrant is
exercised, the investor will receive shares in the underlying company.
Importantly, warrants do not make interest payments to investors.
Value of Warrants Correct Answer-A warrant provides an investor the
ability to purchase a company's stock at a specified exercise price for a
set time period.
For example, the investor is given the right to purchase the stock at $100
per share. The investor would want to exercise this right if the price
increases above the exercise price (investor wants to pay $100 for stock
worth $150 not for stock only worth $50) and therefore the market value
of a warrant is tied to the value of the underlying stock.
Issuance Price of Warrants Correct Answer-Warrants are generally not
issued with intrinsic value, meaning they are issued with an exercise
price above the current market value of the stock.
For example, if the current stock price is $50, the exercise price given to
the warrants might be $80. For the warrant to be exercised by an
investor, the price would have to increase to above the exercise price.
Penny Stock Correct Answer-Penny stocks are defined as OTC equity
securities (aka unlisted), and worth less than $5.00 per share.
, Blue Chip versus Penny Stocks Correct Answer-Stocks of well-
established, stable companies with a long history of steady earnings and
dividends are known as blue-chip stocks.
Blue chip stocks typically trade on the major exchanges such as the
NYSE or NASDAQ.
Penny stocks are riskier, more volatile, and less liquid than blue chip
stocks.
Wilshire 5000 Correct Answer-The Wilshire 5000 is an index which
measures the value of US companies with actively traded stock.
Business Risk Correct Answer-Non-systematic risk is business risk,
which is the risk that a specific company may not be profitable.
Risk of ADRs Correct Answer-ADRs help to facilitate the trading of a
foreign corporation's stock in the US.
Investors in ADRs face political risk, which is the risk that political
instability and uncertainty in that foreign country might negatively
impact their investment.
Importantly, because ADRs are common stock and not debt securities,
they do not have call risk or interest rate risk.
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