71 Newest CFA Level 1 Practice Exam Free Questions and Answers on Equity Investments

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Which of the following choices represents the correct ranking of securities from shortest to longest life?a) rights, options, warrantsb) options, warrants, rightsc) warrants, options, rightsd) warrants, rights, options

• Last possibl day to own shares and receive dividends
• The date that the dividend is authorized
• B - The portion of a company's profit that is paid to common and preferred shareholders is called a dividend
• A - Rights usually last less than 60 days. Options usually last for 9 months or less, although some can exist for up to three years. Warrants usually have a life span of several years and can be perpetual.

When a shareholder has limited liability, this means the shareholder:a) Must pay the debts of the company upon requestb) Is required to limit the number of shares he purchasesc) Is not generally responsible for the corporation's debtsd) Can purchase shares on margin and pay a limited amount

• C - Limited Liability is one of the rights of a shareholder. It means that a shareholder is usually not personally responsible for paying the corporation's debts, even though he has an ownership stake in the corporation.
• Dividend is sent to the shareholders
• If a trade occurs before the ex-div date, the buyer is entitled to the dividend-
• B - The portion of a company's profit that is paid to common and preferred shareholders is called a dividend

Declaration Date

• The date that the dividend is authorized
• Defensive Stocks
• Transfer Agent or Registrar
• Dividend is sent to the shareholders

Treasury Stock

• Dividend is sent to the shareholders
• The exchanges ad the over-the-counter market have standardized the time when stocks trade ex-dividend (without the dividend).Ex-Div is set by the SRO(finra) Ex Dividends pay second business day prior to the record dates.
• is a taxable payment declared by the company's directors and paid to shareholders out of the company's retained earnings. Typically, a cash transaction and paid quarterly. No law stating it has to be cash; shares of stock or awards of the company's product are also acceptable to regulators. No law stating a dividend must be paid; firms that tend to pay dividends are mostly blue chip and defensive stock.
• Shares issued and subsequently owned by the company are referred to as treasury stock. As long as the stock remains in the treasury, it has no voting rights and does not receive dividends. It appears as an informational item on the balance sheet.

Issued Shares

• do better in bear markets, when investors are looking for safe places that are not affected greatly by economic currents to park their money. Companies in the food, health care and defense industries are all examples
• Represents the amount of stock that has actually been sold. Shares that have not been sold or distributed are called unissued stock.
• Special type of investment that tracks the value of a common stock or some other underlying asset.
• Refers to the number of shares to be issued to the public, less stock that has been reacquired by the company (treasury stock). Outstanding stock receives dividends and has voting rights. Market professionals use the term market capitalization; which is found by taking the current market price of the stock, multiplied by the number of outstanding shares.

Company whose sales, earnings and share of the market are expanding faster than the general economy and industry average.

• Blue-Chip Stocks
• Cyclical Stocks
• Growth Stocks
• Preferred Stock

The portion of a company's profit paid to shareholders is called a:a) cash receiptb) dividendc) stock certificated) statutory right

• C - Limited Liability is one of the rights of a shareholder. It means that a shareholder is usually not personally responsible for paying the corporation's debts, even though he has an ownership stake in the corporation.
• The portion of the company's profit that is paid to common and preferred shareholders.
• is a taxable payment declared by the company's directors and paid to shareholders out of the company's retained earnings. Typically, a cash transaction and paid quarterly. No law stating it has to be cash; shares of stock or awards of the company's product are also acceptable to regulators. No law stating a dividend must be paid; firms that tend to pay dividends are mostly blue chip and defensive stock.
• B - The portion of a company's profit that is paid to common and preferred shareholders is called a dividend

Which TWO basic methods does a corporation use to raise capital?I. Equity FinancingII. Real Estate LeveragingIII. Equipment LeasingIV. Debt Financinga) I and IIb) I and IVc) II and IIId) II and IV

• B - the registrar is hired to audit the transfer agent. His main responsibility is to make sue the number of outstanding shares does not exceed the number of authorized shares. Choices (a), (c) and (d) are all responsibilities of the transfer agent.
• B - There are two basic methods used by corporations to raise money; debt financing and equity financing
• Another type of equity type of security that corporations may issues.Warrants resemble stock rights in that they give the purchaser the option of buying common stock in the future.UNLIKE stock rights that have relatively short lives, warrants do not expire for a number of years after they are issued.
• D - Convertible preferred stock can be converted into a designated number of common shares

Wash Sale

• move with the broader market and often with greater volatility; they outpace the market during an expansion but whipsaw back during contraction. Automotive stocks are an example
• young firm in new industry with good growth prospects, but also high-risk
• The date that the dividend is authorized
• The IRS does not allow deductions for capital losses from investments if the taxpayer purchases "substantially the same security". Covered Wash Sale time 61 days... 30 before, 30 days after.

Debt Financing

• Last possibl day to own shares and receive dividends
• Shareholders vote each of their shares once for each director slot being contested.
• Two methods:Debt FinancingEquity Financing
• Raising money for working capital or capital expenditures by selling bonds, bills, notes.

ADRS

• ADR - American Depositary Receipts
• American Depositary Receipts, ADR equity securities are used to facilitate the trading of foreign stocks IN the U.S.
• Ownership Stake in the CompanyMore likely to receive greater dividend paymentsHigher priority if the company goes bankruptIssued with a specific dividend rate
• If a trade occurs before the ex-div date, the buyer is entitled to the dividend-

If an individual sells a security at a loss and within 30-thirty days, repurchases substantially the same security, the IRS will disallow the loss; this is called

• Owner
• Step-up
• Warrants
• Wash Sale

Due Bills

• Dividend is sent to the shareholders
• The date that the dividend is authorized
• Last possibl day to own shares and receive dividends
• If a trade occurs before the ex-div date, the buyer is entitled to the dividend-

Record Date

• Last possibl day to own shares and receive dividends
• Dividend is sent to the shareholders
• Transfer Agent or Registrar
• The date that the dividend is authorized

Which of the following activities are rights of a shareholder?I. Inspect the corporation's booksII. Receive dividends when declaredIII. Vote on the amount of the dividendIV. Transfer shares freelya) I and II onlyb) I and III onlyc) I, II and III onlyd) I, II, and IV only

• Common stockholders may also be entitled to preemptive rights. If a corporation issues new stock the current stockholders have the right to buy the same shares before they are offered to the public. (rights offering)
• D - Among the rights of a shareholder are the right to inspect the corporation's books and the right to freely transfer his shares. Though a shareholder also has the right to receive dividends if they are declared, he does not have the right to vote on the amount of the dividend.
• C - American Depositary Receipts (ADRs) are used to facilitate the trading of foreign stocks in the United States
• A - Preemptive right gives existing shareholders the right to purchase shares of a corporation's stock before it is offered to the public. This right allows existing shareholders to maintain proportional ownership in the company

Portion of the company's profit that is paid to common and preferred shareholders; paid quarterly and are taxable in the year in which they are paid/received.

• Dividend
• Option
• Owner
• Step-up

Dividends

• The portion of the company's profit that is paid to common and preferred shareholders.
• Shareholders vote each of their shares once for each director slot being contested.
• The date that the dividend is authorized
• Annualized Dividend/Stock's Current Market Price

Blue Chip

• young firm in new industry with good growth prospects, but also high-risk
• The date that the dividend is authorized
• strong, stable and mature, with a long history of consecutive quarterly dividends, may also be income
• Last possibl day to own shares and receive dividends

Options

• A third party derivative. A contract between two parties that gives on of them the right to buy or sell a security at a set price for a limited period.The security that is the subject of the option contract is called the UNDERLYING SECURITY.
• Ownership Stake in the CompanyGreater Potential for capital appreciationVoting Rights
• is a taxable payment declared by the company's directors and paid to shareholders out of the company's retained earnings. Typically, a cash transaction and paid quarterly. No law stating it has to be cash; shares of stock or awards of the company's product are also acceptable to regulators. No law stating a dividend must be paid; firms that tend to pay dividends are mostly blue chip and defensive stock.
• Ownership Stake in the CompanyMore likely to receive greater dividend paymentsHigher priority if the company goes bankruptIssued with a specific dividend rate

Growth

• B - The portion of a company's profit that is paid to common and preferred shareholders is called a dividend
• strong potential for improving profits faster than it has to pay back its debts, and thus a strong potential for outperforming the market. These companies often sell at a high price relative to their earnings ratio (high P/E ratio)
• The portion of the company's profit that is paid to common and preferred shareholders.
• Raising money for working capital or capital expenditures by selling bonds, bills, notes.

Income

• Shareholders vote each of their shares once for each director slot being contested.
• mature company with high dividend yield and few prospects for growth or diversification. These are typically utility companies; however, they may also be blue chip companies
• young firm in new industry with good growth prospects, but also high-risk
• The date that the dividend is authorized

Corporations that reacquire their issued shares; no voting rights and does not receive dividends; appears as informational item on the balance sheet.

• Preferred Stock
• Treasury Stock
• Growth Stocks
• Defensive Stocks

Current Yield

• Transfer Agent or Registrar
• Dividend is sent to the shareholders
• Annualized Dividend/Stock's Current Market Price
• ADR - American Depositary Receipts

Emerging growth industry

• young firm in new industry with good growth prospects, but also high-risk
• Transfer Agent or Registrar
• Last possibl day to own shares and receive dividends
• Dividend is sent to the shareholders

Equity Financing

• In order to decrease the price of the stock and make it more marketable.Company issues more shares to the existing stock.
• Shareholders may multiply the number of shares they own by the number of directors being elected and cast as many votes as they want.
• Another type of equity type of security that corporations may issues.Warrants resemble stock rights in that they give the purchaser the option of buying common stock in the future.UNLIKE stock rights that have relatively short lives, warrants do not expire for a number of years after they are issued.
• Raising capital through the sale of shares in the enterprise. Referring to the sale of an ownership interest to raise funds for business purposes.

Stock usually issued by established companies that already have common stock. Investors are typically more interested in income than capital appreciation; do not usually have voting rights. Issued at par value of $100

• Defensive Stocks
• Treasury Stock
• Growth Stocks
• Preferred Stock

Warrant Facts

• Life Span: Long- 3-5 years or moreUnderlying Instruments: StocksUse: A sweetener attached to issues of stocks or bonds to encourage purcahse
• Life Span: Short- usually less than 60 daysUnderlying Instruments: StocksUse: Allow existing stockholders to maintain their interest in the co.
• Two methods:Debt FinancingEquity Financing
• Life Span: Varies, usually 9 months or less or up to 3 yearsUnderlying securities: Stocks, bonds, indexes, and FXUse: Hedging speculation and Income.

Rights Facts

• A - Rights usually last less than 60 days. Options usually last for 9 months or less, although some can exist for up to three years. Warrants usually have a life span of several years and can be perpetual.
• Life Span: Short- usually less than 60 daysUnderlying Instruments: StocksUse: Allow existing stockholders to maintain their interest in the co.
• Last possibl day to own shares and receive dividends
• 1) Speculate on a direction of a stock or index2) Hedge an existing position3) Create income for the investor

refers to the number of shares issued to public, less stock that has been reacquired by the company. Receives dividends and has voting rights.

• Outstanding Stock
• Defensive Stocks
• Cost Basis
• Preferred Stock

Corporation

• Two methods:Debt FinancingEquity Financing
• Life Span: Long- 3-5 years or moreUnderlying Instruments: StocksUse: A sweetener attached to issues of stocks or bonds to encourage purcahse
• Ownership Stake in the CompanyGreater Potential for capital appreciationVoting Rights
• Legal EntityMay buy propertyObtain loansSue or be suedIs owned by shareholdersShareholders may not be held personally responsible for corporations debt.If business fails a shareholder would lose their original investment - feature is known as limited liability

Option Contracts may be used to:

• 1) Right to a Stock Certificate as proof of ownership2) Right of Transfer - sell, give away or bequeath to heirs3) Right of Inspection - certain books and company records4) Right of Vote - common stockholders have voting rights
• Two methods:Debt FinancingEquity Financing
• Life Span: Short- usually less than 60 daysUnderlying Instruments: StocksUse: Allow existing stockholders to maintain their interest in the co.
• 1) Speculate on a direction of a stock or index2) Hedge an existing position3) Create income for the investor

Derivative Securities

• The portion of the company's profit that is paid to common and preferred shareholders.
• If a trade occurs before the ex-div date, the buyer is entitled to the dividend-
• Special type of investment that tracks the value of a common stock or some other underlying asset.
• A - Stock splits are done to reduce the market price of the stock and make it more marketable. The split will increase the number of authorized shares and decrease the par value. There is no net change in the market value (shares outstanding x market price per share) as a result of a stock split

Is responsible for issuing new certificates, canceling old certificates, keeping record of shareholders and number of shares owned by each and handling any problems that come about in cases of missing, lost, stolen or mutilated securities.

• Warrants
• Preferred Stock
• Transfer Agent or Registrar
• Writer or Grantor

Reverse Stock Split

• A - Stock splits are done to reduce the market price of the stock and make it more marketable. The split will increase the number of authorized shares and decrease the par value. There is no net change in the market value (shares outstanding x market price per share) as a result of a stock split
• If a company feels like the price of the stock is undervalued then they will raise the price of the stock.
• American Depositary Receipts, ADR equity securities are used to facilitate the trading of foreign stocks IN the U.S.
• If a trade occurs before the ex-div date, the buyer is entitled to the dividend-

Cost Basis of Securities

• The date that the dividend is authorized
• Shares issued and subsequently owned by the company are referred to as treasury stock. As long as the stock remains in the treasury, it has no voting rights and does not receive dividends. It appears as an informational item on the balance sheet.
• The cost basis of a security is the total price paid to acquire that security including any transaction costs.
• Last possibl day to own shares and receive dividends