Loma 357 C10

LOMA 357
Chapter 10
Reference: c. 10, pp. 2-3
Corporations issue two basic types of stock: common and preferred. One true
statement about common stock and preferred stock is that
A. common stock is a hybrid security that has characteristics of both equity and
debt
B. common stockholders have a higher priority in claims on assets than do
preferred stockholders
C. preferred stockholders have the right to vote to elect the board of directors
D. preferred stockholders have a guaranteed stock dividend rate
Corporations issue two basic types of stock: common and preferred. The dividend
rate is guaranteed for (both common and preferred stock / preferred stock only). In
addition, (both common and preferred stockholders / only common stockholders)
usually have the right to vote on company matters.
A. both common and preferred stock / both common and preferred stockholders
B. both common and preferred stock / only common stockholders
C. preferred stock only / both common and preferred stockholders
D. preferred stock only / only common stockholders
Reference: c. 10, p. 3
The following statement(s) can correctly be made about preferred stock and common stock
as an investment:
A. Preferred stock offers a fixed-dividend rate and may result in capital gains when sold.
B. When the investment objective is to gain an enhanced level of returns by seeking
enhanced risk, institutional investors focus on preferred stock, rather than common stock.
A. Both A and B
B. A only
C. B only
D. Neither A nor B
On June 5, the board of directors of the Islington Corporation declared a dividend
of $1.50 per share to stockholders of record as of Wednesday, June 11, with a
payment date of June 15. The Mayfair Insurance Company purchased Islington
stock on June 9. One true statement about this situation is that
A. the record date was June 5

B. the declaration date was June 11
C. the ex-dividend date was June 13
D. Mayfair is not entitled to receive the declared dividend
On June 5, the board of directors of the Islington Corporation declared a dividend
of $1.50 per share to stockholders of record as of Wednesday, June 11, with a
payment date of June 15. The Mayfair Insurance Company purchased Islington
stock on June 9. One true statement about this situation is that
A. the record date was June 5

B. the declaration date was June 11
C. the ex-dividend date was June 13
D. Mayfair is not entitled to receive the declared dividend
Reference: c. 10, pp. 7
In the analysis and valuation of stock, one value that investors use is based on an
evaluation of all aspects of the issuing company’s business, including both
tangible and intangible factors. By definition, this value is known as
A. book value
B. market value
C. listed value
D. intrinsic value
The following information relates to the Tailwind Company:
Total profit = $800,000

Number of common stock shares outstanding = 500,000
Annual dividend per share of common stock = $2
Current market price of Marzipan’s common stock = $40
From the answer choices below, select the response that correctly identifies Tailwind’s earnings per share (EPS) and its
dividend yield.
EPS Dividend yield
A. $1.60 5%
B. $1.60 20%
C. $25.00 5%
D. $25.00 20%
Use the following information to answer questions 3 through 7.
Cecil Turco wanted to purchase shares of Longtime, Inc.'s common stock because he was impressed with Longtime's record of dividend payments and the stock's
potential for capital gains over time. Mr. Turco obtained the following financial information from Longtime's most recent annual report:
● Total profit = $2,400,000

● Number of shares of common stock outstanding = 1,000,000
● Preferred stock dividends = $600,000
● Book value of common stock = $64 per share
The current market price of Longtime's common stock is $40 per share, and the common stock pays annual dividends of $2 per share. The price/book ratio of other
companies in the same industry as Longtime is 55%. After completing his research, Mr. Turco placed an order with his broker to buy 100 shares of Longtime stock
immediately at the best available price. Mr. Turco purchased the stock prior to September 30, the record date for a dividend on Longtime stock.
The dividend yield on Longtime's common stock equals
A. 5.0%
B. 6.0%
C. 7.1%
D. 8.6%

Longtime's earnings per share (EPS) for the previous year equaled
A. $1.80
B. $2.00
C. $2.40
D. $3.00

Longtime's price-to-book (P/B) ratio for the previous year equaled
A. 62.5%, and this information indicates that Longtime's stock may be undervalued for its industry
B. 160%, and this information indicates that Longtime's stock may be undervalued for its industry
C. 62.5%, and this information indicates that Longtime's stock may be overvalued for its industry
D. 160%, and this information indicates that Longtime's stock may be overvalued for its industry

The fact that Mr. Turco purchased the Longtime stock by placing an order to buy 100 shares of the stock immediately at the best available price indicates that he
bought the stock by executing the type of order known as a
A. rights offering
B. limit order
C. secondary offering
D. market order

With regard to September 30, the record date, it most likely is correct to say that this date is the date on which
A. Longtime determined who will receive the dividend

B. Longtime's board of directors decided whether it would declare a dividend
C. Mr. Turco had to be a registered Longtime stockholder to be entitled to receive Longtime's dividend
D. Longtime must pay a declared cash dividend or distribute additional shares of stock to Longtime's registered stockholders
Reference: c. 10, pp. 9, 10, 12
For this question, if statements (1) through (3) are all correct, select answer choice
(4). Otherwise, select the one correct statement.
A. A trade occurs in an auction-based market if the highest bid price equals the
lowest ask price.
B. A market maker holds an inventory of a particular stock and stands ready to
buy and sell shares of that stock.
C. Institutional investors can use alternative electronic markets to trade
anonymously and to resell private placement securities.
D. all of the above
An institutional investor placed the following order:
Sell 500 shares of Frazzle stock at or above $100 a share
With respect to types of orders, bid sizes, and ask sizes, it is most likely correct to
say that this institutional investor placed a
A. market order specifying a bid size

B. market order specifying an ask size
C. sell limit order specifying a bid size
D. sell limit order specifying an ask size
The Larkspur Fund holds a put option for Waverly stock at a strike price of $50 per
share. The current price of Waverly stock is $45. From the answer choices below,
select the response that correctly indicates the intrinsic value of this put option and
whether this put option is in the money or out of the money.
Intrinsic value In the money or out of the money?
A. –$5 out of the money

B. –$5 in the money
C. $5 out of the money
D. $5 in the money
Reference: c. 10, pp. 17
One type of derivative financial instrument can be thought of as a form of
insurance or hedge against the risk that the issuer of a security, such as a bond or
mortgage-backed security, will fail to meet its obligations under the security. The
purchaser of this financial instrument makes premium payments to the seller, or
writer, of the instrument. In return, the writer promises to pay a benefit to the
purchaser if the purchaser experiences the specified failure defined in the
agreement. This type of derivative financial instrument is known as
A. an interest-rate swap
B. a credit default swap
C. a futures contract
D. a currency swap
Reference: c. 10, pp. 14, 19
Regulatory authorities in many jurisdictions impose various restrictions on insurance
company investments in common stocks and derivatives for the general account. The
following statements are about restrictions for insurance companies in the United States.
Select the answer choice containing the correct statement.
A. An insurer must purchase or sell derivatives for hedging purposes by a stated minimum
percentage-usually 20 percent-of the insurer's admitted assets.
B. An insurer must adopt and obtain regulatory approval for their written guidelines for
handling derivative transactions.
C. State insurance codes prohibit insurers from investing more than 30 percent to 40
percent of their admitted assets in common stocks.
D. Common stocks held in an insurer's general account have an asset valuation reserve
(AVR) that is significantly lower than the required AVR for investment-grade bonds.
Reference: c. 10, pp. 15, 17-18
Common derivative securities include options, swaps, and futures. (Options /
Futures) are contracts for the sale of an asset at a specified future date and price
that impose on all parties the obligation to buy or sell the asset. Puts and calls are
types of (options / swaps).
A. Options / options
B. Options / swaps
C. Futures / options
D. Futures / swaps
The Perimeter Life Insurance Company purchased 7 July 42 put contracts for
Jarman stock at $3.00 per share. The current market price of Jarman stock is $40
per share. This information indicates that Perimeter paid a total cost of
A. $882 for this option, and the option is in the money

B. $2,100 for this option, and the option is in the money
C. $882 for this option, and the option is out of the money
D. $2,100 for this option, and the option is out of the money
Historically, any investment not included in the categories of stocks, bonds, or cash equivalents
has been referred to as an alternative investment. Generally, characteristics of alternative
investments include
A. That they charge investors a base management fee and a potential incentive management fee
B. That they provide investors with an unlimited ability to liquidate the investment on demand
C. That they do not impose minimum net worth or income requirements on investors
I. A, B, and C
II. A and B only
III. B and C only
IV. A only
The Tuxedo Fund is an opportunistic hedge fund that invests exclusively in 10
other hedge funds. This information indicates that the Tuxedo Fund is a type of
opportunistic hedge fund known as a
A. vulture fund
B. fund of funds
C. global macro fund
D. convergence trading hedge fund
The paragraph below contains an incomplete statement. Select the answer choice
containing the term that correctly completes the paragraph.
One type of hedge fund, known as a ___________, takes large positions on

changes in interest rates, currency movements, monetary policies, and other
macroeconomic indicators.
A. corporate restructuring hedge fund

B. market-directional hedge fund
C. convergence trading hedge fund
D. global macro fund
The following statements are about hedge funds. Three of the statements are true, and
one of the statements is false. Select the answer choice containing the FALSE
statement.
A. Hedge funds typically have lower returns and much lower risk and volatility than
do private equities and public equities.
B. In the United States, many hedge funds invest in private placement securities that
do not require a prospectus and do not have a review by the Securities and
Exchange Commission (SEC).
C. Hedge funds typically require a minimum initial investment of $10,000.
D. A hedge fund typically concentrates on only one economic sector or market
segment.
The Dahlia Insurance Company invested in a private equity fund that uses the
value in a target company to secure debt financing to purchase the outstanding
equity of the company. This information indicates that Dahlia invests in the type of
private equity fund known as a
A. mezzanine debt fund

B. leveraged buyout fund
C. distressed debt fund
D. venture capital fund

Loma 357 C10

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LOMA 357

A. the record date was June 5

A. the record date was June 5

Total profit = $800,000

EPS Dividend yield

● Total profit = $2,400,000

The dividend yield on Longtime's common stock equals

● Total profit = $2,400,000

● Total profit = $2,400,000

Longtime's price-to-book (P/B) ratio for the previous year equaled

● Total profit = $2,400,000

● Total profit = $2,400,000

A. Longtime determined who will receive the dividend

Sell 500 shares of Frazzle stock at or above $100 a share

A. market order specifying a bid size

Intrinsic value In the money or out of the money?

A. –$5 out of the money

A. $882 for this option, and the option is in the money

One type of hedge fund, known as a ___________, takes large positions on

A. corporate restructuring hedge fund

A. mezzanine debt fund

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