Characteristics of Equity Securities

B is correct. Common stockholders have a residual claim on assets, meaning they are last in line during liquidation. The priority order is: secured creditors, unsecured creditors (including bondholders), preferred stockholders, and finally common stockholders. This is why common stock is considered the riskiest class of securities in a company's capital structure.

A (Before bondholders) is incorrect because bondholders are creditors and always have priority over equity holders. C (Equal to preferred) is incorrect because preferred stockholders have priority over common stockholders in both dividends and liquidation. D (Before all others) is incorrect because this completely reverses the correct priority order.

C is correct. In a 2-for-1 forward split, the investor receives twice as many shares (200), but the price per share is cut in half ($40). The total value remains unchanged at $8,000 (200 shares × $40 = $8,000, same as 100 shares × $80). The investor's cost basis per share also adjusts to $40.

A (100 shares at $40) is incorrect because it shows the price adjustment but forgets the investor receives more shares. B (200 shares at $80) is incorrect because while the share count doubles, the price must also adjust proportionally. This would incorrectly double the total value. D (50 shares at $160) is incorrect because this describes a reverse split (1-for-2), not the stated 2-for-1 forward split.

A is correct. To receive a dividend, an investor must purchase the stock before the ex-dividend date (or on the business day before the ex-dividend date) to settle by the record date. Due to T+1 settlement, buying before the ex-date ensures the investor is on the books as of the record date. The ex-dividend date is set one business day before the record date.

B (Declaration date) is incorrect because while purchasing before declaration would receive the dividend, it's not the latest possible date. This is overly restrictive. C (Record date) is incorrect because purchasing on the record date is too late. With T+1 settlement, the trade settles one business day later, missing the record date cutoff. D (Payment date) is incorrect because this is when the dividend is actually paid, weeks after eligibility has been determined.

B is correct. Cumulative voting allows shareholders to multiply their votes (shares owned × number of positions open) and allocate them freely, including concentrating all votes on a single candidate. This gives minority shareholders a better chance to elect at least one director by pooling their voting power. For example, with 100 shares and 5 director positions, a shareholder has 500 votes to allocate however they wish.

A (Institutional investors) is incorrect because large shareholders already have significant influence and benefit more from statutory voting where their size dominates. C (Preferred stockholders) is incorrect because preferred stockholders typically have no voting rights at all. D (Management and insiders) is incorrect because management typically prefers statutory voting, which favors majority shareholders and makes it harder for minority groups to gain board representation.

C is correct. Preemptive rights (also called subscription rights) allow existing shareholders to purchase additional shares before they are offered to the public, enabling them to maintain their proportionate ownership percentage when the company issues new stock. This prevents dilution of their ownership stake and voting power.

A (Dividends before new shareholders) is incorrect because dividend priority is determined by stock class (preferred vs common), not preemptive rights. All shareholders of the same class receive dividends equally. B (Vote on major decisions) is incorrect because this describes general voting rights, not preemptive rights specifically. D (Sell back to company) is incorrect because this describes a put option or redemption feature, not preemptive rights.

D is correct. Reverse splits are typically done to increase the per-share price, often to meet minimum listing requirements (such as the NYSE or NASDAQ $1 minimum bid price). Companies facing delisting due to low share prices use reverse splits to boost the price. In a 1-for-5 reverse split, shareholders receive 1 share for every 5 shares owned, and the price increases proportionally.

A (Increase market value) is incorrect because reverse splits do not change total market capitalization. They only redistribute value across fewer shares. B (Make shares affordable) is incorrect because this is backwards. Reverse splits INCREASE the per-share price, making shares less affordable. Forward splits make shares more affordable. C (Reduce tax burden) is incorrect because stock splits (forward or reverse) are not taxable events and don't change the tax treatment of shareholdings.

C is correct. Anti-dilution provisions adjust the conversion ratio to protect convertible preferred stockholders when the company issues additional common shares at prices below the conversion price. These provisions prevent the dilution of the preferred stockholder's potential common stock position by increasing the number of common shares they can convert into, maintaining their economic interest.

A (Interest rate increases) is incorrect because anti-dilution provisions address ownership dilution, not interest rate risk. Rising rates affect bond prices, not conversion ratios. B (Dividend reductions) is incorrect because anti-dilution provisions protect conversion ratios, not dividend payments. Preferred dividends are typically fixed or have separate protections. D (Management changes) is incorrect because anti-dilution provisions are financial protections related to share issuance, not corporate governance matters.

D is correct. Total return includes both capital appreciation and income. The formula is: (ending value - beginning value + dividends) ÷ beginning value. Calculation: ($55 - $50 + $2) ÷ $50 = $7 ÷ $50 = 0.14 or 14%. Total return captures the complete investment performance, including both price gains and dividend income.

A (10%) is incorrect because this calculates only the capital appreciation ($5 ÷ $50), ignoring the dividend income. B (4%) is incorrect because this calculates only the dividend yield ($2 ÷ $50), ignoring the $5 capital gain. C (7%) is incorrect because this appears to add the percentage gains (10% + 4%) but uses incorrect methodology. The correct approach uses the formula with dollar amounts, not adding separate percentages.

A is correct. Income stocks are characterized by high dividend yields and stable cash flows, making them suitable for investors seeking regular income, such as retirees. These are typically established companies in mature industries that distribute most earnings as dividends rather than reinvesting for growth. Utilities and consumer staples often fall into this category.

B (Growth stocks) is incorrect because growth stocks typically reinvest earnings for expansion rather than paying dividends, making them unsuitable for income-focused retirees. C (Cyclical stocks) is incorrect because cyclical stocks fluctuate with economic conditions and often cut dividends during downturns, creating income uncertainty for retirees. D (Small-cap stocks) is incorrect because small-cap stocks typically have high volatility and low or no dividends, making them inappropriate for conservative retirees needing stable income.

B is correct. Statutory voting (also called straight voting) gives shareholders one vote per share for each director position. If there are 5 director positions and you own 100 shares, you cast 100 votes for each of the 5 positions separately. You cannot combine votes from different positions. This system favors majority shareholders.

A (Allocate votes freely) is incorrect because this describes cumulative voting, not statutory voting. Cumulative voting allows shareholders to multiply and allocate votes across candidates however they wish. B is the defining characteristic of statutory voting. C (Only preferred stockholders) is incorrect because voting rights apply to common stock, and preferred stockholders typically have no voting rights. D (Vote equally) is incorrect because shareholders can choose different candidates for each position, but they cannot concentrate votes from multiple positions onto one candidate.