Types of Equity Securities

C is correct. With cumulative preferred stock, all missed dividends accumulate as "dividends in arrears" and must be paid before any dividends can be paid to common stockholders. Two years of missed dividends at $5 per year equals $10 in arrears, plus the current year's $5 dividend, totaling $15 per share.

A ($5) is incorrect because it only accounts for the current year's dividend and ignores the two years of arrears. B ($10) is incorrect because it only includes the arrears and forgets the current year's dividend must also be paid. D (No dividends owed) is incorrect because cumulative preferred stock requires payment of all missed dividends, whether or not they were formally declared.

B is correct. Preferred stockholders generally have NO voting rights under normal circumstances. However, many preferred stock agreements grant voting rights if the company misses a specified number of dividend payments (typically 4-6 quarters).

A (Equal voting rights) is incorrect because preferred shareholders typically have no voting rights at all. C (Must vote on major decisions) is incorrect because preferred stock rarely carries voting privileges. D (Superior voting rights) is incorrect because when preferred shareholders do gain voting rights due to missed dividends, they are not superior to common stock voting rights.

A is correct. Even though ADRs are denominated in U.S. dollars and dividends are paid in dollars, the investor still faces currency exchange rate risk. The underlying foreign stock's value fluctuates with exchange rates, which affects the ADR's dollar value. When the foreign currency weakens against the dollar, the ADR's value typically declines.

B (Pay dividends in euros) is incorrect because ADR dividends are converted to U.S. dollars before being paid to investors. C (Inability to trade on U.S. exchanges) is incorrect because ADRs are specifically designed to trade on U.S. exchanges. D (Convert dollars to euros) is incorrect because investors purchase ADRs with U.S. dollars on U.S. exchanges.

D is correct. Rights (subscription rights) are short-term securities (typically 30-45 days) issued to existing shareholders with exercise prices below the current market price, allowing shareholders to maintain their proportionate ownership. Warrants are long-term securities (often years) frequently attached to bonds as a "sweetener," with exercise prices above the current market price at issuance.

A (Warrants short-term) is incorrect because it reverses the timeframes. Warrants are the long-term instrument. B (Rights to bondholders) is incorrect because rights go to existing shareholders, while warrants are often attached to bonds. C (Warrants cannot be traded) is incorrect because warrants can typically be detached and traded separately, while rights may or may not be transferable.

A is correct. Rights have value and can be sold in the open market if the shareholder does not wish to exercise them. This allows the shareholder to monetize the value of the rights without purchasing additional shares.

B (Expire worthless) is incorrect because while rights will expire if neither exercised nor sold, they have market value before expiration. The shareholder can capture this value by selling them. C (Exchange for preferred) is incorrect because rights can only be exercised to purchase the specific security offered, typically common stock, not exchanged for other securities. D (Charity donation) is incorrect. While rights could potentially be donated, this is not a typical or optimal use, and the tax treatment would not provide a "full" deduction of the market value.

B is correct. Convertible preferred stock typically pays a lower dividend rate than non-convertible preferred because the conversion feature (the ability to exchange preferred shares for common stock) has value to the investor. Investors accept lower current income in exchange for the potential upside if the common stock appreciates.

A (Voting rights) is incorrect because preferred stock, whether convertible or not, typically does not carry voting rights. C (Higher credit rating) is incorrect because convertibility does not inherently affect credit ratings. D (Tax advantages) is incorrect because convertible and non-convertible preferred dividends receive the same tax treatment. Both are taxed as dividend income.

C is correct. Callable preferred stock benefits the issuing corporation, not the investor. When interest rates fall, the corporation can call (redeem) the preferred stock and reissue new preferred at a lower dividend rate, similar to refinancing a mortgage. This is advantageous to the issuer but disadvantageous to investors who lose their high-dividend security.

A (Provides exit strategy) is incorrect because the call feature benefits the issuer, not the investor. The investor would prefer to keep receiving the higher dividend. B (Increases dividend income) is incorrect because callable preferred actually requires a higher dividend rate to compensate investors for call risk, but the call feature itself doesn't increase income. D (Benefits both equally) is incorrect because the call feature clearly favors the issuer.

D is correct. This is the EXCEPT question, so we're looking for the false statement. Neither cumulative nor non-cumulative preferred stock typically has voting rights. Preferred stockholders generally do not vote, regardless of whether the preferred is cumulative or non-cumulative.

A (Accumulates unpaid dividends) is true. This is the defining feature of cumulative preferred. B (Higher dividend rate for non-cumulative) is true. Non-cumulative preferred carries more risk because missed dividends are gone forever, so it typically pays a higher rate. C (Missed dividends lost) is true. This is the key disadvantage of non-cumulative preferred from the investor's perspective.

A is correct. ADRs (American Depositary Receipts) are the actual certificates that investors trade, while ADSs (American Depositary Shares) are the underlying foreign shares that the ADR represents. One ADR may represent one ADS, multiple ADSs, or a fractional ADS, depending on the structure. The terms are often used interchangeably in casual conversation, but technically they are distinct.

B (Trading venue) is incorrect because both ADRs and the underlying ADSs can appear in various trading contexts. The distinction is not about where they trade. C (Currency risk) is incorrect because neither ADRs nor ADSs eliminate currency risk; both expose investors to exchange rate fluctuations. D (Domestic vs foreign) is incorrect because both ADRs and ADSs relate to foreign companies, not domestic ones.

C is correct. Level 3 sponsored ADRs are the only ADR structure that allows a foreign company to raise new capital through a public offering in the United States. Level 3 ADRs require full SEC registration (Form F-1), exchange listing, and comprehensive financial reporting (Form 20-F), similar to U.S. companies conducting IPOs.

A (Level 1) is incorrect because Level 1 ADRs trade over-the-counter and cannot raise capital. They require minimal SEC filing (Form F-6 only). B (Level 2) is incorrect because while Level 2 ADRs are exchange-listed and require full reporting (Form 20-F), they cannot raise new capital. They only facilitate trading of existing shares. D (Unsponsored) is incorrect because unsponsored ADRs have no company involvement and cannot raise capital for the issuer.