FIL 241 exam 3 study guide isu sherill questions and answers verified

FIL 241 exam 3 study guide isu sherill questions and answers verifiedWhat are the basic characteristics and rights or being a stockholder? Have a right to share in the firm’s profits Are residual claimants Have limited liability Have voting rights How do the returns and volatility of stocks and bonds compare? Stocks produce higher returns than bonds, but they are much more volatile. 00:35 01:23 Describe how dividends for common stock work. Are they guaranteed? What are consequences of missing? Is dollar amount fixed? What is alternative to paying dividends for company? Dividends are paid out after company has paid out all its other shareholders. Dividends are not guaranteed for common stock Not many consequences other than replacing board of directors Dollar amount is not fixed Companies can reinvest their earnings back into the company instead of paying out dividends What level of priority do common shareholder have? What does a "residual claim" mean? What do shareholders vote on? What is a dual-class firms and what is some of the recent pushback on this structure? Common shareholders have the lowest level of priority Residual claims are a right to claim assets Common shareholders vote on board of directors Pushback is investors in dual class firms have little rights What is the difference in cumulative versus straight voting? Which method favors minority shareholders? Cumulative voting: All nominees voted on at the same time, Shareholders can vote all for single person or spread out votes, Candidates with most total # votes win straight voting: Vote for one director at a time and Can’t place all votes for single director Minority shareholders prefer cumulative voting How does preferred stock differ from common stock? Are dividends guaranteed? What is the difference between cumulative and noncumulative preferred stock? What is the difference between nonparticipating and participating preferred stock? According to WSJ, how have preferred stock performed recently? preferred stockholders get paid out before common stockholders Preferred stocks do not have guarenteed dividends Participating: may get more than promised dividend non-participating: fixed dividends regardless of profit preferred stocks have underperformed recently What is a direct listing and why would a company do this? a direct listing is when the existing investors, promoters, and any employees already holding shares of the company can directly sell their shares to the public. A company would do this when they do not enough resources to pay underwriters or do not want to dilute shares What are preemptive rights as it relates to an SEO? Preemptive rights give existing stockholders the ability to maintain their proportional ownership. Cheaper than market prices Can sell right to buy (similar to an option) What is program trading and what are some criticisms of it? the simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $1 million using computer programs to initiate the trades. Criticisms: Impact on stock price volatility and the May 2010 Flash Crash What is a circuit breaker for the overall market as well as individual stock, what is its purpose, and what happened during March 2020 as it relates to circuit breakers? circuit breakers are pauses in the stock market if abnormally large decline in stock prices There were 4 circuit breakers in March of 2020 What is high frequency trading and dark pools? high frequency trading: Trading using computer algorithms to transact large number of trades in fractions of a second. Changes in market conditions influence trades. dark pools: Crossing networks, Provide liquidity without trade transparency, institutional and large traders Does much trading occur on ECNs? Is there a trading floor for ECNs? ECNs are about 1/3 of transactions and nearly all after-hours trades Popular ECNs: NYSE Arca, Instinet (owned by NASDAQ), BATS What is the efficient market hypothesis say? What do each of the 3 versions of the EMH mean? What happens if current market price differs from “intrinsic value”? Which is undervalued/overvalued? EMH says stock prices on the NASDAQ are accurate and reflect what true price of stock should be Weak form efficiency: Historic prices and volume info and Technical analysis Semistrong form efficiency: Publicly available info Strong form efficiency: Private info and Insider trading if current market price is higher than intrinsic value then it is overvalued if it is under the intrinsic value it is undervalued What US agency is the primary regulator of stock markets? What did Sarbanes-Oxley Act address and what types of rules did it put in place? What types of other regulations and regulators impact stock markets? The SEC is the primary regulator of stock markets Sarbanes-Oxley act: Independent auditing oversight board, higher penalties for wrongdoing, more extensive financial disclosure Enforce Securities Act of 19 33 and Securities Exchange Act of 1934. Which country has the largest stock market? Generally, do the stock markets between countries have weak correlations, strong correlations, or does it vary? What are some of the risks of investing in international stocks? US has the largest stock market Stock market correlations vary Risks: May be less familiar with market/stock, Political risk, Foreign exchange risk What is an ADR and how do they work? What are the 3 levels of ADRs? What are the pros and cons of investing in an ADR versus an international stock directly? American Depository Receipt: Certificate that represents ownership of a foreign stock. Created by a U.S. bank, after acquiring stock in foreign corporations in their domestic currencies. Then bank issues dollar ADRs backed by the shares of the foreign stock, investors earn returns in U.S. dollars. Level 1: trade O T C and are not required to meet U.S. GAAP nor issue annual reports. Level 2: trade on US exchanges and must meet exchange requirements and adhere to U.S. reporting standards. Level 3: meet the same reporting standards as Level 2 and must register with the SEC and file the equivalent of 10K forms. These firms are allowed to raise public capital in the U.S. How can a US company with only domestic operations be impacted by FX risks? If the dollar strengthens against the euro, the cost to come to the U.S. resort increases for Europeans and can reduce the number of foreign visitors at the U.S. resort. How large a market is FX trading per day? What are the most common currencies used in FX trades? $6.6 trillion in FX trading per day USD involved in 88% of trades, Euro in 32% of trades What are the roles and needs for FX markets and trading? facilitate foreign trade, raising capital in foreign markets, transfer of risk between participants What hours and days do FX trading occur at? How do FX trades work compared to futures and forwards? FX trading occurs 24 hours a day futures: less than 1% actually delivered forwards: over 90% delivered What does “dollarization” mean? What are motivations for this? Use of a foreign currency in parallel to, or instead of, the local currency Promotes fiscal discipline, more financial stability and lower inflation