Series 7 Chapter 1 UPDATED ACTUAL
Exam Questions and CORRECT Answers
What is a security? - CORRECT ANSWER - It is an investment that represents either an
ownership stake or a debt stake in a company.
Stock - CORRECT ANSWER - Represents equity or ownership in a common, and bonds
are a loan to a company.
Balance Sheet - CORRECT ANSWER - Summarizes the company's
-assets; what the company owns
-liabilities; what the company owes
-equity; the excess of the value of assets over the value of liabilities.
Net Worth - CORRECT ANSWER - A company's net worth is computed by subtracting all
liabilities from the value of total assets. Assets - Liabilities = Net Worth
Issuance of Stock - CORRECT ANSWER - A company issues stock as its primary means
of raising business capital. The investor who buys the stock owns a share in the company's net
worth. Each share entitles the owner to a portion of the company's profits and dividends.
Common Stock - CORRECT ANSWER - Can be classified by the common owner or
investor in a corp. It can be classified as authorized, issued, outstanding, and treasury.
Preferred Stock - CORRECT ANSWER - It represents equity ownership in the
corporation, but it doesn't have the same voting rights or appreciation potential as common stock.
Pays a fixed dividend semiannual, and it has priority claims over common stock.
Authorized Stock - CORRECT ANSWER - the specific numbers of shares the company
has authorized to issue or sell.
, Issued Stock - CORRECT ANSWER - has been authorized and distributed to investors.
Outstanding Stock - CORRECT ANSWER - includes any shares that a company has
issued but has not repurchased that is, stock the investor owned.
Treasury Stock - CORRECT ANSWER - stock a corp. has issued and subsequently
repurchased from the public. A corp. buys back its stock for a number of reasons:
-increase earnings per share
-have an inventory of stock available to distribute as stock options, fund an employee pension
plan, and so on;
-use for future acquisitions.
Common stock values - CORRECT ANSWER - The laws of supply and demand (based
largely on the perception of a company's profitability and business prospects) determine the
company's stock price in the market.
Par Value - CORRECT ANSWER - For investors par value is meaningless. It is an
arbitrary value the company gives the stock in the company's articles of incorporation and has no
effect on the stocks market price.
Book Value - CORRECT ANSWER - A stocks book value per share is a measure of how
much a common stockholder could expect to receive for each share if a corp. were liquidated.
Used by analysts, it is the difference between the value of the corp. tangible assets and its
liabilities divided by the number of shares outstanding.
Market Value - CORRECT ANSWER - the price investors must pay to buy the stock, it is
the most familiar measure of a stocks value.
Common stock ownership voting rights - CORRECT ANSWER - Common stockholders
use their voting rights to exercise control of a corp. by electing a board of directors. Investors can
vote on:
-issuance of convertible securities (dilutive to current stockholders) or additional common stock.
Exam Questions and CORRECT Answers
What is a security? - CORRECT ANSWER - It is an investment that represents either an
ownership stake or a debt stake in a company.
Stock - CORRECT ANSWER - Represents equity or ownership in a common, and bonds
are a loan to a company.
Balance Sheet - CORRECT ANSWER - Summarizes the company's
-assets; what the company owns
-liabilities; what the company owes
-equity; the excess of the value of assets over the value of liabilities.
Net Worth - CORRECT ANSWER - A company's net worth is computed by subtracting all
liabilities from the value of total assets. Assets - Liabilities = Net Worth
Issuance of Stock - CORRECT ANSWER - A company issues stock as its primary means
of raising business capital. The investor who buys the stock owns a share in the company's net
worth. Each share entitles the owner to a portion of the company's profits and dividends.
Common Stock - CORRECT ANSWER - Can be classified by the common owner or
investor in a corp. It can be classified as authorized, issued, outstanding, and treasury.
Preferred Stock - CORRECT ANSWER - It represents equity ownership in the
corporation, but it doesn't have the same voting rights or appreciation potential as common stock.
Pays a fixed dividend semiannual, and it has priority claims over common stock.
Authorized Stock - CORRECT ANSWER - the specific numbers of shares the company
has authorized to issue or sell.
, Issued Stock - CORRECT ANSWER - has been authorized and distributed to investors.
Outstanding Stock - CORRECT ANSWER - includes any shares that a company has
issued but has not repurchased that is, stock the investor owned.
Treasury Stock - CORRECT ANSWER - stock a corp. has issued and subsequently
repurchased from the public. A corp. buys back its stock for a number of reasons:
-increase earnings per share
-have an inventory of stock available to distribute as stock options, fund an employee pension
plan, and so on;
-use for future acquisitions.
Common stock values - CORRECT ANSWER - The laws of supply and demand (based
largely on the perception of a company's profitability and business prospects) determine the
company's stock price in the market.
Par Value - CORRECT ANSWER - For investors par value is meaningless. It is an
arbitrary value the company gives the stock in the company's articles of incorporation and has no
effect on the stocks market price.
Book Value - CORRECT ANSWER - A stocks book value per share is a measure of how
much a common stockholder could expect to receive for each share if a corp. were liquidated.
Used by analysts, it is the difference between the value of the corp. tangible assets and its
liabilities divided by the number of shares outstanding.
Market Value - CORRECT ANSWER - the price investors must pay to buy the stock, it is
the most familiar measure of a stocks value.
Common stock ownership voting rights - CORRECT ANSWER - Common stockholders
use their voting rights to exercise control of a corp. by electing a board of directors. Investors can
vote on:
-issuance of convertible securities (dilutive to current stockholders) or additional common stock.
