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Common Stock Ownership Quiz

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Questions and Answers

What is the term used for common stockholders who are entitled to dividend income only after all other obligations have been met?

Residual Owners (correct)

Primary Owners

Priority Owners

Guaranteed Owners

What is the main reason investors buy common stocks?

To participate in the profits of a firm (correct)

To avoid the risks associated with other investments

To hedge against inflation

To secure guaranteed profit distribution

Which of the following is an advantage of stock ownership?

High unit cost per share

Difficulty in buying and selling

Low purchasing power risk (correct)

Guaranteed profit distribution

Why are common stocks subject to various risks?

Including business risk, financial risk, and market risk (D) Signup and view all the answers

What makes it difficult to predict which stocks will go up in value?

Wide swings in profits and general stock market performance (A) Signup and view all the answers

What factor makes common stocks an easy investment to buy and sell?

Low purchasing power risk (B) Signup and view all the answers

Which of the following represents an equity (ownership) position in a firm?

Issuing new shares (D) Signup and view all the answers

What process results in increasing the number of shares outstanding by exchanging a specified number of new shares for each outstanding share?

Stock splits (B) Signup and view all the answers

When a firm executes a stock split, what is the main reason behind it?

To make the stock more attractive to investors by lowering the stock price (B) Signup and view all the answers

What privilege do different classes of classified common stock offer to its holders?

Different voting rights and different dividends (C) Signup and view all the answers

What is the process of repurchasing shares by the issuing firm known as?

Treasury stock (A) Signup and view all the answers

When does a firm normally execute buybacks (treasury stock)?

When they believe that the stock is undervalued and they aim to increase the price of their stock (C) Signup and view all the answers

What represents the conversion of one of a firm’s subsidiaries/divisions to a stand-alone company by distributing stock in the new company to existing shareholders?

Stock spin-offs (A) Signup and view all the answers

What is the process of increasing the number of shares outstanding by exchanging a specified number of new shares for each outstanding (current) share called?

Stock splits (C) Signup and view all the answers

In which type of offering do existing investors have the opportunity to purchase additional shares on a pro-rata basis?

Rights offering (A) Signup and view all the answers

When do firms normally execute stock spin-offs?

When they believe that subsidiary/division is no longer a good fit with future strategies/plans (C) Signup and view all the answers