Common Stock Practice Questions for the SIE

Answer: The election of members of the board of directors

Common shareholders control a corporation indirectly: under state corporate law and the corporate charter, they elect the board of directors and vote on major matters such as mergers or the issuance of additional dilutive securities. Dividends, by contrast, are declared at the discretion of the board — shareholders do not vote on them, and no dividend is ever guaranteed. Of the dividend dates, the board sets the declaration, record, and payable dates, while the ex-dividend date is set by the exchange or FINRA based on the record date. Day-to-day executives are hired and supervised by the board, not elected by shareholders.

The Trap: Shareholders vote on whether dividends are paid (they don't — the board declares dividends)

• Whether the company will pay a quarterly cash dividend: Misconception: shareholders vote on dividends. Dividends are declared at the discretion of the board of directors and are never guaranteed.
• The hiring of the company's day-to-day executives: Misconception: shareholders manage the company directly. Officers and managers are appointed by the board, not elected by shareholders.
• The setting of the ex-dividend date for a declared dividend: Misconception: shareholders (or the board) set the ex-date. The board sets the declaration, record, and payable dates; the ex-dividend date is set by the exchange or FINRA.

Verified against: dividends declared by board; who sets which dividend dates); SIE outline 2.1.1

Answer: The investor may cast a total of 600 votes and may allocate all of them to a single candidate

Under cumulative voting, a shareholder's total votes equal shares owned multiplied by the number of open seats — here 200 x 3 = 600 — and the shareholder may distribute them in any combination, including all 600 on one candidate. This is the method that benefits minority shareholders, who can concentrate their votes to win a single board seat. Under statutory (regular) voting, the investor could cast no more than 200 votes per seat, which favors larger shareholders. Watch the word 'cumulative': cumulative voting is a method of electing directors, while cumulative preferred is a class of stock whose missed dividends accumulate — two unrelated concepts that share a name, and a favorite exam collision. Voting power is based on shares owned, not one vote per seat.

The Trap: Statutory vs. cumulative voting confusion, plus the cumulative-voting/cumulative-preferred word collision

• The investor may cast no more than 200 votes for any one candidate: Misconception: describes statutory (regular) voting, which caps votes per seat at shares owned and prevents concentrating votes — the classic statutory-vs-cumulative mix-up.
• The investor is entitled to receive any missed dividends before other common shareholders are paid: Misconception: confuses cumulative VOTING with cumulative PREFERRED stock, whose missed dividends accumulate as arrears — same word, unrelated concept.
• The investor receives three votes in total, one for each open seat: Misconception: one vote per open seat regardless of shares held. Voting power is based on the number of shares owned.

Verified against: cumulative voting vs. cumulative preferred word collision)

Answer: Maintain their proportionate ownership interest when the issuer sells new common shares

Preemptive rights are an anti-dilution protection: when the issuer sells additional common shares, existing shareholders receive rights to buy enough of the new shares — typically at a subscription price below the current market, during a short subscription window — to keep their percentage ownership intact. The rights create no obligation for the issuer to buy anything back. Dividend priority runs the other way from choice B: preferred stockholders are paid before common. And whether a dividend is paid at all is decided by the board of directors, not by shareholder vote.

The Trap: Misidentifying the purpose of preemptive rights (buyback / dividend-priority confusion)

• Sell their shares back to the issuer before the shares are offered to other investors: Misconception: confuses preemptive rights with a repurchase or put-back feature. Preemptive rights are about buying newly issued shares, not selling existing ones.
• Receive dividends ahead of the preferred stockholders: Misconception: inverts dividend priority. Preferred stockholders are paid dividends before common stockholders.
• Approve or reject the board's decision to pay a dividend: Misconception: shareholders vote on dividends. Dividend decisions rest with the board of directors, not a shareholder vote.

Verified against: SIE outline 2.1.1

Answer: DEF has 7 million shares outstanding, and the treasury shares neither vote nor receive dividends

Outstanding shares equal issued shares minus treasury shares: 8 million − 1 million = 7 million. When an issuer repurchases its own stock and holds it in treasury, those shares remain 'issued' but are no longer 'outstanding,' and they lose their shareholder privileges entirely — treasury stock does not vote and does not receive dividends (a company cannot meaningfully pay dividends to itself). Choice A confuses the issued count with the outstanding count; choice C adds the repurchased shares instead of subtracting them; choice D remembers only half of the treasury-stock rule. The outstanding figure is the one that matters for voting and per-share calculations.

The Trap: Issued vs. outstanding conflation and treasury-stock privileges

• DEF has 7 million shares outstanding, and the treasury shares continue to receive dividends but cannot vote: Misconception: partial treasury-stock knowledge. Treasury stock loses BOTH privileges — it neither votes nor receives dividends.
• DEF has 8 million shares outstanding, because treasury shares remain issued shares: Misconception: conflates issued with outstanding. Treasury shares remain issued but are subtracted to compute outstanding shares.
• DEF has 9 million shares outstanding, because repurchased shares are added back to the total: Misconception: adds treasury shares instead of subtracting them — a sign of not understanding that a buyback removes shares from circulation.

Verified against: treasury stock: no vote, no dividend; outstanding-share math)

Answer: $12

A 6% dividend on $100 par is $6 per share per year. Because this preferred is cumulative, the skipped $6 from last year (the 'arrears') plus the full $6 for the current year — $12 in total — must be paid to the preferred holders before any dividend can go to common shareholders. If the stock were straight (non-cumulative) preferred, only the current $6 would be required and the missed year would simply be lost. Choice C ($18) would be right only if two full years had been missed in addition to the current year. Choice D misuses a true idea: no board is ever obligated to declare a dividend, but the cumulative feature blocks any common dividend until the preferred arrears are cleared.

The Trap: Cumulative vs. straight preferred — forgetting arrears (or miscounting them) in the classic computation

• $18: Misconception: near-miss arrears count — $18 would require two missed years plus the current year, but only one year was skipped here.
• $6: Misconception: treats the stock as straight (non-cumulative) preferred and pays only the current year, ignoring the arrears — the classic cumulative-vs-straight trap.
• $0, because preferred dividends are payable only if the board chooses to declare them: Misconception: misapplies 'dividends are never guaranteed.' True in general, but once the board wants to pay common, the cumulative feature forces preferred arrears to be cleared first.

Verified against: Preferred stock cumulative dividend arrears mechanics — terms fixed by the issuer's certificate of designation (general corporate finance principle, not a single FINRA/SEC rule)

Answer: Fall, because its fixed dividend is now less attractive than newer, higher-yielding alternatives

Straight preferred stock pays a fixed dividend and has no maturity date, so its market price behaves like that of a long-term bond: when market interest rates rise, the fixed 5% payment becomes less competitive and the price must fall until its yield matches the market; when rates fall, the price rises. Being legally 'equity' does not exempt preferred from interest-rate risk — investors buy it for income and price it against prevailing yields. Only adjustable-rate preferred, whose dividend resets with market rates, tends to hold near par. This inverse price/yield relationship is one of the most heavily tested concepts on the exam.

The Trap: Believing preferred stock is immune to interest-rate risk because it is equity

• Stay near its par value, because the stated dividend automatically resets to match market rates: Misconception: confuses straight preferred with adjustable-rate preferred, whose resetting dividend is what keeps its price near par.
• Rise along with interest rates: Misconception: assumes a direct price/rate relationship. Fixed-income-style prices move inversely to market interest rates.
• Stay the same, because preferred stock is equity and is not sensitive to interest rates: Misconception: 'it's equity, so rates don't matter.' Preferred pays a fixed dividend with no maturity, so it trades like a long-term bond and is highly rate-sensitive.

Verified against: adjustable-rate stays near par)

Answer: Interest rates have fallen since the preferred was issued

Issuers call preferred stock for the same reason they call bonds: after interest rates fall, the issuer can retire the old 7% issue and replace it with new financing at a lower rate. That is exactly when investors least want to surrender the shares — they must reinvest the proceeds at lower prevailing yields (reinvestment risk) — which is why callable preferred typically compensates investors with a higher stated dividend than comparable non-callable issues. If rates had risen, the issuer would happily keep the now-cheap 7% issue outstanding. A rising common stock price is the trigger for calling convertible securities to force conversion, and sharing in strong earnings describes participating preferred — neither explains calling a plain callable issue.

The Trap: Thinking issuers call preferred when rates rise (inverting the call-when-rates-fall rule)

• JKL's common stock price has risen sharply above a conversion price: Misconception: confuses a plain callable preferred with calling a CONVERTIBLE security to force conversion when the common trades above parity.
• Interest rates have risen since the preferred was issued: Misconception: inverts the call logic. When rates rise, the existing 7% dividend is cheap financing, so the issuer is happy to leave the issue outstanding.
• JKL had unusually strong earnings, obligating it to pay an extra dividend: Misconception: confuses callable preferred with PARTICIPATING preferred, which may share in extra dividends during strong years — a feature, not a call trigger.

Verified against: participating and convertible contrasts)

Answer: Rights are short-term with a subscription price below the stock's current market price; warrants are long-term and issued with an exercise price above the current market price

Rights and warrants both allow the purchase of the issuer's common stock, but they differ on nearly every axis. Preemptive rights are distributed to existing shareholders, last only weeks (commonly around 30 to 60 days), and carry a subscription price below the current market so shareholders can avoid dilution; unsubscribed shares may go to a standby underwriter. Warrants run for years and are created with an exercise price above the market at issuance — they have value only if the stock later rises — and they are the classic 'sweetener' attached to bond or preferred offerings. Neither instrument pays dividends or votes; those privileges begin only when the holder exercises and becomes a common shareholder.

The Trap: Rights vs. warrants — flipping the term length and the below-market/above-market exercise prices

• Both entitle their holders to receive dividends until they are exercised: Misconception: treats rights and warrants as if they carry shareholder privileges. Neither pays dividends nor votes — those begin only after exercise into common stock.
• Rights are long-term with an exercise price above the market; warrants are short-term with a subscription price below the market: Misconception: the exact reversal of the true relationship — the single most common rights/warrants error.
• Rights are typically attached to bond offerings as a sweetener; warrants are distributed to existing shareholders to prevent dilution: Misconception: swaps the origin of each instrument. Warrants are the bond-offering sweetener; rights go to existing shareholders for anti-dilution.

Verified against: Preemptive rights vs. warrants — standard equity securities characteristics (general corporate finance/securities principles, not a single FINRA/SEC rule)

Answer: Warrants

Long-term certificates to buy the issuer's stock at a fixed price above the current market, attached to a bond offering to make it easier to sell, are warrants — the classic 'sweetener.' They are typically detachable and can trade separately from the bonds. Preemptive rights have the opposite profile: short-term, priced below market, and distributed to existing shareholders to prevent dilution. Listed call options are standardized contracts created on options exchanges and guaranteed by the Options Clearing Corporation (OCC) — the issuing corporation does not create them. A conversion privilege would let the bondholder exchange the bond itself for stock; a warrant is a separate instrument that lets the holder buy stock while keeping the bond.

The Trap: Failing to identify the warrant 'sweetener' profile (confusing it with rights, options, or conversion features)

• Preemptive rights: Misconception: the rights/warrants mix-up. Rights are short-term, priced below market, and distributed to existing shareholders — not attached to bond offerings.
• Conversion privileges attached to the bonds: Misconception: confuses a bond sold with detachable warrants with a convertible bond. A conversion privilege exchanges the bond itself for stock; a warrant is a separate certificate to buy stock while keeping the bond.
• Call options: Misconception: confuses issuer-created warrants with listed options, which are standardized contracts created on options exchanges and guaranteed by the OCC, not issued by the corporation.

Verified against: Warrants as a bond-offering sweetener — standard corporate finance/securities characteristics (general market practice, not a single FINRA/SEC rule)

Answer: Decrease in dollar terms, because the yen amount converts into fewer dollars

An ADR investor is paid in U.S. dollars, but the dividend starts life in the issuer's home currency — here, yen — and is converted by the depositary bank at the prevailing exchange rate. If the yen weakens against the dollar, the same yen dividend converts into fewer dollars, so the payment shrinks. Receiving dollars changes the form of the payment, not the economic exposure: the ADR holder bears currency (exchange-rate) risk on both dividends and the value of the underlying shares. A weaker yen benefits someone converting dollars into yen — the opposite of this investor's position. And ADR holders do not receive foreign currency directly; conversion into dollars is part of the depositary bank's role. (A foreign tax may also be withheld on the dividend, which is generally creditable for U.S. tax purposes.)

The Trap: ADR dividends are paid in dollars, therefore no currency risk (false — the investor still bears it)

• Be unchanged, because payment in U.S. dollars removes the currency risk: Misconception: the top ADR trap — 'paid in dollars, so no currency risk.' Payment in USD changes the form of the money, not the exchange-rate exposure.
• Be paid in yen instead of dollars: Misconception: ADR holders receive foreign currency. Converting dividends to U.S. dollars is part of what the depositary arrangement provides.
• Increase, because a weaker yen means each dollar buys more yen: Misconception: runs the conversion in the wrong direction. A weaker yen helps someone converting dollars INTO yen — not an investor converting yen income into dollars.

Verified against: direction of harm when foreign currency weakens)