Series 7 Equity Securities Practice Questions

Correct answer: A. $3

Intrinsic value = stock price minus exercise price = $46 - $40 = $6. The warrant trades at $9, so the premium (time value) above intrinsic value = $9 - $6 = $3.

• A. Intrinsic value is $46 - $40 = $6, and the warrant trades at $9, so the premium (time value) is $9 - $6 = $3.
• B. $0 ignores that the warrant trades above its intrinsic value; there is a premium here.
• C. $6 is the intrinsic value itself, not the premium above intrinsic value.
• D. $9 is the warrant's full market price, not just the time-value portion above intrinsic value.

Correct answer: A. Cumulative voting

Cumulative voting allows a shareholder to allocate all of their votes (shares held × number of board seats up for election) to one or a few candidates, improving the odds minority shareholders can concentrate votes to elect a director. Statutory voting allows only up to the number of shares held per open seat, favoring majority shareholders.

• A. Correct.
• B. Incorrect — statutory voting favors majority shareholders.
• C. Incorrect — proxy voting is simply a mechanism for voting by absentee ballot, unrelated to minority influence.
• D. Incorrect — preemptive rights relate to maintaining proportional ownership in new share issuances, not board elections.

Correct answer: D. An arbitrary accounting value with no necessary relationship to the stock's market value

Par value for common stock is a nominal, arbitrary accounting figure stated on the stock certificate and used to compute the 'common stock' line item on the balance sheet (par value × shares outstanding). It has no bearing on market price, no redemption guarantee, and no floor-price effect. Unlike bonds, where par typically equals the maturity redemption value, common stock has no maturity date and is not redeemed by the issuer.

• A. Par value is not a floor or minimum trading price - common stock can and does trade below its stated par value in the market or on an exchange.
• B. Common stock carries no redemption guarantee at par or otherwise — that concept applies to instruments like bonds or preferred stock, not common shares.
• C. Par value is unrelated to the actual IPO subscription price, which is typically set well above a nominal par value.
• D. Correct. Par value on common stock is simply an arbitrary accounting/bookkeeping figure with no necessary connection to the stock's actual market value.

Correct answer: A. $120

Conversion value equals shares received times the common stock price: 4 x $30 = $120. It differs from par value and the $5 annual dividend.

• A. 4 shares x $30 = $120.
• B. This is the par value, not the value of the common shares received.
• C. This is not tied to the conversion calculation; it ignores the share ratio and price.
• D. This overstates the value; it does not result from 4 x $30.