FINRA SIE — Securities Industry Essentials — All Questions

A customer sells short 500 shares of EFG at $30.00 in a new margin account. Under Regulation T, what initial deposit is required?

• a.$22,500
• b.$3,750
• c.$7,500✓
• d.$15,000

Regulation T requires a short sale account to hold 150% of the current market value: the proceeds plus 50% equity. The short sale is worth 500 x $30.00 = $15,000, and the customer's own deposit is 50% of that, or $7,500; the $15,000 sale proceeds are credited to the account to make the 150%. $3,750 is 25% of the value, a long-position maintenance level and not the Regulation T deposit. $15,000 is a 100% deposit, and $22,500 is the total 150% held in the account, not the customer's deposit.Regulation T, 12 CFR 220.12

A customer is short 400 shares of HIJ when the company pays a $0.75 per share cash dividend and the stock goes ex-dividend. What happens in the customer's margin account?

• a.Nothing is posted, as a short seller owns no shares earning a dividend
• b.$300 is debited, because the short seller owes the lender the dividend✓
• c.$300 is credited, because a dividend adds to the short sale proceeds
• d.The $300 comes from the escrowed proceeds, with no balance change

A short seller borrowed the shares, and the lender is entitled to the dividend it would have received. The short seller must make a payment in lieu of the dividend of 400 x $0.75 = $300, which is debited from the margin account. It is not a credit. Having no shares does not remove the obligation, and the debit is a real charge to the customer rather than an internal transfer of proceeds.

A broker-dealer's customer sells short on Monday, October 5, 2026, and the broker-dealer fails to deliver on the T+1 settlement date. By when must the position be closed out under Rule 204, assuming no holidays?

• a.Before the open on Tuesday, October 6
• b.Before the open on Wednesday, October 7✓
• c.Before the open on Friday, October 9
• d.Before the open on Monday, October 12

T+1 settlement puts the settlement date on Tuesday, October 6. Rule 204 requires a short-sale fail to be closed out by the beginning of regular trading hours on the settlement day after the settlement date, which is Wednesday, October 7. Friday, October 9 is the third consecutive settlement day, the deadline for a long-sale fail. Tuesday is the settlement date itself, too early, and Monday, October 12 is beyond any applicable deadline.Regulation SHO Rule 204

A customer sells short 100 shares of KLM at $42.50 and pays a $20 commission on the sale and a $20 commission on the purchase to cover. Ignoring interest, at what cover price does the customer break even?

• a.$42.50
• b.$42.90
• c.$42.30
• d.$42.10✓

Net proceeds are 100 x $42.50 - $20 = $4,230. Covering costs 100 x P + $20, so breakeven requires 100P + $20 = $4,230, which gives P = $42.10. Commissions on both sides push the breakeven below the sale price, not above it. $42.50 ignores commissions, $42.30 deducts only one commission, and $42.90 adds the commissions as if they helped the seller.

An investor bought a stock at $40.00. A year later it trades at $43.00 after paying $1.60 per share in dividends during the year. What is the total return?

• a.10.7%
• b.4.0%
• c.7.5%
• d.11.5%✓

Total return combines price change and income: ($43.00 - $40.00 + $1.60) / $40.00 = $4.60 / $40.00 = 11.5%. The 7.5% figure counts only the $3.00 price gain, and 4.0% counts only the $1.60 dividend. Dividing $4.60 by the ending price of $43.00 gives 10.7%, which uses the wrong base; return is measured on the amount invested.

A stock trades at $60.00 and pays a regular dividend of $0.60 each quarter. What is its current yield?

• a.4.0%✓
• b.1.0%
• c.2.4%
• d.25.0%

Current yield is the annual dividend divided by the current market price. The annual dividend is 4 x $0.60 = $2.40, and $2.40 / $60.00 = 4.0%. Using one quarterly payment gives 1.0%. The figure 2.4% is the annual dividend in dollars written as a percent, and 25.0% inverts the ratio ($60.00 / $2.40).

A fund charges an annual management fee of 85 basis points. What is the yearly fee on a $24,000 investment?

• a.$2,040
• b.$850
• c.$20.40
• d.$204✓

One basis point is 0.01%, so 85 basis points is 0.85%, or 0.0085. The fee is $24,000 x 0.0085 = $204 per year. $20.40 moves the decimal one place too far, treating 85 bp as 0.085%. $2,040 treats it as 8.5%, and $850 multiplies 85 by ten and attaches a dollar sign.

A price-weighted index tracks three stocks priced at $150, $60 and $30, with a divisor of 3. The $150 stock rises $3, the $30 stock rises $6, and the $60 stock is unchanged. Assuming the divisor stays the same, what is the new index value?

• a.85.9
• b.81.0
• c.82.0
• d.83.0✓

In a price-weighted index the value is the sum of the prices divided by the divisor. The new prices are $153, $60 and $36, which total $249, and $249 / 3 = 83.0 (up from 80.0). Averaging the percentage changes (2% and 20%) gives 85.9, which is not how a price-weighted index works. 82.0 counts only the $6 gain and 81.0 counts only the $3 gain.

A market-capitalization-weighted index holds two companies. Company A is 90% of the index's total market value and rises 1%. Company B is 10% and falls 4%. What is the index return?

• a.-3.0%
• b.+1.0%
• c.-1.5%
• d.+0.5%✓

In a capitalization-weighted index each company's return is weighted by its share of total market value: (0.90 x 1%) + (0.10 x -4%) = 0.9% - 0.4% = +0.5%. The -1.5% is the simple average of the two returns, which would apply only to an equal-weighted index. The -3.0% is just the sum of the two returns, and +1.0% looks only at the larger company.

A portfolio manager invests only in small-capitalization U.S. companies. Which index is the most appropriate benchmark for comparing performance?

• a.MSCI EAFE Index
• b.S&P 500 Index
• c.Russell 2000 Index✓
• d.Dow Jones Industrial Average

A benchmark should match the portfolio's market segment. The Russell 2000 tracks small-capitalization U.S. stocks. The S&P 500 and the Dow Jones Industrial Average represent large U.S. companies, and the MSCI EAFE Index covers developed markets outside the United States and Canada.

A mutual fund holds large companies headquartered in the United Kingdom, Germany, Japan and Australia. Which index is the most appropriate benchmark for the fund?

• a.Russell 2000 Index, covering small-capitalization U.S. companies
• b.MSCI Emerging Markets Index, covering developing economies only
• c.S&P 500 Index, covering large companies listed in the United States
• d.MSCI EAFE Index, covering developed markets outside the U.S. and Canada✓

The fund's holdings are in developed countries outside North America, which is the territory of the MSCI EAFE Index (Europe, Australasia and the Far East). The S&P 500 is a U.S. large-company index and the Russell 2000 is a U.S. small-company index, so neither matches the fund's geography. The MSCI Emerging Markets Index covers developing economies, and the UK, Germany, Japan and Australia are developed.

A news report says the VIX jumped from 15 to 30 in one week. What does the rise indicate?

• a.Trading volume in S&P 500 options doubled during the past week
• b.Realized volatility of the S&P 500 doubled over the past 30 days
• c.The S&P 500 Index lost half of its value during the past week
• d.Option prices imply the market expects more S&P 500 volatility ahead✓

The VIX is derived from S&P 500 option prices and measures the volatility the market expects over roughly the next 30 days, which is why it is called a forward-looking fear gauge. A higher reading means greater expected swings, not a particular price decline. Realized (historical) volatility looks backward, and trading volume is a separate statistic that does not set the index level.

An investment earned a nominal return of 6.0% in a year when inflation ran 2.5%. What is the approximate real return?

• a.8.5%
• b.6.0%
• c.2.4%
• d.3.5%✓

Real return is approximately the nominal return minus the inflation rate: 6.0% - 2.5% = 3.5%. Adding the two (8.5%) is the wrong direction, because inflation erodes purchasing power. Dividing 6.0 by 2.5 gives 2.4, which is not a return measure. The 6.0% figure is the nominal return itself, which ignores inflation.

A customer bought 100 shares of NOP in January 2025 at $20 and another 100 shares in March 2026 at $30. On October 6, 2026 she sells 100 shares at $50 and gives no lot instructions. What is the tax result?

• a.A $2,500 long-term capital gain
• b.A $2,000 short-term capital gain
• c.A $3,000 long-term capital gain✓
• d.A $3,000 short-term capital gain

With no identification, shares sold are treated as the earliest bought, first-in first-out. The January 2025 lot cost $20, so the gain is ($50 - $20) x 100 = $3,000, and it was held more than one year, so it is long-term. A $2,000 gain would come from selling the March 2026 lot, which was held less than a year. The $2,500 figure uses the average cost of $25. A $3,000 short-term gain has the right amount but the wrong holding period.IRS Publication 550

A woman inherits 100 shares of QRS. The decedent paid $15 per share, and the shares were worth $60 on the date of death. She sells all 100 shares four months later at $64. What is her gain?

• a.$4,900, taxed as short-term
• b.$400, taxed as long-term✓
• c.$4,900, taxed as long-term
• d.$400, taxed as short-term

Inherited property generally takes a basis equal to its fair market value on the date of death, so the basis is $60 per share and the gain is ($64 - $60) x 100 = $400. Inherited property is treated as long-term no matter how briefly the heir held it. Using the decedent's $15 cost would give $4,900, but that carryover basis is not used for inherited shares, and the short-term label ignores the automatic long-term rule.IRS Publication 550

A donor paid $30 per share for 100 shares of TUV, then gave them to her son when they were worth $22 per share. He later sells them at $26 per share. What is his result?

• a.No gain or loss, as $26 sits between the two bases✓
• b.A $400 gain, using the $22 market value as basis
• c.An $800 loss, the full drop from $30 to $22
• d.A $400 loss, using the donor's $30 basis

When the value at the gift is below the donor's basis, the donee uses the donor's basis to figure a gain and the lower market value to figure a loss. A sale at $26 is above the $22 loss basis and below the $30 gain basis, so it produces neither a gain nor a loss. Using $30 alone gives a $400 loss and using $22 alone gives a $400 gain. The $800 figure is the decline before the gift, which is not his result.IRS Publication 551

An investor bought 200 shares of WXY for $5,000 total. The company pays a distribution of $1.50 per share that it classifies entirely as a return of capital. What is her adjusted cost basis afterward?

• a.$5,300
• b.$5,000
• c.$4,998.50
• d.$4,700✓

A return of capital is not taxed as a dividend; it reduces the cost basis. The distribution is $1.50 x 200 = $300, so the new basis is $5,000 - $300 = $4,700. Leaving the basis unchanged treats the payment as a dividend, and adding it to the basis goes the wrong direction. Subtracting only $1.50 ignores the share count. Once basis reaches zero, any further distribution is a capital gain.IRS Publication 550

An investor sells 100 shares of KLM at a loss on Friday, June 12, 2026. Which purchase of KLM shares makes this a wash sale?

• a.Buying on May 18, 25 days before the sale✓
• b.Buying on May 8, 35 days before the sale
• c.Buying on July 27, 45 days after the sale
• d.Buying on July 17, 35 days after the sale

A wash sale occurs when substantially identical stock is bought within 30 days before or 30 days after the loss sale, a 61-day window that includes the sale date. For a June 12 sale, the window runs from May 13 to July 12. May 18 is 25 days before the sale, so it is inside the window and the loss is disallowed. May 8 is 35 days before, which is outside the window. July 17 is 35 days after and July 27 is 45 days after, so both fall outside it as well. The rule looks backward as well as forward, but only 30 days in either direction.IRC Section 1091

An investor bought shares on Monday, March 3, 2025. What is the earliest trade date on which a sale can produce a long-term capital gain?

• a.March 4, 2026✓
• b.March 5, 2026
• c.December 31, 2025
• d.March 3, 2026

A long-term gain requires holding the property for more than one year. The holding period starts the day after the purchase trade date, so day one is March 4, 2025, and a full year is completed on March 3, 2026. A sale on March 4, 2026 is the first date that is more than one year. March 3, 2026 is exactly one year, not more than one. March 5, 2026 counts from settlement instead of the trade date, and December 31, 2025 is only about ten months.IRS Publication 550

Which purchase is a covered security, so the broker must report its cost basis to the IRS on Form 1099-B?

• a.Common stock bought for cash on March 1, 2011✓
• b.A corporate bond bought in 2011
• c.Common stock bought for cash on December 15, 2010
• d.Common stock bought for cash in 2008

Brokers must report basis for covered securities, which for ordinary stock means shares acquired on or after January 1, 2011. Stock bought in December 2010 or in 2008 predates that date and is a noncovered security. Debt instruments became covered only when acquired on or after January 1, 2014, so a bond bought in 2011 is also noncovered; the investor tracks basis personally.Form 1099-B / IRC Section 6045

A company declares a 30% stock dividend with a record date of Friday, June 12, 2026 and a payable date of Friday, June 26, 2026. On what date does the stock begin trading ex-dividend?

• a.Thursday, June 11, 2026
• b.Friday, June 26, 2026
• c.Monday, June 29, 2026✓
• d.Friday, June 12, 2026

For stock dividends or splits of 25% or more, the ex-date is the first business day after the payable date, which here is Monday, June 29. Friday, June 12 would be the ex-date for a cash dividend under T+1, because the ex-date equals the record date. Thursday, June 11 is the old T+2 pattern of one business day before the record date. Friday, June 26 is the payable date itself, and the ex-date comes after it.FINRA Rule 11140

An investor owns 200 shares of CDE with a basis of $40.00 per share. The company pays a 5% stock dividend, and she receives 10 more shares. What is her new basis per share, to the nearest cent?

• a.$40.00
• b.$42.00
• c.$38.00
• d.$38.10✓

A common stock dividend on common stock is generally not taxable, and the original total basis is spread over all the shares. The total basis is 200 x $40.00 = $8,000, spread over 210 shares, so the basis is $8,000 / 210 = $38.10 per share (rounded). Keeping $40.00 ignores the added shares, $42.00 multiplies the basis by 1.05, and $38.00 multiplies it by 0.95, which is not how the shares are counted.IRS Publication 550

An investor in a dividend reinvestment plan owns 300 shares and receives a $0.50 per share cash dividend, which the plan uses to buy 6 new shares at $25.00. How is the reinvested dividend treated?

• a.It is taxable as a dividend this year, and the new shares have a $150 basis✓
• b.It is taxable this year, and the new shares have a zero basis
• c.It is not taxable because no cash was received, and the basis is zero
• d.It is not taxed until the 6 shares are sold, and their basis is $150

Reinvesting a dividend does not make it tax-free. The 300 x $0.50 = $150 dividend is taxed in the year it is paid, as if received in cash, and the 6 shares cost 6 x $25.00 = $150, which becomes their basis. Deferring the tax until sale, or treating the dividend as untaxed because no cash arrived, is wrong. A zero basis would tax the same $150 a second time when the shares are sold.IRS Publication 550

An investor buys common stock 20 days before its ex-dividend date and sells it 35 days after the ex-date, so she holds it 55 days in total. How is the dividend taxed?

• a.As a qualified dividend, because the stock was held more than 30 days
• b.As a qualified dividend, because she held the stock through the ex-date
• c.As an ordinary dividend, because she held the stock 60 days or less✓
• d.As a tax-free return of capital, because the stock was sold soon after

A qualified dividend requires holding the common stock more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Holding it 55 days fails the test, so the dividend is taxed as an ordinary dividend at ordinary rates. Holding through the ex-date alone is not enough, and 30 days is not the threshold. A return of capital depends on the company's classification, not on how soon the investor sells.IRS Publication 550

On which date does a corporation's declared cash dividend become a liability of the company?

• a.The ex-dividend date
• b.The payable date
• c.The declaration date✓
• d.The record date

The dividend becomes a legal obligation when the board of directors declares it on the declaration date, when the amount, record date and payable date are announced. The ex-dividend date and the record date determine who is entitled to the payment, and the payable date is when the cash is actually paid. None of those create the obligation.FINRA Rule 11140 (ex-dividend dates); corporate dividend declaration

A customer buys stock regular way on Wednesday, November 25, 2026. Thursday, November 26 is Thanksgiving and the markets are closed. On what date does the trade settle?

• a.Friday, November 27, 2026✓
• b.Monday, November 30, 2026
• c.Wednesday, November 25, 2026
• d.Thursday, November 26, 2026

Regular-way settlement is one business day after the trade date. Thanksgiving is not a business day, so the next business day after Wednesday is Friday, November 27 (a shortened trading day, but still a business day). Thursday ignores the holiday. Monday would be two business days after the trade, the old T+2 cycle. Wednesday is same-day settlement, which applies only to cash trades.FINRA Rule 11320 / SEC Rule 15c6-1

A customer sells stock regular way on Thursday, July 2, 2026. Friday, July 3 is the observed Independence Day holiday and the markets are closed. What is the settlement date?

• a.Tuesday, July 7, 2026
• b.Monday, July 6, 2026✓
• c.Friday, July 3, 2026
• d.Saturday, July 4, 2026

Settlement is one business day after the trade date. Friday, July 3 is a market holiday and Saturday is not a business day, so the next business day is Monday, July 6. Friday ignores the closure, and Saturday is not a business day. Tuesday adds an extra business day, as under the former T+2 cycle.FINRA Rule 11320

A customer exercises a long equity call option on Monday, October 5, 2026. When is the underlying stock delivered?

• a.Friday, October 9, 2026
• b.Tuesday, October 6, 2026✓
• c.Wednesday, October 7, 2026
• d.Monday, October 5, 2026

Delivery of the stock on exercise of an equity option settles on the same cycle as a regular-way stock trade, one business day after exercise since May 28, 2024. Monday is the exercise date, not the delivery date. Wednesday follows the former T+2 cycle, and Friday matches no current equity settlement convention.OCC rules

A registered firm-commitment underwritten offering is priced at 5:00 p.m. ET on Tuesday. Under Rule 15c6-1, what is the latest settlement date permitted without a separate agreement?

• a.Friday, which is T+3
• b.Wednesday, which is T+1
• c.Thursday, which is T+2✓
• d.Tuesday, which is the same day

Rule 15c6-1(c) lets a firm-commitment offering that is registered and priced after 4:30 p.m. ET settle T+2 instead of the standard T+1, so Thursday is the latest date. Wednesday would be the standard T+1 date, which is allowed but is not the latest. Friday is T+3, beyond the permitted limit, and same-day settlement is not required.SEC Rule 15c6-1(c)

An institutional customer's account is set up for delivery versus payment (DVP). How does settlement work?

• a.The customer pays in full before the trade date
• b.Securities and cash are exchanged against each other at the same time✓
• c.The firm delivers securities on the trade date whether or not payment arrives
• d.Securities are delivered first and paid for within 30 days

Delivery versus payment means the securities are delivered to the customer's agent or custodian only against simultaneous payment, so neither side bears the risk of delivering first. Prepayment is a different arrangement, a 30-day credit period is not part of regular-way settlement, and delivering on the trade date regardless of payment would leave the firm unprotected.FINRA Rule 11860 (COD/DVP orders)

A customer sells stock at a loss on Thursday, December 31, 2026. With T+1 settlement and the New Year's Day holiday, the trade settles on Monday, January 4, 2027. In which tax year is the loss recognized?

• a.2027, because the trade settles in January
• b.2026, because the trade date determines the year✓
• c.Either year, at the customer's election
• d.2027, because the cash is received in January

For securities traded on an exchange, the sale is taken into account on the trade date, not the settlement date, for both the tax year and the holding period. The loss therefore belongs to 2026. Settlement date and the date cash arrives do not control. The customer cannot choose the year.IRS Publication 550

At 1:30 p.m. on Monday, a customer buys 100 shares and the order is marked as a cash trade. When does a cash trade settle?

• a.The same day it is traded, Monday✓
• b.Five business days later, next Monday
• c.Two business days later, Wednesday
• d.The next business day, Tuesday

A cash trade settles on the trade date, so the buyer pays and the securities are delivered the same day if the trade is made before the applicable cutoff. A regular-way trade settles one business day later, and T+2 is the old cycle. Five business days is not a standard settlement cycle for exchange-traded stock.FINRA Rule 11320

XYZ declares a cash dividend with a record date of Wednesday, June 17, 2026. Assuming T+1 settlement and no holidays, what is the last trade date on which a purchase makes the buyer a holder of record?

• a.Monday, June 15, 2026
• b.Thursday, June 18, 2026
• c.Tuesday, June 16, 2026✓
• d.Wednesday, June 17, 2026

To be the holder of record on June 17, the purchase must settle by June 17. With T+1 settlement, a trade on Tuesday, June 16 settles on Wednesday, June 17, so Tuesday is the last cum-dividend day, and the stock goes ex-dividend on the record date, Wednesday. Monday was the last day under the former T+2 cycle. A purchase on Wednesday settles Thursday, after the record date, and Thursday is later still.FINRA Rule 11140 / Rule 11320

A company effects a 1-for-10 reverse split, and the stock trades at $2.40 before the split. An investor owns 1,055 shares, and the company pays cash in lieu of fractional shares. What does the investor receive?

• a.105 shares and $24.00 in cash
• b.105 shares and $12.00 in cash✓
• c.106 shares and no cash
• d.105 shares and $1.20 in cash

A 1-for-10 reverse split turns 1,055 shares into 105.5 shares, and the new price is 10 x $2.40 = $24.00. The investor receives 105 whole shares, and the half share is paid in cash at the post-split price: 0.5 x $24.00 = $12.00. Using the old price gives $1.20, which values the fraction before the split. Rounding up to 106 shares is not done when cash in lieu is paid. $24.00 pays for a full share rather than a half.

A stock trading at $50 declares a 5-for-4 forward split. After the split, what would an investor who owned 200 shares hold, ignoring any market movement?

• a.250 shares at about $50
• b.160 shares at about $62.50
• c.200 shares at about $40
• d.250 shares at about $40✓

A 5-for-4 split gives five new shares for every four old ones, so 200 shares become 200 x 5/4 = 250 shares. The total value stays $10,000 (200 x $50), so the price adjusts to $10,000 / 250 = $40. Keeping the price at $50 would create value. 160 shares at $62.50 describes the reverse, a 4-for-5 reverse split. Holding 200 shares at $40 would destroy value.

A bidder launches a tender offer for a company's common stock. What is the minimum period the offer must remain open?

• a.20 business days✓
• b.20 calendar days
• c.30 calendar days
• d.10 business days

Rule 14e-1 requires a tender offer to stay open at least 20 business days from commencement. If the consideration offered or the percentage sought changes, it must remain open at least 10 business days from the notice of the change. Counting calendar days understates the period, 30 days is not the rule's figure, and 10 business days is the extension after a change, not the original minimum.Exchange Act Rule 14e-1

An investor buys enough common stock to own 6% of a public company and intends to seek influence over its management. What must the investor file, and by when?

• a.Form 4, within two business days of the purchase
• b.Schedule 13G, within 45 days of crossing 5%
• c.Schedule 13D, within five business days of crossing 5%✓
• d.Form 3, within ten days after the trade date

A person who becomes the beneficial owner of more than 5% of a class of registered voting equity must file a Schedule 13D within five business days. Schedule 13G is the shorter passive filing, available only to certain passive investors, and its deadlines differ. Forms 3 and 4 are filed by officers, directors and 10% holders, and they report insider ownership and changes, not a 5% ownership stake.Exchange Act Rule 13d-1

An investor owns 100 shares of PAR with a total basis of $5,000. PAR completes a tax-free spin-off of a subsidiary. Afterward, the PAR shares are worth $4,500 and the spun-off shares are worth $500. What basis is allocated to the spun-off shares?

• a.$5,000
• b.$0
• c.$500✓
• d.$2,500

In a tax-free spin-off, the original basis is split between the old and new shares in proportion to their fair market values after the distribution. The spun-off shares are $500 of a $5,000 total, which is 10%, so they get 10% of the $5,000 basis, or $500, and the PAR shares keep $4,500. A zero basis would tax the full value later. $2,500 splits the basis evenly, and $5,000 moves all of it to the new shares.26 CFR 1.358-2

Shareholders of a target company vote on a statutory merger in which they will receive newly issued shares of the acquirer. How does Securities Act Rule 145 treat this?

• a.As an exempt exchange needing no registration, because no cash is paid
• b.As no offer at all, because shareholders vote rather than buy
• c.As a sale made only by the target's officers and directors
• d.As an offer and sale of the new shares needing registration or exemption✓

Rule 145(a) deems a vote on a statutory merger or consolidation, a reclassification (other than a stock split) or a transfer of assets to be an offer or sale of the new securities to the voting holders. The acquirer must therefore register the shares or rely on an exemption. Receiving shares instead of cash does not make the exchange exempt, a vote still counts as an offer, and the rule reaches the issuer, not just insiders.Securities Act Rule 145

Which statement correctly distinguishes a Chapter 11 bankruptcy from a Chapter 7 bankruptcy of a corporation?

• a.Chapter 11 liquidates the company; Chapter 7 reorganizes it
• b.Chapter 11 reorganizes a company that keeps operating; Chapter 7 liquidates it✓
• c.Chapter 11 applies only to individuals; Chapter 7 applies only to corporations
• d.Chapter 7 pays common stockholders before the company's creditors

Under Chapter 11 the company continues to operate while it restructures its debts under a court-approved plan. Under Chapter 7 a trustee sells the assets and distributes the proceeds in order of priority. Reversing the two is wrong, and both chapters are open to corporations. In a liquidation, creditors rank ahead of stockholders, and common stockholders are paid last, only if anything remains.

Which corporate action is mandatory, meaning the shareholder takes no action and has no choice?

• a.Accepting a tender offer
• b.Exercising a rights offering
• c.Electing to receive stock in place of cash
• d.A 2-for-1 forward stock split✓

A forward split is mandatory: the issuer changes every holder's share count automatically and no decision is required. A tender offer, a rights offering and an election between stock and cash are voluntary, because the holder must choose to participate and respond by a deadline or the opportunity lapses.

A company earns $10 million and has 5 million shares outstanding. It repurchases 500,000 shares, and net income is unchanged. What is the earnings per share after the buyback, to the nearest cent?

• a.$2.22✓
• b.$1.82
• c.$1.80
• d.$2.00

Earnings per share is net income divided by shares outstanding. After the buyback there are 4.5 million shares, so EPS is $10 million / 4.5 million = $2.22 (versus $2.00 before). $2.00 ignores the lower share count. $1.82 divides by 5.5 million, adding the repurchased shares instead of removing them. $1.80 assumes net income fell 10% ($9 million / 5 million), but the question holds income unchanged.

In a stock merger, each target share converts into 0.75 share of the acquirer, with cash paid for any fraction at the acquirer's $40 share price. How are 410 target shares settled?

• a.307 acquirer shares and $40.00 cash
• b.307 acquirer shares and $30.00 cash
• c.307 acquirer shares and $20.00 cash✓
• d.308 acquirer shares and no cash

The exchange gives 410 x 0.75 = 307.5 acquirer shares. The holder receives 307 whole shares, and the 0.5 fractional share is paid in cash: 0.5 x $40 = $20.00. $30.00 values the fraction at 0.75 of a share, using the exchange ratio again. $40.00 pays for a whole share. Rounding up to 308 shares is not how cash in lieu of fractions works.

An issuer sends proxy materials to a broker-dealer for shares held in street name for its customers. What must the firm do?

• a.Forward the materials only to customers who request them
• b.Hold the materials until after the meeting, since the customers are not holders of record
• c.Forward the materials to the beneficial owners and ask for voting instructions✓
• d.Vote the shares as the firm sees fit, since they are registered in its name

Rule 2251 requires a member to forward proxy and annual-report material to the beneficial owners of stock held in street name and to ask for their voting instructions. The firm is the registered holder, but it cannot vote those shares on its own judgment unless an exception applies. Sending material only on request or holding it until after the meeting denies owners their voting rights.FINRA Rule 2251

A company sets a May 1 record date for its annual meeting on June 15. An investor buys shares on May 8 and holds them through the meeting. May she vote those shares?

• a.No, because only May 1 holders of record may vote✓
• b.Yes, because the purchase settled before the meeting
• c.Yes, because she owns the shares on the meeting date
• d.Yes, but only if she owns shares for 60 days or longer

Voting rights follow the record date set for the meeting. Only holders on the record date, May 1, are entitled to vote, so a buyer who purchases afterward may not vote the shares at that meeting, even though she owns them on the meeting date and the purchase settled before it. The record date, not the meeting date or settlement date, decides, and there is no 60-day holding requirement.Exchange Act Section 14(a)

A customer deposits $18,000 in cash in a new margin account and wants to buy as much marginable stock as Regulation T permits. What is the largest purchase the customer can make?

• a.$54,000, with the firm lending $36,000 on one-third down
• b.$72,000, with the firm lending $54,000 on a 25% deposit
• c.$18,000, because the full price must be paid in cash
• d.$36,000, with the firm lending the other $18,000✓

Regulation T sets initial margin at 50% of the current market value, so every dollar of equity supports two dollars of purchases: $18,000 / 0.50 = $36,000, of which the firm lends $18,000. Paying in full would be the rule for a cash account, not a margin account. A 25% deposit is the FINRA maintenance level for long stock, not the initial requirement, and would imply $72,000. A one-third deposit appears in no rule and would imply $54,000.Regulation T, 12 CFR 220.12(a)

A margin account holds long marginable stock now worth $24,000 against a debit balance of $20,000. Using the 25% maintenance requirement in FINRA Rule 4210, what is the minimum maintenance call?

• a.$2,000, the gap between $6,000 required and $4,000 of equity✓
• b.$8,000, the amount needed to bring equity back to 50%
• c.$4,000, the amount of equity that remains in the account
• d.$6,000, the full 25% requirement on the current value

Equity is $24,000 - $20,000 = $4,000. The 25% maintenance requirement is 0.25 x $24,000 = $6,000, so the shortfall and minimum call is $2,000. The full $6,000 is the requirement itself, not the shortfall. Restoring 50% equity would need $12,000 - $4,000 = $8,000, but that is the Regulation T initial level, not what maintenance demands. The $4,000 is simply the equity the customer still has.FINRA Rule 4210(c)(1)

A customer sells short 400 shares of a $55 stock in a margin account. Besides the $22,000 of short-sale proceeds, how much must the customer deposit to meet the Regulation T initial requirement?

• a.$5,500, which is 25% of the value of the short position
• b.$11,000, since the requirement is 150% of the $22,000 value✓
• c.$22,000, which is 100% of the entire value of the short position
• d.$6,600, which is 30% of the value of the short position

For a short sale of a non-exempt stock, Regulation T requires 150% of the current market value: $33,000 on a $22,000 position. The $22,000 of proceeds counts toward it, so the customer deposits the remaining $11,000, or 50% of the value. The 25% and 30% figures are FINRA maintenance levels for long and short stock, which apply later, not at the outset. Depositing 100% of the value would double-count the proceeds the firm already holds.Regulation T, 12 CFR 220.12(c)

A customer is short 800 shares of a stock that now trades at $14 in a margin account. Under FINRA Rule 4210, what is the minimum maintenance margin on this position?

• a.$3,360, which is 30% of the $11,200 market value, with no floor
• b.$4,000, the $5-per-share floor, which exceeds 30% of the value✓
• c.$2,800, which is 25% of the $11,200 market value of the stock
• d.$11,200, which is the full market value of the shares sold short

For a short stock priced at $5.00 or more, Rule 4210 requires the greater of $5.00 per share or 30% of market value. Here 30% of $11,200 is $3,360, but $5.00 x 800 shares is $4,000, and the greater amount governs. Using 30% alone ignores the per-share floor. The full market value is the requirement only for shorts under $5. The 25% rate belongs to long positions.FINRA Rule 4210(c)(3)

A margin customer is told to deposit $4,000 by Friday. On Thursday the firm sells shares from her account without calling again. She objects that she was owed until Friday and the right to choose the shares. What does the margin disclosure statement required by FINRA Rule 2264 say?

• a.The firm may sell without contacting her, and she cannot choose which shares✓
• b.The firm had to send a second written notice before selling any position
• c.The firm had to wait for the Friday deadline it set before selling anything
• d.The firm may sell without notice, but she may choose which of her shares are sold

The statement every non-institutional margin customer receives says the firm can sell securities without contacting the customer, may do so even after giving a deadline, and that the customer is not entitled to choose which securities are sold or to an extension of time. A stated deadline therefore does not bind the firm, the customer has no say in what is liquidated, and no second notice is required.FINRA Rule 2264