Series 7 – General Securities Representative Exam Equity Securities & Stock Markets 2 — Questions and Answers
Question 1: A company's earnings per share (EPS) is $4 and the stock trades at $60. What is the price-to-earnings (P/E) ratio?
- 10
- 15 (Correct answer)
- 20
- 24
Correct answer: 15
P/E ratio = Price ÷ EPS = $60 ÷ $4 = 15.
Question 2: Which of the following best describes a rights offering?
- An option to buy stock at a discount given to existing shareholders before a new public offering (Correct answer)
- A company's right to repurchase shares on the open market
- A warrant attached to a new bond issue
- The right of bondholders to convert bonds to equity
Correct answer: An option to buy stock at a discount given to existing shareholders before a new public offering
A rights offering allows existing shareholders to purchase new shares at a discounted price before they are offered to the public.
Question 3: What is a tender offer in the context of equity securities?
- An offer by a company to buy back its own shares at a premium
- A public offer to purchase shareholders' shares at a specified price, usually to acquire control (Correct answer)
- An offer by a broker to sell shares at the bid price
- A company's offer to convert preferred shares to common shares
Correct answer: A public offer to purchase shareholders' shares at a specified price, usually to acquire control
A tender offer is a public bid to buy a significant portion or all of a company's shares at a premium to gain controlling interest.
Question 4: Which SEC rule governs the resale of restricted and control securities?
- Rule 144 (Correct answer)
- Rule 10b-5
- Rule 415
- Regulation D
Correct answer: Rule 144
SEC Rule 144 establishes the conditions under which restricted and control securities may be sold to the public.
Question 5: A 'blue chip' stock is best described as:
- A stock trading below $5 per share
- A stock of a well-established, financially stable, large-cap company (Correct answer)
- Any stock listed on the NYSE
- A stock that pays no dividends
Correct answer: A stock of a well-established, financially stable, large-cap company
Blue chip stocks are shares of large, reputable, and financially sound companies with a long history of stable earnings.
Question 6: What is the primary function of a market maker in equity markets?
- To set the official opening price of a stock each day
- To provide liquidity by continuously quoting bid and ask prices (Correct answer)
- To enforce FINRA trading rules on member firms
- To audit company financial statements before listing
Correct answer: To provide liquidity by continuously quoting bid and ask prices
Market makers provide liquidity by standing ready to buy and sell securities at publicly quoted bid and ask prices.
Series 7 – General Securities Representative Exam Equity Securities & Stock Markets 2
A company's earnings per share (EPS) is $4 and the stock trades at $60.
What is the price-to-earnings (P/E) ratio?