A stock trades at $48 with $3 EPS. The industry P/E is 20x. Is it cheap or expensive? If you said "cheap because 16x is below 20x," you got the direction right but skipped the punchline: the P/E-implied intrinsic value is $60, making the stock undervalued by 25%. The Series 65 wants you to finish the calculation.
Common stock gives you two core rights: voting and residual claim. You vote on board elections, mergers, and charter amendments. If the company liquidates, you get whatever remains after creditors and preferred shareholders are paid. That residual claim is why common stock sits at the bottom of the capital structure.
Two voting systems show up on the exam. Statutory (straight) voting gives you one vote per share per seat. You cannot concentrate votes. Cumulative voting lets you multiply your shares by the number of open seats and stack all those votes on one candidate. Cumulative voting protects minority shareholders.
KEY: Cumulative voting formula, to guarantee electing one director, you need: (total shares outstanding / (seats + 1)) + 1 shares.
Common mistakes
- Using the wrong denominator in the cumulative voting formula. The formula is (shares outstanding / (seats + 1)) + 1. With 1,000,000 shares and 5 seats, the answer is 166,668. The trap uses (seats) instead of (seats + 1) and gets 200,001.
- Forgetting to grow D0 to D1 in the DDM. If a question gives the current dividend as $2.80 growing at 4%, the numerator is $2.80 times 1.04 = $2.912, not $2.80. Using D0 instead of D1 gives a value roughly 4% too low.
- Confusing NQSO and ISO tax treatment at exercise. NQSO spread is ordinary income. ISO spread triggers no regular income tax but may cause AMT. The exam puts the NQSO treatment as a trap answer on ISO questions and vice versa.
Bottom line
- Common stock = voting rights + residual claim; preferred stock = fixed dividend + priority but usually no vote
- ADRs let U.S. investors hold foreign shares in dollars; sponsored ADRs must file with the SEC
- Cumulative preferred accumulates unpaid dividends as arrears, paid in full before any common dividend
- DDM: Price = D1 / (r - g), where D1 = D0(1 + g); valid only when r > g
Exam shortcut
When a DDM question gives you D0 instead of D1, your first move is always to multiply by (1 + g). The trap answer uses D0 directly, and it will appear as one of the choices. Remember the voting split: Straight = one-per-seat, Cumulative = stack-on-one. Cumulative protects minorities. For the formula, the denominator is always seats plus one, not seats alone. Golden cross = bullish (gold is good).
The full lesson (about 3,048 words, 20 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- B5
- B6
- B7
- B8
- B9
- B10
- B11
- B12
- B13
- B14
- B15
- B16
- B17
- B18
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