FINC Ch 14 Smartbook

Common stock that has been issued but is currently held by the company is called _________.

treasury stock

If a firm issues 100 million shares of stock with part value $.10 what is the total par value?

$10 million

If the annual coupon rate on a fixed interest loan is 12% and the amount borrowed is $1000, how much is the annual interest payment?

$120

Select all that apply Why is it that buying or selling financial securities in an efficient market is a zero NPV investment? Choose all that apply.

- The price of a financial security in an efficient market is the present value of the expected future cash flows.- Financial securities are priced at their true value and investors cannot make excess profit from the transaction.

Only _______ percent of the dividends received by a corporation for their ownership in the preferred or common stock of another corporation is subject to corporate taxes.

30

In cumulative voting, if nine directors are up for election and you own 50 shares of stock, how many votes can you cast?

450

Which shareholder is more likely to receive regular dividend income?

A preferred stockholder

True or false: If a corporation uses cumulative voting and you are a minority shareholder who wants a seat on the board, you will prefer staggering.

False

Why is it that a firm's capital investments can be positive NPV investments? Choose all that apply.

Firms may enjoy a monopoly advantage in their geographical area. Firms can exploit patents or exclusive technology to create competitive advantage. Firms can build customer recognition and loyalty for their products to generate repeat sales.

Under what conditions may a preferred stockholder be given the right to vote?

If preferred dividends have not been paid

Recently, which of the following sources of funds has played the greatest role in the financing of U.S. nonfinancial firms?

Internal funds

Like common stock dividends, preferred stock dividends are paid out of ________ income.

after-tax

When a company bundles the cash flows from a group of loans and sells them, the resulting bond is called a(n) _________.

asset-backed bond

The maximum number of shares that a firm can issue without the approval of the existing shareholders is called the _____________.

authorized share capital

When a corporation fails to repay interest and/or principal payments on its debt, it may go into _______ and have to hand-over its assets to the creditors.

bankruptcy

Because interest payments on debt are paid out of _______ income and dividends are paid out of ________ income, debt has a tax advantage over equity.

before-tax; after-tax

A bond that may be converted entirely to shares of stock at the discretion of the bondholder is called a ______ bond.

convertible

Preferred stock that includes the option of exchanging it for the company's common stock is called _________ preferred stock.

convertible

The difference between the issue price and par value of a stock is the _______________.

additional paid-in capital

Knowing that the issuing firm may buy back a callable bond, its market price will never rise above its _________.

call price

The price that the issuing firm will pay investors for a callable bond that is being bought back is known as the ________.

call price

The ________ sets the agenda and guides the board's deliberations, thereby having extra influence over the board.

chair of the board

The fixed interest rate charged on most long term loans is called the _______ rate.

coupon

A corporation will choose to go bankrupt only if the value of its assets is less than the amount of its ____________.

debt

When a company repurchases $10 million of its outstanding stock from stockholders, the book value of stockholders' equity _________.

decreases by $10 million

Internally generated cash is calculated as a combination of:

depreciation retained earnings

Different classes of stock usually imply

disproportional voting rights

The price at which a share of stock is recorded in the company's books when issued is referred to as the _________.

par value

Net common equity is the sum of ______ , _______ and _______ less _______.

par value; additional paid in capital; retained earnings; repurchased stock

In general, ______ shareholders do not have the right to vote.

preferred

Loans with floating rate interest payments are usually tied to benchmark rates such as the ______.

prime rate

The main goal of a proxy fight is:

to replace the current management team

A firm's financial deficit is the gap between __________ and __________.

internally generated cash; cash the company needs

Net common equity is the total amount contributed by shareholders in direct and indirect ways when the firm:

issues new stock plows back earnings

A long-term rental agreement is called a:

lease

When a bond has a sinking fund, investors may be prepared to lend at a ________ rate of interest for that bond.

lower

The most common type of asset-backed bond is backed by:

mortgages

In majority voting, if nine directors are up for election, each director is voted on separately and each stockholder can cast ____ vote(s) per candidate for each share they own.

one

A staggered election occurs when:

only a fraction of the board are elected at a time

The board of directors of a public corporation usually consists of the following members. (Select all that apply.)

outside directors who are not firm employees members of the firm's top management The CEO

Common stock that has been issued and is in the hands of shareholders is called ________.

outstanding shares

A bond that is sold directly to a small number of qualified institutional investors and may only be resold to other qualified institutional investors is called a _________.

private placement

The sale of securities to a limited number of investors without a public offering is called a(n):

private placement

In a leasing arrangement, if the lessee fails to make lease payments, the lessor may _______ the leased equipment.

repossess

An indirect form of shareholder investment in the company that occurs when the company keeps some portion of its profits for reinvestment is called __________.

retained earnings

The firm must make up its financial deficit by ________ or _______.

selling new equity; borrowing

A firm's authorized share capital is the maximum number of shares the firm can issue without ______ approval.

shareholder

Most major corporations are owned by multiple investors, called __________.

shareholders

In order to be prepared to repay a bond's principal at maturity, a firm may annually put aside a sum of cash into a _______ fund.

sinking

The owners of most major corporations are called _________ or _________.

stockholders; shareholders

Collateralized debt obligations backed by __________ became nearly worthless during the financial crisis of 2008, resulting in huge losses for investors.

sub-prime mortgages

By 2007, more than half of the new issues of CDOs involved exposure to ________.

subprime mortgages

Some decisions, such as approval of mergers, require much more than 50% of the shareholder votes to approve. This is called a ______.

supermajority vote

Since interest payments on debt are paid out of before-tax income, debt reduces the ________ of the firm.

tax liability

The typical marketing location of Eurobonds is

London branches of international banks

Who elects the board of directors?

Shareholders

Earnings not paid out as dividends are called:

retained earnings

Initially, convertible preferred stock received ____dividends but has the option to exchange this preferred stock for the company's ____ ____

Blank 1: fixed Blank 2: common Blank 3: stock, shares, or equity

Appointing a non-executive chair for the board of directors reduces the influence of the ______ on the board of directors.

CEO

Who enjoys the right to elect the board of directors in a corporation?

Common stockholders

Which two groups usually compete to obtain votes from shareholders during a proxy fight?

Current management and an outside group of shareholders

Which of the following best describes the prime rate?

It is the rate charged by banks to large customers with very good credit

Which two types of voting methods are used to elect directors to a corporation's board?

Majority voting Cumulative voting

When is a corporation legally obligated to pay dividends to preferred stockholders?

Never

What happens if preferred stock dividends are unpaid?

No dividends will be paid on common stock until the preferred dividend has been paid.

Which securities are paid out on an after tax basis?

Preferred Stock Common Stock

Stock is almost always sold to investors at a price that exceeds the par value. This additional amount over par is recorded on the company's books as ____________ or _____________.

additional paid in capital capital surplus

If Nuka-Cola purchases 100,000 shares at $35 per share of Poseidon Energy which pays a dividend of $2 per share, what is the tax liability for Nuka-Cola with respect to its ownership of Poseidon Energy during the first year (assuming it sells none of the shares)?

Reason:$2 X 100,000 X .50 = $100,000

Who is entitled to any profits that are left after lenders have been paid?

Shareholders

Which of the following statements is/are true of the relationship between shareholders and the board of directors?

The board of directors acts as a link between shareholders and management. The board of directors' role is to protect the interests of shareholders. Shareholders elect the board of directors.

What is the legal consequence if the firm is unable to pay dividends to preferred stockholders?

There is no legal consequence as dividends are not a liability.

Which of the following is the primary motive for creating dual or multiple classes of stock?

To maintain control of the firm

When a company repurchases some of its outstanding stock from stockholders and returns it to the company treasury, the book value of stockholders' equity is _________.

decreased

A ________ is a bond that is sold internationally regardless of its currency of denomination.

eurobond

Dollars held on deposit in banks outside of the U.S. are called _______

eurodollars

Pounds held on deposit in banks outside of the U.K. are called _______.

europounds

Debt that is repayable more than one year from the date of issue is called _______ debt, or _______ debt.

funded; long-term

A convertible bond will sell at a _________ a comparable bond that is not convertible.

higher price than

If a supermajority of votes are needed for a firm to be taken over, this protects

incumbent management

The New York Stock Exchange and NASDAQ require that the board of directors of their member firms have a majority of __________ directors.

independent outside

Debt that is repayable less than one year from the date of issue is called _______ debt, or _______ debt.

unfunded; short-term

The right to buy shares from a company at a stipulated price before a set date is called a ___________.

warrant

The right to buy shares from a company at a stipulated price before a set date is called a:

warrant