Section 4 Practice Quiz Questions

A corporation with a 7% $100 par cumulative preferred paid $5 to preferred stockholders last year. Before the company can pay common dividends, how much must it pay each preferred share outstanding? A) $9.00 B) $15.00 C) $3.00 D) $7.00

A) $9.00

Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? I. As an inducement to make the bonds more marketable. II. To lower their interest cost on the issue. III. To increase the marketability of their common stock. IV. To increase the number of common shares outstanding. A) I and II. B) I only. C) I and IV. D) I, II, III and IV.

A) I and II.

Which of the following statements best describes cumulative preferred stock? A) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock. B) Owners are allowed to vote for directors using the cumulative voting procedures. C) Owners lose any claim to dividends that are not paid in any one year. D) Owners receive an extra dividend along with common shareholders, in addition to the preferred dividend.

A) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock.

As interest rates fall, prices of straight preferred stock will: A) rise. B) remain unaffected. C) fall. D) become volatile.

A) rise.

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the 2 previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $16.00 B) $24.00 C) $8.00 D) $0.00

B) $24.00

Which of the following statements accurately describes the doctrine of limited liability? A) A shareholder of a corporation has some personal liability for the corporation's debts. B) A shareholder of a corporation is not personally liable for the corporation's debts. C) A partner is not personally liable for the debts of the partnership. D) The owner of a sole proprietorship is not personally liable for the proprietorship's debts.

B) A shareholder of a corporation is not personally liable for the corporation's debts.

An investment in which of the following would expose the investor to the greatest capital risk? A) Debentures. B) Common stock. C) Mortgage bonds. D) Preferred stock.

B) Common stock.

A company's dividend on its common stock is: A) mandatory if the company is profitable. B) determined by its board of directors. C) voted on by shareholders. D) specified in the company charter.

B) determined by its board of directors

When using the Dividend Discount Model, A) a higher degree of accuracy in forecasting stock prices is obtained with preferred stock B) future expected dividends are discounted to compute the present value of the stock C) the discount rate is generally lower than the expected rate of return D) best results are obtained from stocks that pay irregular dividends

B) future expected dividends are discounted to compute the present value of the stock

When analyzing a preferred stock, an investment adviser would give the most credence to: A) the company's short-term debt obligations. B) the ability of the company to pay the stated dividend. C) book value per share. D) earnings per share.

B) the ability of the company to pay the stated dividend.

An analyst using the dividend growth model would take into account all of the following factors EXCEPT: A) the growth of the dividend. B) the current earnings per share. C) the investor's required rate of return. D) the current dividend.

B) the current earnings per share.

A common stockholder's rights include all of the following EXCEPT: A) electing the board of directors. B) the right to determine the par value of the stock. C) preemptive rights. D) the receipt of dividends if declared by the board of directors.

B) the right to determine the par value of the stock.

Investing in emerging market stocks primarily exposes your client to which of the following risks? I. Currency. II. Inflation. III. Liquidity. IV. Political. A) I and IV. B) II and III. C) I, II, III and IV. D) I, III and IV.

C) I, II, III and IV.

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? I. Loss of principal II. Price volatility of preferred stock is closely related to interest rates III. Preferred stock cannot be traded as readily as bonds IV. If the stock is callable, the client's income can be suddenly lowered A) III and IV B) I and II C) I, II, and IV D) I, II, III, and IV

C) I, II, and IV

Which of the following statements regarding rights is TRUE? A) Common stockholders do not have the right to subscribe to a rights offering. B) Neither common nor preferred stockholders have the right to subscribe to a rights offering. C) Both common and preferred stockholders have the right to subscribe to a rights offering. D) Preferred stockholders do not have the right to subscribe to a rights offering.

D) Preferred stockholders do not have the right to subscribe to a rights offering.