Chapter 3 - Custom Exam v.1

XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of XYZ common stock is:

$90,000,000 - A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = $90,000,000.

Preferred shares:

Don't have the right to vote - Preferred shares receive dividends before the common shares. In addition, preferred shares will be paid before common shares if the company declares bankruptcy (i.e., if the firm is liquidated). However, the bondholders are paid before the preferred shares in bankruptcy. Typically, only common shareholders of a company receive the right to vote in corporate elections.

Preferred dividends:

Must be satisfied before common dividends - Preferred shares receive dividends before the common stock dividends can be paid. However, a company doesn't guarantee preferred dividends will be paid each year.

If a company is utilizing statutory voting, how many votes will a common shareholder receive per vacant seat on the board?

One vote for each share that the stockholder owns - When using the statutory voting method, a shareholder is given one vote, per share, per open seat on the board. For example, if an investor owns 1,000 shares and there are three openings on the board, she's able to cast 1,000 votes for the three open seats. If she chooses not to use all of her 1,000 votes per open seat, she cannot transfer them to another candidate. If the company utilized a cumulative voting system, a shareholder is able to multiply the number of shares owned by the number of open seats on the board. With this method, the stockholder is able to be very selective in how to cast her votes. For example, a stockholder may choose to use all of her votes on only one candidate, thereby making it more likely that her candidate will gain a seat on the board.

In a Chapter 11 bankruptcy proceeding, which of the following has the highest priority claim?

Secured debt holders - In a bankruptcy proceeding, secured creditors are given the highest claim priority. For companies is the U.S., there are two types of bankruptcy proceedings -- Chapter 7 and Chapter 11. Chapter 7 is when the company is going out of business and all of the assets owned by the company are sold. This type of bankruptcy is also referred to as liquidation. Chapter 11 is also referred to as reorganization because the company is not going out of business; instead, it's taking steps to come out of the proceedings in a healthier financial position.

Common and preferred stock are similar in that:

The dividends for both must be declared by the board of directors - Dividends for both common and preferred stock must be declared by the board of directors. While preferred stock normally has a fixed dividend, neither common nor preferred stockholders are guaranteed a dividend.

Which of the following statements is TRUE regarding warrants?

Warrants can be perpetual - Warrants can be perpetual in their duration and are issued by the corporation that also issues the common stock. Warrants give the holder the ability to convert the warrant into the common stock of the same corporation at a specified price and at the holder's option.

Which of the following represents the correct ranking of securities from longest to shortest life?

Warrants, options, rights - Rights usually last less than 60 days. Options usually last for nine months or less, although some can exist for three years. Warrants usually have a life span of several years and they can even be perpetual.

A method of voting that gives smaller, less substantial stockholders a greater degree of voting power over the larger, more substantial stockholders is:

cumulative voting - A method of voting that gives larger, more substantial stockholders a greater degree of voting power over smaller, less substantial stockholders is statutory voting. Under statutory voting, each stockholder has one vote per share, per election. For example, if a corporation is electing three directors, and a shareholder owns 100 shares, the shareholder could cast 100 votes in each election. Cumulative voting permits shareholders to concentrate their votes for one favored candidate. For example, if a corporation is electing three directors and a shareholder owns 100 shares, that shareholder could cast 300 votes for one director, potentially having a larger influence on that one election.

A corporation's shareholders must vote for: a. Cash dividends b. Stock dividends c. Stock splits d. Stopping dividends

stock splits - The board of directors has control over dividends but must have shareholder approval for a stock split.