Finance Ch 7 practice

CS OR PS: Increases the firm's borrowing power

CS

CS OR PS: Last to receive earnings or distribution of assets in the event of bankruptcy

CS

CS or PS: Potential dilution of earnings and voting power

CS

CS OR PS: Frequently includes a call feature

PS

CS OR PS: May be convertible into another type of security

PS

CS OR PS: May have cumulative and participating features

PS

CS or PS: Used by young firms receiving investment funds from venture capital firms

PS

Edward Accounting Services has an outstanding issue of 1,000 shares preferred stock with a $100 par value, an 9 percent annual dividend, and 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the last two years, how much must preferred stockholders be paid prior to paying dividends to common stockholders?

The amount to be paid to preferred stockholders prior to paying dividends to common stockholders = Cumulative preferred dividends + Current year preferred dividend = $9,000 × 2 + $9,000 = $27,000

9) Holders of equity capital ________. A) own the firm B) receive interest payments C) receive guaranteed income D) have loaned money to the firm

a

ADRs are ________. A) securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets B) securities, backed by Securities Exchange Commission (SEC), that permit all investors to hold shares of U.S. companies and trade them in U.S. markets C) securities, backed by American depositary shares (ADSs), that permit non-U.S. investors to hold shares of U.S. companies and trade them in U.S. markets D) securities, backed by Securities Exchange Commission (SEC), that permit U.S. investors to hold shares of non-U.S. companies and trade them in international markets

a

Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________. A) cumulative B) nonparticipating C) participating D) convertible

a

Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective? A) There is a seniority of preferred stockholder's claim over common stockholders. B) The preferred stockholders have superior voting rights in the selection of board of directors. C) The preferred stockholders are always paid a higher proportion of dividend payments. D) Issuance of preferred stocks will result in a higher risk, to the disadvantage of common stockholders.

a

Which of the following is true of common stocks? A) The common stock of a corporation can be either privately or publicly owned. B) Firms often issue common stock with no par value. C) Preemptive rights often result in a dilution of ownership. D) A firm's corporate charter indicates the rate at which dividends are paid.

a

Which of the following is true of preferred stocks? A) Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock. B) Like bonds, preferred stocks are due for payment on a fixed maturity date along with interest. C) Restrictive covenants of preferred stocks include provisions about listing of stocks on the securities exchange and determining the price of stock. D) A firm's bond indenture indicates how many authorized preferred shares and bonds it can issue.

a

Which of the following is typically a feature of preferred stocks? A) They are settled prior to common stocks during liquidation. B) They are mostly noncumulative in nature. C) They are paid dividends that grow at a constant rate. D) They carry voting rights and have maturity date.

a

________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends. A) Preferred stockholders B) Common stockholders C) Bondholders D) Creditors

a

10) Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________. A) fixed dividend payments B) greater returns from their investment in the firm's stock C) all profits to be paid out in dividends D) warrants to be attached to the stock issue

b

8) Which of the following is a difference between common stock and bonds? A) Bondholders have a voice in management; common stockholders do not. B) Bondholders have a senior claim on assets and income relative to stockholders. C) Stocks have a stated maturity but bonds do not. D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.

b

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________. A) $4.00 B) $8.00 C) $8.80 D) $80.00

b

Which of the following is true of equity? A) equityholders do not have voting rights. B) It does not mature, so repayment is not required. C) It is a temporary form of financing for a firm. D) Equity financing is obtained from creditors.

b

) Preferred stock is characterized by ________. A) voting rights B) maturity date C) quasi-debt nature D) preemptive rights

c

7) Which of the following is an advantage for a firm to issue common stock over long-term debt? A) the cost of equity financing is less than the cost of debt financing B) the primary claim of equityholders on income and assets in the event of liquidation C) no maturity date on which the par value of the issue must be repaid D) the tax deductibility of dividends which lowers the cost of equity financing

c

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year? A) $ 8,000 B) $16,000 C) $24,000 D) $25,000

c

A proxy statement is a statement transferring ________. A) the ownership of a bondholder to another party B) the votes of a bondholder to the another party C) the votes of a stockholder to another party D) the ownership of a stockholder to another party

c

A violation of preferred stock restrictive covenants usually permits preferred shareholders to ________. A) force the company into bankruptcy B) suit against the shareholders C) force the retirement of the preferred stock at or above its par value D) force the company to repurchase the shares at a stated amount below par

c

Equity capital can be raised through ________. A) the money market B) the NYSE bond market C) the stock market D) a private placement with an insurance company

c

Preferred stockholders ________. A) do not have preference over common stockholders in the case of liquidation B) have preference over bondholders in the case of liquidation C) do not have preference over bondholders in the case of liquidation D) have preference over creditors in the case of liquidation

c

The cost of preferred stock is ________. A) lower than the cost of long-term debt B) higher than the cost of common stock C) higher than the cost of long-term debt and lower than the cost of common stock D) lower than the cost of convertible long-term debt and higher than the cost of common stock

c

Which of the following is usually a right of a preferred stockholder? A) right to convert shares to common stock on demand B) preemptive right to participate in the issuance of new common shares C) right to receive dividend payments before any dividends are paid to common stockholders D) right to sue company in bankruptcy proceedings if promised preferred dividends are not paid

c

CS or PS: Source of financing which places minimum constraints on the firm

cs

11) If bankruptcy were to occur, ________ would have the first claim on assets. A) preferred stockholders B) unsecured creditors C) equity stockholders D) secured creditors

d

A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. At the end of the current year, the preferred stockholders must be paid ________ prior to paying the common stockholders. A) $ 0/share B) $12/share C) $24/share D) $36/share

d

Common stockholders are sometimes referred to as ________. A) non preemptive right holders B) managers C) creditors D) residual owners

d

From a corporation's point of view, a disadvantage of issuing preferred stock is ________. A) that it increases financial leverage B) that it has to give fixed payments as well as voting rights to the holders C) its excellent merger security D) that the dividends are not tax-deductible

d

Which of the following is typically a feature of common stock? A) Most common stocks are callable. B) Most common stocks are cumulative. C) Common stocks have a maturity value. D) Common stocks may or may not pay dividends.

d

Which of the following typically applies to common stock but not to preferred stock? A) par value B) dividend yield C) legally considered as equity in the firm D) voting rights

d

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

false

A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left—the residual—after all other claims on the firm's income and assets have been satisfied.

false

Dividends paid to stockholders is tax deductible.

false

No-par preferred stock has no stated face value, but its annual dividend is stated as a percentage of the market value.

false

Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.

false

Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.

false

The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.

false

The market value of common stock is related to its par value because both are sensitive to the reactions of investors to new information.

false

The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.

false

The par value on a common stock is used as a basis for determining its fixed dividend.

false

Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation.

false

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent.

false

Unlike equityholders, creditors are owners of the firm.

false

CS or PS: Fixed financial obligation

ps

Although preferred stock provides added financial leverage in much the same way as bonds, it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.

true

Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.

true

Common stock can be either privately owned by private investors or publicly owned by public investors.

true

Common stockholders are often referred to as residual claimants.

true

Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.

true

Holders of equity have claims on both income and assets that are secondary to the claims of creditors.

true

In the case of liquidation, bondholders are paid first, followed by preferred stockholders, followed by common stockholders.

true

Interest paid to bondholders is tax deductible.

true

Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.

true

The market value of common stock is completely unrelated to its par value.

true

The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock.

true

The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

true

Unlike creditors, equityholders are owners of the firm

true