Chapter 15
In the U.S. the principal value of a bond is most commonly: A. $100. B. $5,000. C. $500. D. $10,000. E. $1,000.
E. $1,000.
Which one of these is not included in the indenture? A. bond seniority B. registered owner C. protective covenant D. call provision E. repayment provisions
B. Registered owner
Different classes of stock usually are issued to: A. allow a certain group to maintain ownership control while reducing that group's equity position. B. reduce the firm's dividend obligation. C. fool investors. D. extract perquisites from one class of shareholders without the other class of shareholders knowing. E. distinguish the time periods in which the various shares were issued.
A. Allow a certain group to maintain ownership control while reducing that group's equity position.
There are 3 directors' seats up for election. If you own 1,000 shares of stock and have been granted a total of 3,000 votes, then the firm uses the voting procedure referred to as: A. cumulative voting. B. absolute priority voting. C. sequential voting. D. straight voting. E. market share voting.
A. Cumulative voting.
Rembrandt bonds are associated with which country? A. Netherlands B. Switzerland C. Germany D. Belgium E. Austria
A. Netherlands
If a group other than current management solicits the authority to vote shares as part of their effort replace the current management team, a _____ is said to occur. A. proxy fight B. stockholder derivative action C. tender offer D. vote of confidence E. seniority turnover
A. Proxy fight
Which one of these is a positive covenant? A. The firm must maintain a current ratio of 1.2 or better. B. The firm will not issue any debt with higher seniority. C. The firm cannot be acquired in a friendly takeover. D. No dividend increases will be allowed. E. The market debt-equity ratio cannot exceed .60.
A. The firm must maintain a current ratio of 1.2 or better.
Which one of these terms is used to refer to short-term debt? A. unfunded debt B. allocated debt C. notes D. bonds E. expensed debt
A. Unfunded debt
Bonds with attached warrants are frequently issued: A. with very low coupons. B. at a greatly discounted price. C. with an attached share of preferred stock. D. with a share purchase price set equal to the market price minus the stock's par value at time of purchase. E. with an attached share of common stock.
A. With very low coupons.
There are three seats on the board of directors of MMT, Inc. up for election. The firm has 175,000 shares of stock outstanding and uses cumulative voting. Each share is granted one vote per open seat. You currently own 10,000 shares that have a market value of $23 each. How much must you spend, if anything, to acquire sufficient shares to guarantee your election to the board? Assume no one else votes for you. A. $1,111,690 B. $776,273 C. $830,814 D. $1,006,273 E. $688,230
B. $776,273
Analysts estimate that a bond has an equal probability of being priced at either $940 or $1,050 one year from today. The bond is also callable at any time at $1,020. What is the expected value of this bond in one year? A. $995 B. $980 C. $1,000 D. $1,020 E. $940
B. $980
There are seven seats on the board of directors of Furniture Unlimited up for election. The firm has 246,500 shares of stock outstanding and uses straight voting. Each share is granted one vote. How many shares must you control if you want to guarantee your election to the board assuming no one else votes for you? A. 123,250 B. 123,251 C. 30,814 D. 35,215 E. 30,813
B. 123,251
There are five seats on the board of directors of Atlas Corp. up for election. The firm has 120,000 shares of stock outstanding and uses cumulative voting. Each share is granted one vote per open seat. How many shares must you control if you want to guarantee your election to the board assuming no one else votes for you? A. 24,000 B. 23,999 C. 20,001 D. 20,000 E. 24,001
B. 23,999
Financial economists prefer to use market values rather than book values when measuring debt ratios because market values are: A. more stable than book values. B. a better reflection of current information. C. net of taxes. D. used by Standard amp; Poor's to measure credit worthiness. E. required by financial regulators.
B. A better reflection of current information.
Which set of circumstances would best ensure the price of a bond with attached warrants will increase given no change in the bond's credit quality or terms? A. an increase in both the market rate of interest and the underlying stock price B. a decrease in the market rate of interest and an increase in the underlying stock price C. an increase in the market rate of interest and a decrease in the underlying stock price D. a decrease in both the market rate of interest and the underlying stock price E. a decrease in the market rate of interest with no change in the underlying stock price
B. A decrease in the market rate of interest and an increase in the underlying stock price
Sinking fund arrangements are least apt to contain which one of these requirements? A. a deferred provision for the first few years B. a one-time repayment of the entire principal and interest at maturity C. a balloon payment D. equal payments of principal over the life of the bond E. sufficient payments over the bonds' life to retire the entire bond issue
B. A one-time repayment of the entire principal and interest at maturity
A grant of authority allowing someone else to vote shares of stock that you own is called: A. a power-of-share authorization. B. a proxy. C. a share authority grant (SAG). D. a restricted conveyance. E. a general right of execution.
B. A proxy
Which characteristic does not apply to Eurobonds? A. generally traded from London B. always denominated in euros C. always denominated in a single currency D. generally denominated in the issuer's home currency E. issued in multiple countries
B. Always denominated in euros
If an issuer retires a debt issue before maturity, the specific amount paid to do so is called the: A. amortized payoff. B. call price. C. sinking fund amount. D. the discount. E. par or face amount.
B. Call price.
Preferred stock dividends: A. become a debt of the firm if unpaid. B. can be deferred indefinitely. C. are only paid if common stock dividends are also paid. D. have priority over debt interest payments but not common stock dividends. E. are a tax-deductible business expense.
B. Can be deferred indefinitely.
Which one of these applies to floating-rate bonds? A. Bondholders can generally redeem their bonds at par at any time. B. Coupon payments are variable while the par value is fixed. C. Interest adjustments are accrued and paid on the maturity date. D. Coupon payments are fixed but the par value is variable. E. Bondholders frequently are granted a put provision at the current market price.
B. Coupon payments are variable while the par value is fixed.
Unsecured corporate debt is called a(n): A. indenture. B. debenture. C. note. D. mortgage obligation. E. preferred stock.
B. Debenture.
Since 1995 U.S. nonfinancial corporations have tended to: A. issue new equity securities and retire debt. B. finance share repurchases with new debt. C. increase their issuance of both debt and equity securities. D. retire more debt than they issue. E. issue more equity shares than they repurchase.
B. Finance share repurchases with new debt.
A bank line of credit: A. generally requires the borrower to borrow the entire credit line amount at some point in time. B. Generally involves a fee charged to the borrower on the unused portion of the revolver. C. may only be offered for periods of one year or less. D. is generally free unless money is actually borrowed. E. allows the borrower to determine the amount of credit to be granted.
B. Generally involves a fee charged to the borrower on the unused portion of the revolver.
Bulldog bonds are associated with which country? A. Spain B. Great Britain C. France D. Germany E. Morocco
B. Great Britain
What is the predominant source of financing for positive NPV projects by U.S. nonfinancial corporations? A. preferred stock B. internally-generated funds C. common stock D. publicly-issued debt E. privately-issued debt
B. Internally-generated funds
Which one of these statements related to "junk" bonds is false? A. Investors' appetite for "junk" bonds increases when market interest rates are low. B. Internationally, new issues of "junk" bonds have been prohibited since the financial crisis of 2008. C. "Junk" bonds have low credit ratings. D. "Junk" bonds are more apt to default. E. "Junk" bonds are also called high yield bonds.
B. Internationally, new issues of "junk" bonds have been prohibited since the financial crisis of 2008.
A classified board is one which has: A. representation from various classes of stock. B. terms that expire at different times. C. both employee and non-employee directors. D. directors elected solely by one class of shareholders. E. directors that have been assigned differing numbers of votes per seat.
B. Terms that expire at different times.
A blanket mortgage is securitized by: A. the sinking fund. B. the borrower's inventory. C. all of the borrower's real property. D. the good faith and credit of the borrower. E. the borrower's inventories and accounts receivables.
C. All of the borrower's real property.
Bonds that grant the issuer the right to extinguish the debt prior to maturity are referred to as which type of bond? A. put bond B. debenture C. callable bond D. subordinated bond E. covenant bond
C. Callable bond
The written agreement between a corporation and its bondholders is called the: A. collateral agreement. B. note. C. indenture. D. conveyance. E. legal understanding.
C. Indenture.
If a debt is subordinated, it: A. has a higher priority status than secured creditors. B. is secondary to equity. C. must give preference to the secured creditors in the event of default. D. has been issued because the company is in default. E. is treated as an equity security.
C. Must give preference to the secured creditors in the event of default.
When shareholders are granted preemptive rights, they obtain the right: A. to elect members to the board of directors. B. to share proportionally in regular and liquidating dividends. C. of first refusal for their proportionate percentage of new shares offered. D. to receive dividends prior to any preferred shareholders. E. to resell their shares to the issuer at any time at a predetermined price.
C. Of first refusal for their proportionate percentage of new shares offered.
ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive from this situation? A. ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income. B. ABC benefits because it is able to treat any XYZ dividends it receives as interest income. C. Seventy percent of the dividends paid by XYZ to ABC is exempt from income taxes. D. ABC can exclude 30 percent of any XYZ dividends received from its taxable income. E. All dividend income ABC receives from XYZ is tax-exempt.
C. Seventy percent of the dividends paid by XYZ to ABC is exempt from income taxes.
Firms may prefer to issue cumulative preferred stock rather than debt for which reason? A. If there is no current taxable income, preferred stock dividends are automatically voided. B. Preferred stock has no voting rights but debt does. C. Preferred dividends provide a tax shield but debt does not. D. Corporate investors can receive a tax break on dividends but not on interest. E. Dividend payments are tax deductible, interest on debt is not.
D. Corporate investors can receive a tax break on dividends but not on interest.
Which one of the following statements is true? A. Bondholders are generally granted voting rights equal to those of common shareholders. B. Payments of both interest and dividends are tax-deductible as business expenses. C. Unpaid common stock dividends can force a firm into liquidation. D. Debt increases the possibility of financial distress. E. U.S. non-financial firms tend to use more debt than equity financing.
D. Debt increases the possibility of financial distress.
The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n): A. maintenance of security provision. B. collateral restriction. C. affirmative indenture. D. restrictive covenant. E. put provision.
D. Restrictive covenant.
There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can vote 1,000 votes in each of the three elections, then the firm uses the voting procedures referred to as: A. cumulative voting. B. absolute priority voting. C. sequential voting. D. straight voting. E. market share voting.
D. Straight voting.
Analysts estimate that a bond has a 40 percent probability of being priced at $950 and a 60 percent probability of being priced at $1,050 one year from today. The bond is also callable at any time at $1,010. What is the expected value of this bond in one year? A. $995 B. $980 C. $1,000 D. $1,010 E. $986
E. $986
If a bond has a make-whole call provision, the: A. call premium can be either positive or negative. B. bond's market price will always equal its face value. C. bondholder will receive the face value amount plus interest if the bond is called. D. bondholder will receive the face value amount minus any interest paid to date if the bond is called. E. call price will increase as interest rates decrease.
E. Call price will increase as interest rates decrease.
Which one of these statements correctly applies to either a leveraged or an unleveraged syndicated loan? A. The loan will always be rated as investment grade. B. The loan may not be publicly traded. C. The loan arranger is not involved with the actual lending. D. Each bank that participates negotiates the terms for its portion of the overall loan. E. Each bank has its own loan agreement with the borrowers.
E. Each bank has its own loan agreement with the borrowers.
Which type of bond only pays coupon payments if it can do so from the income earned by the firm? A. No bond B. readi-cash bond C. floater bond D. LIBOR-based bond E. income bond
E. Income bond
Ideally, corporations try to create securities that have the tax benefits: A. of equity but the bankruptcy benefits of debt. B. and bankruptcy benefits of debt. C. and bankruptcy benefits of equity. D. of debt and the equity benefits of dividends. E. of debt but the bankruptcy benefits of equity.
E. Of debt but the bankruptcy benefits of equity.
Which one of the following statements about preferred stock is true? A. Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense. B. Dividends on preferred stock payable during the next twelve months are considered to be a corporate liability. C. If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year. D. There is no significant difference in the voting rights granted to preferred and common shareholders. E. Preferred stock usually has a stated liquidating value of $100 per share.
E. Preferred stock usually has a stated liquidating value of $100 per share.
If a bond issue is callable, the call price generally is: A. less than par value. B. variable based on the market rate of interest. C. equal to par value. D. constant over the life of the debt. E. set so it decreases as the bond approaches maturity.
E. Set so it decreases as the bond approaches maturity.
Not paying dividends on a cumulative preferred issue may result in: A. preferred dividend arrearages that can be eliminated only after all common dividends are paid. B. increased taxes based on the amount of the dividend arrearage. C. the permanent forfeiture of all unpaid past dividends but the resumption of future dividends. D. the issuer being forced into repaying all preferred shareholders the stated value of their shares. E. voting rights being granted to preferred shareholders.
E. Voting rights being granted to preferred shareholders.