FI 400 CH 7
A firm issued 10,000 shares of $2 par-value common stock, receiving proceeds of $40 per share. The amount recorded for the paid-in capital in excess of par account is ________. A) $420,000 B) $380,000 C) $400,000 D) $800,000
B
A firm issued 5,000 shares of $1 par-value common stock, receiving proceeds of $20 per share. The amount recorded for the paid-in capital in excess of par account is ________. A) $5,000 B) $95,000 C) $100,000 D) $0
B
A proxy statement gives shareholders the right ________. A) of one vote for each share owned B) to give up their vote to another party C) to maintain their proportionate ownership in the corporation when new common stock is issued D) to sell their share of stock at a premium
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
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
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
Which of the following is a marketable security? A) mutual funds B) Treasury bill C) provident fund D) forward contracts
B
Which of the following is an attribute of investment bankers? A) They make long-term investments for banking institutions. B) They bear the risk of selling a security issue. C) They act as middlemen between the issuer and the banker. D) They provide the issuer with advice relating to the amounts of dividend to be paid.
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
Which of the following is true of outstanding shares? A) A firm cannot sell more shares than the outstanding shares mentioned in the charter. B) Authorized shares become outstanding shares when they are issued or sold to investors. C) Outstanding shares are indicated in a firm's corporate charter. D) Outstanding shares are the shares repurchased by the firm.
B
Which of the following is true of par value of a common stock? A) It is determined on the basis of the stock's market value. B) It is an arbitrary value established for legal purposes in a firm's corporate charter. C) It indicates the market value at which the stock was originally sold. D) It allows stockholders to purchase additional shares at a price below the market price.
B
Which of the following is true of the issuance of nonvoting common stock? A) It is issued in the event of a hostile takeover to preserve the interests of existing owners. B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control. C) It helps the existing stockholders to automatically transfer their voting rights to new stockholders without any legal proceeding. D) It tends to result in the dilution of voting rights of current stockholders.
B
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 firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $10,000 and $250,000, respectively. The firm has 10,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________. A) $24/share B) $25/share C) $26/share D) $30/share
C
A firm has the balance sheet accounts, Common Stock and Paid-in Capital in Excess of Par, with values of $40,000 and $500,000, respectively. The firm has 40,000 common shares outstanding. If the firm had a par value of $1, the stock originally sold for ________. A) $11.50/share B) $12.50/share C) $13.50/share D) $15.50/share
C
A firm issued 10,000 shares of no par-value common stock, receiving proceeds of $40 per share. The amount recorded is ________. A) $0 in the Common Stock account B) $0 in the Paid-in Capital in Excess of Par account C) $400,000 in the Common Stock account D) $400,000 in the Paid-in Capital in Excess of Par account
C
A proxy battle is the attempt by ________. A) the creditors of a bankrupt corporation to seize assets of the corporation B) the management to dismiss the board of directors for their incapability to manage the operations C) a nonmanagement group to unseat the existing management and gain control of the firm D) the employees to form trade unions to influence decisions on behalf of members
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
Common stockholders are sometimes referred to as ________. A) non preemptive right holders B) managers C) creditors D) residual owners
C
Common stockholders expect to earn a return by receiving ________. A) semiannual interest B) fixed periodic payments C) dividends D) annual interest
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
In a ________, new shares are sold to the existing shareholders. A) private placement B) public offering C) rights offering D) direct placement
C
Preferred stock is characterized by ________. A) voting rights B) maturity date C) quasi-debt nature D) preemptive rights
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
Shares of stock currently owned by a firm's shareholders are called ________. A) authorized shares B) issued shares C) outstanding shares D) treasury shares
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
The preemptive right gives shareholders the right ________. A) to caste one vote for each share owned at the annual meeting of the company B) to give up their vote to another party if they do not attend the annual meeting C) to maintain their proportionate ownership in the corporation when new common stock is issued D) to sell their share of stock at a premium in the event of liquidation
C
The purpose of nonvoting common stock is to ________. A) limit the voting power of the management B) allow the minority interest to elect one director C) raise capital without giving up any voting control D) give preference on distribution of earnings to those shareholders who own the stock
C
Treasury stock refers to the ________. A) sale of stock at a price greater than the par value B) stock issued by the US government C) repurchase of outstanding stock D) authorization of additional shares of stock by the board of directors
C
Which of the following is an advantage for a firm to issue common stock over long-term debt? A) the cost of equity financing being 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
Which of the following is true of common stock ? A) It is often considered quasi-debt due to fixed payment obligation. B) It has less restrictive covenants than debt. C) It gives the holder voting rights which permit selection of the firm's directors. D) Its holders have priority over preferred stockholders in the event of liquidation of assets.
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
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
A(n)________ is hired by a firm to find prospective buyers for its new stock or bond issue. A) securities analyst B) trust officer C) commercial loan officer D) investment banker
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
If a firm has class A and class B common stock outstanding, it means that ________. A) each class receives a different dividend B) the par value of each class is different C) the dividend paid to one of the classes is tax deductible by the corporation D) one of the classes is probably nonvoting stock
D
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
Regarding the tax treatment of payments to securities holders, it is true that ________. A) interest and preferred stock dividends are not tax-deductible ,while common stock dividends are tax deductible B) interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductible C) common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductible D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible
D
Which of the following is true of a common stock? A) It gives voting rights which permit determination of the amount of dividend receivable. B) It gives claims on income and assets which are superior to the claims of creditors of the firm. C) Dividends on common stock are fully tax-deductible. D) There is no fixed dividend payment obligation for the company.
D
Which of the following is true of securities analysts? A) They raise initial external equity finance privately for firms. B) They are primarily involved in underwriting of securities. C) They find prospective buyers for new stocks or bonds issue. D) They use a variety of models and techniques to value stocks.
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
A prospectus is another term for a firm's annual report showing the firm's prospects for the coming year.
False
American Depositary Receipts (ADRs) are claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.
False
An underwritten issue of common stock is one in which a firm purchases insurance to cover unexpected losses suffered by shareholders.
False
Corporate venture capital funds are subsidiaries of financial institutions, particularly banks, set up to help young firms grow and, it is hoped, become major customers of the institutions.
False
Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm's earnings than previously.
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
Preferred stockholders are often referred to as residual claimants.
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 claims of the equityholders on a firm's assets have priority over the claims of creditors because the equityholders are the owners of the firm.
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 stock is generally reclassified as class B common stock and has voting rights.
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
Venture capitalists invest in promising early-stage companies in exchange for a portion of the firm's equity.
False
A common stockholder has no guarantee of receiving any cash inflows, but receives what is left after all other claims on the firm's income and assets have been satisfied.
True
A prospectus is a portion of the security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.
True
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
Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity.
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
Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.
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
Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made.
True
Preemptive rights allow existing shareholders to maintain voting control and protect themselves against the dilution of their ownership.
True
Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.
True
Small business investment companies (SBICs) are corporations chartered by the federal government that can borrow at attractive rates from the U.S. Treasury and use the funds to make venture capital investments in private companies.
True
Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.
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
Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation.
True
Unlike creditors, equityholders are owners of the firm.
True
A group formed by an investment banker to share the financial risk associated with underwriting new securities is called a(n) ________. A) underwriting syndicate B) selling group C) investment banking consortium D) broker pool
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
Holders of equity capital ________. A) own the firm B) receive interest payments C) receive guaranteed income D) have loaned money to the firm
A
Stock rights provide the stockholder with ________. A) the right to purchase additional shares in direct proportion to their number of owned shares B) the right to elect the board of directors C) cumulative voting privileges over the preference stockholders D) the opportunity to receive extraordinary earnings
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 financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares. A) Rights offering B) Treasury stocks C) Preemptive rights D) Proxy statements
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
