Question 1

Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level.

Accepted Answer

A) True 
 B)False

Question 2

Shareholders always have preemptive rights when new issues of stock are offered.

Accepted Answer

A) True 
 B)False

Question 3

Ten rights are necessary to purchase one share of stock $84. A right sells for $6.30. The ex-rights value of the stock is:

Accepted Answer

A)  $147. 
B)  $105. 
C)  $63. 
D)  $154. 
A)  $147. 
B)  $105. 
C)  $63. 
D)  $154.

Question 4

Which of the following statements about floating rate preferred stock is true?

Accepted Answer

A)  The dividend rate changes quarterly relative to money market rates. 
B)  The price of the stock will fluctuate with the market. 
C)  The dividend rate is tied to the inflation rate. 
D)  The conversion rate changes annually relative to bankers' acceptance rates. 
A)  The dividend rate changes quarterly relative to money market rates. 
B)  The price of the stock will fluctuate with the market. 
C)  The dividend rate is tied to the inflation rate. 
D)  The conversion rate changes annually relative to bankers' acceptance rates.

Question 5

The floating rate feature on preferred stock allows the shareholders:

Accepted Answer

A)  to receive more dividends than the quoted yield when the firm enjoys a good year. 
B)  to pay lower taxes when the dividend yield increases. 
C)  to receive dividends which the corporation did not pay in previous years. 
D)  to receive a higher or lower dividend yield depending on current competitive market conditions. 
A)  to receive more dividends than the quoted yield when the firm enjoys a good year. 
B)  to pay lower taxes when the dividend yield increases. 
C)  to receive dividends which the corporation did not pay in previous years. 
D)  to receive a higher or lower dividend yield depending on current competitive market conditions.

Question 6

Which of the following statements is true with respect to cumulative voting?

Accepted Answer

A)  Cumulative voting permits one votes for a single director. 
B)  Cumulative voting gives minority shareholders less chance of being represented on the board of directors. 
C)  If 6 directors are to be elected and you own 100 shares, you may vote all 600 votes for one director and none for the others. 
D)  Cumulative voting allows the voter to add one vote for every share owned. 
A)  Cumulative voting permits one votes for a single director. 
B)  Cumulative voting gives minority shareholders less chance of being represented on the board of directors. 
C)  If 6 directors are to be elected and you own 100 shares, you may vote all 600 votes for one director and none for the others. 
D)  Cumulative voting allows the voter to add one vote for every share owned.

Question 7

Nine rights are necessary to purchase one share of stock $99. A right sells for a $7.70. The ex-rights value of the stock is:

Accepted Answer

A)  $99.00. 
B)  $168.30. 
C)  $106.70. 
D)  $69.30. 
A)  $99.00. 
B)  $168.30. 
C)  $106.70. 
D)  $69.30.

Question 8

To the corporate investor, preferred stock offers which of the following advantages?

Accepted Answer

A)  A slightly higher yield than debt. 
B)  25% of preferred dividends are tax-exempt. 
C)  100% of preferred dividends are tax-exempt. 
D)  Less risk than bonds due to ownership. 
A)  A slightly higher yield than debt. 
B)  25% of preferred dividends are tax-exempt. 
C)  100% of preferred dividends are tax-exempt. 
D)  Less risk than bonds due to ownership.

Question 9

Common shareholders have a legal claim to dividend income.

Accepted Answer

A) True 
 B)False

Question 10

Corporation A is issuing preferred stock yielding 9%, and Corporation B is considering buying the stock. Corp A's tax rate is 23% and Corp B's tax rate is 39%. What is the aftertax preferred yield for Corp A?

Accepted Answer

A)  9% 
B)  6.9% 
C)  5.5% 
D)  8.9% 
A)  9% 
B)  6.9% 
C)  5.5% 
D)  8.9%

Question 11

Common shareholders have a residual claim to income, in other words they are last in line.

Accepted Answer

A) True 
 B)False

Question 12

A rights offering may be of limited value to shareholders.

Accepted Answer

A) True 
 B)False

Question 13

Common shareholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place.

Accepted Answer

A) True 
 B)False

Question 14

To the security holder, preferred stock offers the highest risk and the lowest return.

Accepted Answer

A) True 
 B)False

Question 15

The aftertax cost of debt is cheaper than preferred stock to the issuing corporation.

Accepted Answer

A) True 
 B)False

Question 16

Current shareholders are a built-in market for raising capital at a cost below that of underwriting a new issue.

Accepted Answer

A) True 
 B)False

Question 17

Bondholders never have any control over the actions of a firm.

Accepted Answer

A) True 
 B)False

Question 18

Preferred shareholders have a contractual claim against a corporation for dividends not declared by the Board of Directors.

Accepted Answer

A) True 
 B)False

Question 19

To the corporate investor, common stock offers which of the following advantages?

Accepted Answer

A)  Highest claim on assets 
B)  Moderate risk, moderate return 
C)  100% of dividends are tax-exempt 
D)  50% of dividends are tax exempt 
A)  Highest claim on assets 
B)  Moderate risk, moderate return 
C)  100% of dividends are tax-exempt 
D)  50% of dividends are tax exempt

Question 20

Which of the following is not true about rights trading on organized exchanges?

Accepted Answer

A)  Rights trade at low prices 
B)  Continuous trading of a right for long periods of time (similar to stocks) 
C)  Rights trading tends to surge during bull markets 
D)  The period during which rights may be bought, sold, or exercised is usually four to six weeks after what is termed the ex-rights date. 
A)  Rights trade at low prices 
B)  Continuous trading of a right for long periods of time (similar to stocks) 
C)  Rights trading tends to surge during bull markets 
D)  The period during which rights may be bought, sold, or exercised is usually four to six weeks after what is termed the ex-rights date.

Exam 17: Common and Preferred Stock Financing

Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level.

Shareholders always have preemptive rights when new issues of stock are offered.

Ten rights are necessary to purchase one share of stock $84. A right sells for $6.30. The ex-rights value of the stock is:

Which of the following statements about floating rate preferred stock is true?

The floating rate feature on preferred stock allows the shareholders:

Which of the following statements is true with respect to cumulative voting?

Nine rights are necessary to purchase one share of stock $99. A right sells for a $7.70. The ex-rights value of the stock is:

To the corporate investor, preferred stock offers which of the following advantages?

Common shareholders have a legal claim to dividend income.

Corporation A is issuing preferred stock yielding 9%, and Corporation B is considering buying the stock. Corp A's tax rate is 23% and Corp B's tax rate is 39%. What is the aftertax preferred yield for Corp A?

Common shareholders have a residual claim to income, in other words they are last in line.

A rights offering may be of limited value to shareholders.

Common shareholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place.

To the security holder, preferred stock offers the highest risk and the lowest return.

The aftertax cost of debt is cheaper than preferred stock to the issuing corporation.

Current shareholders are a built-in market for raising capital at a cost below that of underwriting a new issue.

Bondholders never have any control over the actions of a firm.

Preferred shareholders have a contractual claim against a corporation for dividends not declared by the Board of Directors.

To the corporate investor, common stock offers which of the following advantages?

Which of the following is not true about rights trading on organized exchanges?

The Goals and Functions of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Operating and Financial Leverage

Working Capital and the Financing Decision

Current Asset Management

Sources of Short-Term Financing

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Underwriting

Long-Term Debt and Lease Financing

Dividend Policy and Retained Earnings

Derivative Securities

External Growth Through Mergers

International Financial Management

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