Question 1

A common shareholder cannot force a company into bankruptcy for eliminating the dividend.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following are benefits of a rights offering?

Accepted Answer

A)  Rights offerings increase return on equity. 
B)  Rights offerings substantiate higher debt to equity ratios. 
C)  Rights offerings decrease earnings per share. 
D)  Rights offerings raise capital for the firm. 
A)  Rights offerings increase return on equity. 
B)  Rights offerings substantiate higher debt to equity ratios. 
C)  Rights offerings decrease earnings per share. 
D)  Rights offerings raise capital for the firm.

Question 3

If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the year.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

XYZ corporation is issuing preferred stock yielding 10%, and ABC Corporation is considering buying the stock. XYZ's tax rate is 20% and ABC's tax rate is 34%. What is the aftertax preferred yield for ABC?

Accepted Answer

A)  3.4% 
B)  10.0% 
C)  6.6% 
D)  8.98% 
A)  3.4% 
B)  10.0% 
C)  6.6% 
D)  8.98%

Question 6

A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called

Accepted Answer

A)  a preemptive right. 
B)  a poison pill. 
C)  ex-rights. 
D)  rights-on. 
A)  a preemptive right. 
B)  a poison pill. 
C)  ex-rights. 
D)  rights-on.

Question 7

Preferred stock generally carries a higher interest rate than debt.

Accepted Answer

A) True 
 B)False

Question 8

Under normal operating conditions the board of directors elected by

Accepted Answer

A)  the common shareholders. 
B)  the preferred shareholders. 
C)  the bondholders. 
D)  two of the other answers are correct 
A)  the common shareholders. 
B)  the preferred shareholders. 
C)  the bondholders. 
D)  two of the other answers are correct

Question 9

A stock sells for $50 rights-on, the subscription price is $40. Nine rights are required to purchase one share. The value of a right is

Accepted Answer

A)  $1.00. 
B)  $10.00. 
C)  $1.11. 
D)  $5.00. 
A)  $1.00. 
B)  $10.00. 
C)  $1.11. 
D)  $5.00.

Question 10

A coattail provision is

Accepted Answer

A)  an anti-takeover device. 
B)  designed to bring all shareholders a similar price offer. 
C)  a motivational tool for employees. 
D)  a means of placing shares in friendly hands. 
A)  an anti-takeover device. 
B)  designed to bring all shareholders a similar price offer. 
C)  a motivational tool for employees. 
D)  a means of placing shares in friendly hands.

Question 11

The most important feature of the preemptive right is that the rights

Accepted Answer

A)  may be sold for profit. 
B)  afford shareholders protection against dilution. 
C)  may be cumulatively voted. 
D)  are nontransferable. 
A)  may be sold for profit. 
B)  afford shareholders protection against dilution. 
C)  may be cumulatively voted. 
D)  are nontransferable.

Question 12

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 13

A rights offering may be of limited value to shareholders.

Accepted Answer

A) True 
 B)False

Question 14

Preferred stock may be good for a company because it

Accepted Answer

A)  expands the capital base of the firm without diluting the common stock ownership. 
B)  does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid. 
C)  is not as costly as common stock or bonds. 
D)  gives up no control even when dividend payments are missed. 
A)  expands the capital base of the firm without diluting the common stock ownership. 
B)  does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid. 
C)  is not as costly as common stock or bonds. 
D)  gives up no control even when dividend payments are missed.

Question 15

The dividend rate paid on floating rate preferred stock will be equal to the market rate at the time dividends are paid.

Accepted Answer

A) True 
 B)False

Question 16

The Jersey Corp. is considering four investments. Which provide the highest aftertax return for Jersey Corp. If it is in the 40% tax bracket?

Accepted Answer

A)  Government of Canada bonds at 12.0% 
B)  corporate bonds at 13.2% 
C)  municipal bonds at 8.4% 
D)  preferred stock at 10.8% 
A)  Government of Canada bonds at 12.0% 
B)  corporate bonds at 13.2% 
C)  municipal bonds at 8.4% 
D)  preferred stock at 10.8%

Question 17

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 18

The effect of a rights offering on a shareholder is

Accepted Answer

A)  to increase his/her wealth. 
B)  to increase his/her wealth only if the new stock is purchased. 
C)  to decrease his/her wealth unless the stock is purchased. 
D)  to decrease his/her wealth if nothing is done. 
A)  to increase his/her wealth. 
B)  to increase his/her wealth only if the new stock is purchased. 
C)  to decrease his/her wealth unless the stock is purchased. 
D)  to decrease his/her wealth if nothing is done.

Question 19

A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids.

Accepted Answer

A) True 
 B)False

Question 20

Common shareholders have a legal claim to dividend income.

Accepted Answer

A) True 
 B)False

Exam 17: Common and Preferred Stock Financing

A common shareholder cannot force a company into bankruptcy for eliminating the dividend.

Which of the following are benefits of a rights offering?

If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the year.

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

XYZ corporation is issuing preferred stock yielding 10%, and ABC Corporation is considering buying the stock. XYZ's tax rate is 20% and ABC's tax rate is 34%. What is the aftertax preferred yield for ABC?

A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called

Preferred stock generally carries a higher interest rate than debt.

Under normal operating conditions the board of directors elected by

A stock sells for $50 rights-on, the subscription price is $40. Nine rights are required to purchase one share. The value of a right is

A coattail provision is

The most important feature of the preemptive right is that the rights

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

A rights offering may be of limited value to shareholders.

Preferred stock may be good for a company because it

The dividend rate paid on floating rate preferred stock will be equal to the market rate at the time dividends are paid.

The Jersey Corp. is considering four investments. Which provide the highest aftertax return for Jersey Corp. If it is in the 40% tax bracket?

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

The effect of a rights offering on a shareholder is

A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids.

Common shareholders have a legal claim to dividend income.

The Goals and Activities 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 Banking: Public and Private Placement

Long-Term Debt and Lease Financing

Dividend Policy and Retained Earnings

Convertibles, Warrants and Derivatives

External Growth Through Mergers

International Financial Management

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