Question 1

Which of the following is the correct order of corporate issues based on risk and return? (Most risk-return to least risk-return)

Accepted Answer

A)  Common stock,subordinated debentures,secured debt,treasury bills. 
B)  Preferred stock,common stock,subordinated debentures,secured debt. 
C)  Common stock,long-term government bonds,secured debt,subordinated debt. 
D)  Common stock,secured debt,subordinated debentures,preferred stock. 
A)  Common stock,subordinated debentures,secured debt,treasury bills. 
B)  Preferred stock,common stock,subordinated debentures,secured debt. 
C)  Common stock,long-term government bonds,secured debt,subordinated debt. 
D)  Common stock,secured debt,subordinated debentures,preferred stock.

Question 2

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

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Why do companies tend to issue preferred stock less then commons stock and bonds?

Accepted Answer

A)  Flotation cost of preferred stock is low compared to bonds. 
B)  Preferred dividends are considered regular (fixed)obligations but are not tax-deductible. 
C)  Preferred shareholders are entitled to receive stipulated dividends before common shareholders. 
D)  Preferred stock typically has cumulative dividends. 
A)  Flotation cost of preferred stock is low compared to bonds. 
B)  Preferred dividends are considered regular (fixed)obligations but are not tax-deductible. 
C)  Preferred shareholders are entitled to receive stipulated dividends before common shareholders. 
D)  Preferred stock typically has cumulative dividends.

Question 5

Describe income trusts.What is the purpose of an income trust?

Accepted Answer

Income trusts allow a firm to raise addi

Question 6

Preferred stock is often sold by companies:

Accepted Answer

A)  wanting to balance their capital structures. 
B)  that have a small amount of debt relative to equity. 
C)  looking for the taxable advantages of preferred dividends over common share dividends. 
D)  that want to reduce dividend payments and avoid bankruptcy. 
A)  wanting to balance their capital structures. 
B)  that have a small amount of debt relative to equity. 
C)  looking for the taxable advantages of preferred dividends over common share dividends. 
D)  that want to reduce dividend payments and avoid bankruptcy.

Question 7

The disadvantage of a rights offering is:

Accepted Answer

A)  current shareholders are protected against dilution. 
B)  the firm has a built-in market of knowledgeable investors. 
C)  distribution costs are lower than a public offering. 
D)  shareholders who do not exercise or sell rights will have their ownership diluted. 
A)  current shareholders are protected against dilution. 
B)  the firm has a built-in market of knowledgeable investors. 
C)  distribution costs are lower than a public offering. 
D)  shareholders who do not exercise or sell rights will have their ownership diluted.

Question 8

The period during a rights offering when the shares no longer include rights to purchase additional shares of common stock is called the ex-rights period.

Accepted Answer

A) True 
 B)False

Question 9

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 10

SED Corporation's shares are currently trading at $52.50.Shareholders have the right to buy 1 share of SED for every 5 rights they own at a price of $48.00.SED's rights trade at $_________?

Accepted Answer

A)  $0.75 
B)  $1.75 
C)  $3.75 
D)  $4.50 
A)  $0.75 
B)  $1.75 
C)  $3.75 
D)  $4.50

Question 11

Occasionally,a company will have several classes of common stock,with each class carrying different rights to dividends and income.

Accepted Answer

A) True 
 B)False

Question 12

Participating preferred stock is advantageous to common shareholders.

Accepted Answer

A) True 
 B)False

Question 13

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 14

If the shareholder is no better off in terms of total valuation,why undertake a rights offering? What are the advantages of a rights offering?

Accepted Answer

There are a number of possible advantage

Question 15

Firm Y has 5,000,000 outstanding shares.There are 11 directors on the firm's board.The Bubba family owns 20% the firm's stock.How many directors can the Bubba family elect by themselves if firm Y uses majority voting?

Accepted Answer

A)  0 
B)  1 
C)  2 
D)  3 
A)  0 
B)  1 
C)  2 
D)  3

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

All of the following statements are true except:

Accepted Answer

A)  poison pills discourage hostile takeovers. 
B)  poison pills discourage potential high takeover bids. 
C)  shareholders have to approve the acceptance of poison pill strategies before a corporation can use them. 
D)  many institutional investors are opposed to the poison pill. 
A)  poison pills discourage hostile takeovers. 
B)  poison pills discourage potential high takeover bids. 
C)  shareholders have to approve the acceptance of poison pill strategies before a corporation can use them. 
D)  many institutional investors are opposed to the poison pill.

Question 18

Define and describe the characteristics of American Depositary Receipts (ADRs).

Accepted Answer

Since foreign companies want to tap into

Question 19

Which of the following is not true about preferred stock?

Accepted Answer

A)  100% of dividends are nontaxable to other corporations which hold preferred stock. 
B)  The aftertax cost is higher than debt with the same yield. 
C)  Dividends are legal obligations of the firm. 
D)  Preferred stocks are often cumulative in respect to dividends. 
A)  100% of dividends are nontaxable to other corporations which hold preferred stock. 
B)  The aftertax cost is higher than debt with the same yield. 
C)  Dividends are legal obligations of the firm. 
D)  Preferred stocks are often cumulative in respect to dividends.

Question 20

A firm has 200,000 outstanding shares and 11 directors.Doug owns 15,500 shares of this firm.How many directors can Doug elect with cumulative voting?

Accepted Answer

A)  0 
B)  1 
C)  2 
D)  3 
A)  0 
B)  1 
C)  2 
D)  3

Exam 17: Common and Preferred Stock Financing

Which of the following is the correct order of corporate issues based on risk and return? (Most risk-return to least risk-return)

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

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

Why do companies tend to issue preferred stock less then commons stock and bonds?

Describe income trusts.What is the purpose of an income trust?

Preferred stock is often sold by companies:

The disadvantage of a rights offering is:

The period during a rights offering when the shares no longer include rights to purchase additional shares of common stock is called the ex-rights period.

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

SED Corporation's shares are currently trading at $52.50.Shareholders have the right to buy 1 share of SED for every 5 rights they own at a price of $48.00.SED's rights trade at $_________?

Occasionally,a company will have several classes of common stock,with each class carrying different rights to dividends and income.

Participating preferred stock is advantageous to common shareholders.

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?

If the shareholder is no better off in terms of total valuation,why undertake a rights offering? What are the advantages of a rights offering?

Firm Y has 5,000,000 outstanding shares.There are 11 directors on the firm's board.The Bubba family owns 20% the firm's stock.How many directors can the Bubba family elect by themselves if firm Y uses majority voting?

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

All of the following statements are true except:

Define and describe the characteristics of American Depositary Receipts (ADRs).

Which of the following is not true about preferred stock?

A firm has 200,000 outstanding shares and 11 directors.Doug owns 15,500 shares of this firm.How many directors can Doug elect with cumulative voting?

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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