Question 1

Generally, the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors.

Accepted Answer

A) True 
 B)False

Question 2

Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund expansions.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

If a corporate charter includes a provision for preemptive rights, the original stockholders

Accepted Answer

A)  must sell their stock to the company. 
B)  get first option to buy additional issues of common stock. 
C)  may purchase existing treasury stock. 
D)  cannot utilize cumulative voting procedures. 
A)  must sell their stock to the company. 
B)  get first option to buy additional issues of common stock. 
C)  may purchase existing treasury stock. 
D)  cannot utilize cumulative voting procedures.

Question 5

Floating rate preferred stock would be ideal to have when the stock price fluctuates and when there are tax benefits to owning preferred stock.

Accepted Answer

A) True 
 B)False

Question 6

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.

Accepted Answer

A) True 
 B)False

Question 7

The subscription rate of a new offering is generally ________ than the rights-on price and ________ than the ex-rights price.

Accepted Answer

A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower 
A)  higher; higher 
B)  higher; lower 
C)  lower; higher 
D)  lower; lower

Question 8

Which one of the following is NOT an advantage that American Depository Receipts (ADRs) have over investing in actual shares of a foreign stock?

Accepted Answer

A)  ADRs are an effective barrier to foreign currency risk. 
B)  Unlike direct foreign stock, ADRs have financial statements presented in a GAAP format. 
C)  Dividends are paid in dollars and are easier to collect than actual shares of foreign stock. 
D)  ADRs are more liquid and less expensive than buying foreign stock directly. 
A)  ADRs are an effective barrier to foreign currency risk. 
B)  Unlike direct foreign stock, ADRs have financial statements presented in a GAAP format. 
C)  Dividends are paid in dollars and are easier to collect than actual shares of foreign stock. 
D)  ADRs are more liquid and less expensive than buying foreign stock directly.

Question 9

Preferred stock generally has a lower after-tax cost than debt to the corporation.

Accepted Answer

A) True 
 B)False

Question 10

An individual investing in preferred stock receiving a before-tax preferred yield of 6.75% and having a tax rate of 25% would receive an after-tax preferred yield of ________. Assume the tax rate on dividends is 15%.

Accepted Answer

A)  6.75% 
B)  5.1% 
C)  5.7% 
D)  6.1% 
A)  6.75% 
B)  5.1% 
C)  5.7% 
D)  6.1%

Question 11

The market price of "floating rate" preferred stock is less volatile than that of regular preferred stock.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is an advantage of American Depository Receipts (ADRs)?

Accepted Answer

A)  No foreign currency exchange risk 
B)  Financial statements are written in English 
C)  Financial statements are translated quickly 
D)  Less frequent reporting of financial results 
A)  No foreign currency exchange risk 
B)  Financial statements are written in English 
C)  Financial statements are translated quickly 
D)  Less frequent reporting of financial results

Question 13

Common stockholders rights include all of the following EXCEPT:

Accepted Answer

A)  Fixed dividend yield 
B)  Voting rights 
C)  First option to purchase new shares 
D)  Residual claim to income 
A)  Fixed dividend yield 
B)  Voting rights 
C)  First option to purchase new shares 
D)  Residual claim to income

Question 14

Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for $4. The ex-rights value of Fogel stock is ________.

Accepted Answer

A)  $70 
B)  $46 
C)  $74 
D)  $50 
A)  $70 
B)  $46 
C)  $74 
D)  $50

Question 15

A rights offering

Accepted Answer

A)  gives the firm a built-in market for new securities. 
B)  will likely lead to considerably higher distribution costs. 
C)  will increase the shareholder's total valuation. 
D)  is the most expensive way to raise capital. 
A)  gives the firm a built-in market for new securities. 
B)  will likely lead to considerably higher distribution costs. 
C)  will increase the shareholder's total valuation. 
D)  is the most expensive way to raise capital.

Question 16

Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is Tricki's expected price when it begins trading ex-rights?

Accepted Answer

A)  $47.23 
B)  $44.00 
C)  $44.09 
D)  $45.00 
A)  $47.23 
B)  $44.00 
C)  $44.09 
D)  $45.00

Question 17

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 that 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 that the corporation did not pay in previous years. 
D)  to receive a higher or lower dividend yield depending on current competitive market conditions.

Question 18

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 19

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

Accepted Answer

A)  A higher yield than debt, everything else being equal before taxes. 
B)  30% of preferred dividends are tax-exempt. 
C)  70% of preferred dividends are tax-exempt. 
D)  70% of preferred dividends are tax-exempt and have a higher yield than debt, all else equal before taxes. 
A)  A higher yield than debt, everything else being equal before taxes. 
B)  30% of preferred dividends are tax-exempt. 
C)  70% of preferred dividends are tax-exempt. 
D)  70% of preferred dividends are tax-exempt and have a higher yield than debt, all else equal before taxes.

Question 20

The increasing sophistication of individual investors has decreased the role of institutional investors in the stock market.

Accepted Answer

A) True 
 B)False

Exam 17: Common and Preferred Stock Financing

Generally, the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors.

Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund expansions.

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

If a corporate charter includes a provision for preemptive rights, the original stockholders

Floating rate preferred stock would be ideal to have when the stock price fluctuates and when there are tax benefits to owning preferred stock.

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.

The subscription rate of a new offering is generally ________ than the rights-on price and ________ than the ex-rights price.

Which one of the following is NOT an advantage that American Depository Receipts (ADRs) have over investing in actual shares of a foreign stock?

Preferred stock generally has a lower after-tax cost than debt to the corporation.

An individual investing in preferred stock receiving a before-tax preferred yield of 6.75% and having a tax rate of 25% would receive an after-tax preferred yield of ________. Assume the tax rate on dividends is 15%.

The market price of "floating rate" preferred stock is less volatile than that of regular preferred stock.

Which of the following is an advantage of American Depository Receipts (ADRs)?

Common stockholders rights include all of the following EXCEPT:

Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for $4. The ex-rights value of Fogel stock is ________.

A rights offering

Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is Tricki's expected price when it begins trading ex-rights?

The floating rate feature on preferred stock allows the shareholders

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

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

The increasing sophistication of individual investors has decreased the role of institutional investors in the stock market.

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

Filters

The subscription rate of a new offering is generally than the rights-on price and than the ex-rights price.