Deck 17: Common and Preferred Stock Financing

Question 1

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:

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

Answer 1

A

Question 2

Preferred stock is often sold by companies:

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.

Answer 2

A

Question 3

If a corporate charter includes a provision for preemptive rights, the shareholders:

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

Answer 3

B

Question 4

The subscription price is generally _______ than the rights-on price and _______ than the ex-rights price.

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

Question 5

Which of the following is not true about preferred stock?

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 6

Given that there are 4,000,000 shares outstanding in a corporation, how many shares will be required for a minority group of shareholders to elect 3 of the 11 members on the board of directors? (Assume cumulative voting required)

A) 800,001
B) 1,000,001
C) 1,090,910
D) 1,000,000

Question 7

If a preferred stock is of the cumulative type,:

A) the dividends must be paid on an equal basis with common so long earnings permit.
B) the dividends cannot be passed if they are not earned.
C) the cumulative voting rule applies in the exercise of the voting privilege.
D) unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common shareholders.

Question 8

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

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 9

Which of the following is not a true statement?

A) Common shareholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common shareholders are legally entitled to some dividend.
D) A minority interest can still elect members to the board of directors under cumulative voting even though someone else owns 51% of the stock.

Question 10

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

A) Cumulative voting requires 33% of board members to be re-elected every three years.
B) Cumulative voting gives majority shareholders a better 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 100 votes for one director and none for the others.
D) 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.

Question 11

Which of the following actions will provide the shareholders with the least total wealth when a company makes a rights offering?

A) Exercise the rights for new shares.
B) Sell the rights themselves and hold existing shares and cash.
C) Exercise the rights and sell the shares.
D) Do no sell or exercise the rights.

Question 12

Preferred stock may be good for a company because it:

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 13

A proxy is:

A) a device for circumventing regular voting procedures.
B) a coupon attached to each share of stock and used by the shareholder in casting his vote on current issues.
C) an authorization of a registered shareholder to another person to act in his place at the general meeting.
D) a warrant allowing a shareholder to purchase a specified number of additional shares at a given price.

Question 14

Advantages that the American Depositary Receipts (ADRs) have over investing in actual shares of a foreign stock include all but the following;

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

Question 15

A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. The value of a right is:

A) $5.50.
B) $0.50.
C) $5.00.
D) $0.57.

Question 16

The purpose of cumulative voting is:

A) to maintain majority control of the board of directors.
B) to allow minority shareholders the possibility of a voice on the board of directors.
C) to obstruct unfriendly mergers and takeover efforts.
D) to prevent the dilution of common stock through preemptive rights offerings.

Question 17

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

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

Question 18

The effect of a rights offering on a shareholder is:

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 share is said to sell "ex-rights":

A) when the period in which the subscription privilege is to be exercised has expired.
B) when transfer of share ownership no longer carries with it the privilege of subscription.
C) after the rights have all been exercised and the new issue is completely sold.
D) after the terms of the subscription have been made public.

Question 20

"Preemptive rights" means that:

A) existing shareholders can prevent management from issuing additional common stock.
B) common shareholders can "preempt" preferred shareholders for dividends.
C) existing common stock shareholders are guaranteed an opportunity to retain their proportional share of ownership of the firm.
D) management can preempt the right of shareholders to receive dividends if earnings are down.

Question 21

Dutch auction preferred stock:

A) is issued first to the bidder willing to accept the lowest yield.
B) matures every seventeen weeks and is re-auctioned at a subsequent bidding.
C) allows foreign investors to take advantage of preferred stock tax benefits.
D) occurs only in Europe.

Question 22

A rights offering:

A) gives a 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 least expensive way to raise capital.

Question 23

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) 0
B) 1
C) 2
D) 3

Question 24

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

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.

Question 25

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

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 26

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

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 27

All of the following statements are true except:

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 28

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

Question 29

A coattail provision is:

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 30

The following are primary purchasers of preferred stock except:

A) corporate investors.
B) insurance companies.
C) pension funds.
D) individual investors.

Question 31

Firm X has 150,000 outstanding shares and 9 directors. Joe Stone owns 37,500 shares of firm X. How many directors can Joe elect with cumulative voting?

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

Question 32

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:

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

Question 33

The disadvantage of a rights offering is:

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 34

When comparing common stock of the same company it is fair to say that:

A) all shares, no matter how many classes, are all created with the same equal rights.
B) companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C) the securities commissions allow only one class of common stock.
D) investors are indifferent between class A and class B shares.

Question 35

The floating rate feature on preferred stock allows the shareholders:

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 36

Under normal operating conditions the board of directors elected by:

A) the common shareholders.
B) the preferred shareholders.
C) the bondholders.
D) the board of directors.

Question 37

Which of the following is not a very common feature of preferred stock?

A) Cumulative dividends
B) Voting rights
C) Call feature
D) Conversion feature

Question 38

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns retained earnings and after tax income this year total $3 million, what could be the maximum payment to the preferred shareholders on a per share basis?

A) $19.50 per share
B) $15.00 per share
C) $13.00 per share
D) $6.50 per share

Question 39

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

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 40

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

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 41

If SED's shares trade ex-rights at $51.75, carry a subscription price of $48 a share, and can be purchase by shareholders in a ratio of 5 rights per share, SED's rights trade at ______.

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

Question 42

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 $_________?

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

Question 43

American Depositary Receipts (ADRs) are:

A) receipts sent to foreign shareholders who own American companies.
B) proof of ownership for Eurodollar deposits held by Americans.
C) certificates that have a legal claim on an ownership interest in a foreign company's common stock.
D) certificates in U.S. companies that allow foreign investors to buy shares of American companies.

Question 44

Davis Aquatic Corp. has 300,000 shares of preferred stock outstanding that is cumulative. The dividend is $8.00 per share and has not been paid for 2 years. If Davis Aquatic Corp. retained earnings and after tax income this year total $3 million, what could be the maximum payment to the preferred shareholders on a per share basis?

A) $10.00 per share
B) $16.00 per share
C) $2.00 per share
D) $8.00 per share

Question 45

A "poison pill":

A) protects current shareholders against dilution.
B) may lower the potential for maximizing shareholder value by discouraging potential high takeover bids.
C) may attract potential investors who will take over the company.
D) are voted in by all shareholders.

Question 46

Advantages that the American Depositary Receipts (ADRs) have over investing in actual shares of a foreign stock include all but the following;

A) Unlike direct foreign stock, ADRs have financial statements presented in a US GAAP or IFRS format.
B) Dividends are paid in dollars and easier to collect than actual shares of foreign stock.
C) ADRs are more liquid and less expensive than buying foreign stock directly.
D) Have annual reports and financial statements presented in French, Spanish and Mandarin.

Question 47

American Depositary Receipts:

A) have annual reports and financial statements presented in English.
B) pay dividends in Euro's.
C) are more liquid and more expensive to buy than foreign stock.
D) are an alternative method to list on the world's largest capital market, the TSX.

Question 48

American Depositary Receipts:

A) do not have annual reports.
B) pay dividends in euros.
C) are less liquid and less expensive to buy than foreign stock.
D) are more liquid and less expensive to buy than foreign stock.

Question 49

Given that there are 6,000,000 shares outstanding in a corporation, how many additional shares will be required for a minority group of shareholders to elect 4 of the 14 members on the board of directors? (Assume cumulative voting required. Assume the group already owns 400,000 shares.)

A) 1,600,001
B) 1,000,001
C) 1,714,286
D) 1,200,001

Question 50

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?

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

Question 51

Which of the following are benefits of a rights offering?

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 52

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?

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

Question 53

Preferred stock is often sold by companies:

A) to expand the capital base without incurring contractual debt obligation.
B) that have a large amount of assets and small amount of debt.
C) looking for the taxable shelter of preferred dividends.
D) that are trying to reduce their dividend obligations.

Question 54

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

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 55

You are a shareholder in Trees N Things (TNT) and you would like to elect 6 of the 11 members of the Board of Directors. If there are 3.5 million shares outstanding what is the minimum number of shares required to elect your slate of directors under cumulative voting?

A) 2,000,001
B) 3,000,001
C) 1,909,091
D) 1,750,001

Question 56

Preferred stock is the most used of all long-term securities because?

A) Investors can get higher returns after taxes than from other investments.
B) Preferred dividends are considered regular (fixed) obligations.
C) Flotation costs are extremely low compared to bonds.
D) It is not the most used security due to no right to vote.

Question 57

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

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 58

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:

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

Question 59

XYZ's rights currently trade at $7.60. Each right can be used to buy one share of XYZ at $27.92 based on a subscription ratio of 5 rights for each share purchased. XYZ's current cum rights share price is _______.

A) $73.52
B) $35.52
C) $65.92
D) $87.50

Question 60

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

Question 61

Preferred stock dividends are a deductible expense for a corporation.

Question 62

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

Question 63

Shares purchased through a rights offering may carry lower margin requirements.

Question 64

If the market value of a stock when the shares are trading ex-rights is $57 and 9 rights are required to buy one share of stock at the subscription price of $45, then the rights are worth $1.33.

Question 65

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

Question 66

To the individual recipient, preferred stock dividends offer no advantage over common stock dividends.

Question 67

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

Question 68

A rights offering may be of limited value to shareholders.

Question 69

Because of tax considerations, corporations are able to issue preferred stock at a slightly lower yield than debt.

Question 70

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

Question 71

Corporations are able to issue preferred stock at a slightly lower pre-tax yield than debt.

Question 72

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

Question 73

Preferred stock generally carries a higher interest rate than debt.

Question 74

The difference between the rights-on and ex-rights common stock price is equal to the value of a right.

Question 75

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

Question 76

Participating preferred stock is advantageous to common shareholders.

Question 77

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

Question 78

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N.

Question 79

The ex-rights date usually takes place after the end of the subscription period.

Question 80

After a rights offering, the common stock will sell at the subscription price.