Deck 34: Financial Structure

Question 1

If a "liquidation preference" is provided, preferred stock usually has priority over common stock.

Answer 1

True

Question 2

Once the amount of shares that a corporation is authorized to issue has been specified in the charter, it cannot be changed, so the charter commonly specifies more shares than are to be issued initially.

Answer 2

False

Question 3

Warrick makes a $10,000 investment in a debenture issued by F & M Company.Warrick is now a secured creditor of F & M Company.

Answer 3

False

Question 4

The difference between common and preferred stock is that the latter is a debt instrument, whereas the former represents an equity interest in the company.

Question 5

If shares are issued with no par value, the entire price must be allocated to stated capital.

Question 6

Dividends paid in stock of the corporation have virtually the same legal significance as cash or property dividends.

Question 7

If no exemption is available, a corporation offering shares of stock for sale is subject to court injunction and civil liability in damages to persons to whom securities are sold in violation of the regulatory statute, but there is no potential criminal liability.

Question 8

A shareholder of one-third of all the stock in a corporation would be entitled to one-third of all corporate assets of an ongoing company.

Question 9

An investor has the right to transfer investment securities by sale, but not by gift or pledge.

Question 10

A secured bond is enforceable by a lien upon specific property rather than against the general assets of the corporation.

Question 11

A company may not initially issue all the shares authorized by the corporate charter.It can hold back shares.

Question 12

Treasury shares are shares that have been authorized but have not yet been issued.

Question 13

Article 8 of the UCC contains rules applicable to transfers of investment securities.

Question 14

A bondholder generally takes less of a risk than a shareholder of a corporation.

Question 15

Dunbar Corp.is a debtor in relation to Martina, who is the holder of an income bond issued by Dunbar.

Question 16

Debentures are the same as indentures.

Question 17

The federal government leaves corporate stock regulation to the states, since corporations are state-created entities.

Question 18

Under the majority rule, an unsuspecting shareholder who receives an illegal dividend from a solvent corporation cannot be compelled to refund the dividend.

Question 19

"Blue sky laws" are state laws that regulate corporate stock issuance and sale.

Question 20

Two principal sources for corporate financing are debt and equity investment securities.

Question 21

Redemption of shares generally results in an increase of treasury stock.

Question 22

The MBCA, RMBCA, and statutes of many states permit corporations to redeem both preferred and common stock.

Question 23

The earned surplus test does not permit capital surplus to be used for the payment of dividends.

Question 24

Shareholders have residual authority over increases in the amount of authorized capital stock.

Question 25

With respect to liability for improper dividends, a non-breaching director and an innocent shareholder are both protected from liability due to their good faith.

Question 26

A corporate bond creates a debtor-creditor relationship between the corporation and the holder of the security.

Question 27

Even if it has been lawfully and properly declared, a stock dividend may be revoked unless it has been actually distributed.

Question 28

The board of directors of Z & X Corporation declared cash dividends of $5 per share.If these dividends are not paid, a shareholder can bring suit to require payment.

Question 29

Earned surplus would include undistributed net profits, income, gains and losses from the date of incorporation.

Question 30

The Revised Act does not consider a stock dividend issued by ZYX Corporation to its stockholders a distribution.

Question 31

The board of directors may issue bonds without the authorization or consent of the shareholders.

Question 32

A stock split results in a larger proportion of corporate ownership by the shareholder.

Question 33

"Capital surplus" would be credited with the excess received over par value for par value shares issued by the corporation.

Question 34

The RMBCA has adopted a net assets test for the issuance of dividends.

Question 35

Income bonds bear a fixed interest rate.

Question 36

In the majority of states, even non-voting shares may vote on fundamental changes that affect that class of shares as a class.

Question 37

The most restrictive test for the issuance of dividends by a corporation is the net assets test.

Question 38

Preemptive rights are shareholders' rights to purchase a proportionate part of a new issue of stock.

Question 39

A director who is a member of the board that declares an illegal dividend is not personally liable to the company for the amount that is illegal.

Question 40

The shareholders normally determine the price for which shares will be issued unless the charter permits the board of directors to set the price.

Question 41

In some states, preemptive rights do not apply to:

A)the reissue of previously issued shares.
B)shares issued for noncash consideration.
C)shares issued in connection with a merger.
D)All of these are correct.

Question 42

A shareholder's obligation to repay an illegally declared dividend depends on:

A)the shareholder's good or bad faith in accepting the dividend.
B)the solvency or insolvency of the corporation and, in some instances, special statutory provisions.
C)the shareholder's knowledge of the facts.
D)All of these.

Question 43

Bonds subject to a redemption provision which permits the corporation to redeem or pay off all, or a part, of the issue before maturity at a specified redemption price are known as bonds.

A)secured
B)income
C)callable
D)convertible

Question 44

Which of the following is incorrect with regard to treasury shares?

A)No dividends may be paid on treasury shares.
B)They are issued but not outstanding.
C)A corporation may sell treasury shares for any amount the board of directors determines, even if the shares have a par value that is more than the sale price.
D)The concept of treasury stock was created by the MBCA and is carried forward in the RMBCA.

Question 45

Which of the following is not a right conferred on the owner of an equity security?

A)The right to title to a proportionate share of the corporation's property
B)The right to participate in control of the corporation
C)The right to participate in the earnings of the corporation
D)The right to participate in the residual assets of the corporation upon dissolution

Question 46

What is the principal source for corporate financing?

A)Debt
B)Equity investment securities
C)Both of these.
D)None of these.

Question 47

If Class A preferred shares provide only for a cumulative dividend of $3 per share, upon liquidation Class A Preferred will:

A)receive $3 per share more than common shares.
B)receive 103% of common shares.
C)share equally with common shares.
D)be subordinated to the rights of common shares.

Question 48

Which of the following determines when to declare dividends and in what amount?

A)The stockholders
B)The officers of the corporation
C)The board of directors
D)The state in which the corporation was chartered

Question 49

Which of the following is correct with regard to "par value"?

A)It indicates the worth of the stock at issue.
B)It is the minimum price at which the corporation may sell the stock at issuance.
C)It represents the maximum price at which the stock may be sold at issuance.
D)It represents the amount for which the stock must be traded.

Question 50

Walker recently purchased 1,000 shares of Heights Corp.stock, but now receives additional 100 shares of Heights stock, which represent a ratable distribution of additional shares by the corporation.Walker's receipt of additional shares is a:

A)property dividend.
B)liquidated dividend.
C)convertible dividend.
D)stock dividend.

Question 51

If 100 shares of $50 par value stock were issued at $75 per share, how much would constitute capital surplus?

A)$750
B)$7,500
C)$2,500
D)$5,000

Question 52

The statute which contains the rules applicable to investment securities transfers is:

A)the Securities and Exchange Commission Act.
B)Article 2 of the UCC.
C)Article 8 of the UCC.
D)the Model Business Corporation Act.

Question 53

Allen owns 500 of the 5,000 shares outstanding of General Myopics.GM plans to issue 600 new shares.If Allen has preemptive rights, he may buy:

A)all 600 shares before anyone else.
B)600 shares at the same price he paid for the other stock.
C)6 shares at a discount of 10%.
D)None of these.

Question 54

The Ajax Corporation issues bonds that pay a minimum of 6% interest but that can pay more if corporate earnings reach certain specified levels.In lieu of payment under this bond, a holder may exchange it for stock of the corporation.This bond would be a:

A)callable income bond.
B)convertible participating bond.
C)convertible unsecured bond.
D)convertible secured bond.

Question 55

Which of the following is correct regarding a two-for-one stock split?

A)The purpose of the split may be to increase the number of potential stockholders.
B)The purpose of the split is to make a distribution to the stockholders.
C)After the split, each stockholder will have greater ownership interest in the corporation.
D)The value of each share of stock will increase as a result of the split.

Question 56

Winstead Co.is authorized by its articles of incorporation to sell 50,000 shares of stock.The company:

A)may not sell 55,000 shares under any circumstances.
B)must sell the number of shares authorized by its articles of incorporation.
C)would issue void securities for any shares the company purports to sell over the 50,000.
D)must repay, with interest from the date of purchase, any purchaser of shares over 50,000.

Question 57

Which of the following is correct with regard to common stock?

A)The Revised Act has eliminated the terms "preferred" and "common."
B)Common stock does not have any special contract rights or preferences.
C)Common stock generally bears the greatest risk of loss in the event of the failure of the enterprise.
D)All of these are correct with regard to common stock.

Question 58

ZYX Corporation purchases 1,000 shares of its own stock from Jones, a shareholder, at a price of $50 a share. These shares will be known as:

A)treasury shares.
B)preemptive shares.
C)preferred stock.
D)no par stock.

Question 59

If the issued and outstanding shares are broken up into a greater number of shares, each representing a proportionately smaller interest in the corporation, this is known as a:

A)property dividend.
B)stock split.
C)stock dividend.
D)liquidating dividend.

Question 60

Max buys shares of newly issued Z Corp.stock for $10 per share and pays $1,000 cash, a car worth $2,000, and a promissory note for $5,000.Under traditional corporate law, followed in about half of the states, how many shares of stock could Max validly buy?

A)100
B)300
C)800
D)600

Question 61

If dividends are not declared for five years, but the company has accumulated earnings each year, the shareholders may:

A)petition the court of law for redress.
B)override the board with a two-thirds vote.
C)ask for an injunction requiring a dividend to be declared.
D)do nothing but sell their stock.

Question 62

A distribution may be in the form of:

A)declaration or payment of a dividend.
B)a purchase, redemption, or other acquisition of shares.
C)a distribution of indebtedness.
D)All of these.

Question 63

In which of the following ways do debt and equity securities necessarily differ?

A)In their characteristic of being sources for corporate financing.
B)In whether they represent an ownership interest.
C)Voting rights.
D)Debt and equity securities do not differ in any of these ways.

Question 64

Markell Inc.issued stock options.Which of the following is not true?

A)The shareholders determine the terms upon which the stock options are issued, their form and content, and the consideration for which the shares are to be issued.
B)A stock warrant is a type of stock option that is freely transferable and that typically has a longer term than a stock right.
C)Markell Inc.may use stock options or warrants in its incentive compensation plans for the directors and officers of the company.
D)Markell Inc.may use stock options to help in raising capital for the business by making one class of securities more attractive by including in it the right to purchase shares in another class.

Question 65

The Revised Act permits a corporation to purchase, redeem, or otherwise acquire its own shares unless:

A)the corporation's total assets after the distribution would be less than the sum of its total liabilities and the maximum amount that would be payable for all outstanding shares having preferential rights in liquidation.
B)the corporation would be unable to pay its debts as they became due in the usual course of its business.
C)Both of these.
D)None of these.

Question 66

Harry bought preferred noncumulative stock on which there were no dividends declared for the year.The dividends that were not declared for the year will:

A)be paid the next year.
B)be paid upon the next declaration of dividends.
C)be paid out of the common stock dividend fund.
D)not be paid.

Question 67

Discuss the use and types of stock options.

Question 68

Gail transfers property to Tel Ko Corp.that she claims is valued at $5,000.The directors determine that the property is adequate to be exchanged for $5,000 worth of Tel Ko Corp.stock.Later it is discovered that the property's true value is $2,000.Under the RMBCA, which is true regarding Gail's liability?

A)She has none, since the directors' determination of adequacy of consideration was conclusive.
B)She is liable to the creditors of the corporation for the $3,000.
C)She is liable to the corporation for $3,000.
D)She is liable to both the corporation and its creditors for $3,000.

Question 69

Percy buys stock in XTX Corporation that pays dividends of $5 per share before dividends are paid on other stock of XTX.If the dividends are not paid in any given year, the dividends for that year must be paid when the company next declares dividends, until fully paid.Percy's dividends per year will not exceed $5 per share.Percy's stock is:

A)cumulative common stock.
B)noncumulative preferred stock.
C)cumulative preferred stock.
D)participating preferred stock.

Question 70

Under the RMBCA, if the charter states that "the corporation elects to have preemptive rights," shareholders have preemptive rights with respect to:

A)shares issued as compensation to directors, officers, and employees.
B)shares issued within six months of incorporation.
C)shares issued for consideration other than money.
D)unissued shares.

Question 71

Participating stock will:

A)share with common stock any additional dividends after preferred and common stockholders receive their normal dividends.
B)accumulate dividends that will be paid later.
C)participate in earnings only to the extent that all other classes do.
D)participate in earnings to the same extent as common stock.

Question 72

What do shares of equity securities confer on their owner in regard to interest in the corporation?

A)Right to participate in control
B)Right to participate in earnings of the corporation
C)Right to participate in residual assets of the corporation upon dissolution
D)All of these.

Question 73

Redemption is not permitted if the corporation:

A)asks for an injunction.
B)would reduce its total assets below the stated capital amount by the redemption.
C)has outstanding treasury shares.
D)is likely to be rendered insolvent by the redemption.

Question 74

A share dividend:

A)is a type of distribution.
B)makes no difference in the assets of the corporation or in the shareholder's relative interest in the net worth of the corporation.
C)is also known as a property dividend.
D)All of these.

Question 75

What are the two major issues regarding payment for shares?

Question 76

Discuss how the RMBCA defines the term "distribution."

Question 77

State laws regulating the issuance and sale of corporate shares of stock and other securities, typically with provisions prohibiting fraud in the sale of securities are called:

A)blue-sky laws.
B)Securities and Exchange Commission Acts.
C)model investment securities acts.
D)stock warrant laws.