Deck 34: Financial Structure of Corporations

Question 1

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

Answer 1

True

Question 2

If Daniels makes a $10,000 investment in a debenture issued by Southern Company, he is now an unsecured creditor of Southern Company.

Answer 2

True

Question 3

Clayton Tile has a secured bond on specific property of Ceramic Creations, Inc. Clayton's claim against Ceramic is enforceable only against that specific property.

Answer 3

False

Question 4

Yields on "junk bonds" are higher than the rate of safe government bonds.

Question 5

Dividends are ordinarily paid in cash, but may be paid in property.

Question 6

Debentures are the same as indentures.

Question 7

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

Question 8

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

Question 9

A company does not have to issue all of the shares authorized by the corporate charter, but it cannot issue more shares than are authorized.

Question 10

Treasury stock is issued but not outstanding.

Question 11

An indenture is a debt agreement.

Question 12

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 13

Marvin owns 50 shares of stock in Richley Corp., which has a total of one thousand shares outstanding. If Richley decides to issue one thousand additional shares of stock and Marvin has preemptive rights, Marvin will be offered one hundred shares of the newly issued stock.

Question 14

Preferred stockholders do not have priority over corporate creditors in liquidation.

Question 15

Gribold, Inc. authorized and specified in its charter 8,000 shares of stock to be issued. If it later needs to issue stock in excess of 8,000 shares, the charter will have to be amended.

Question 16

If a "liquidation preference" is provided, preferred stock usually has priority over common stock to the extent the articles of incorporation state.

Question 17

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

Question 18

Under the Revised Act, dividends must always be paid in money.

Question 19

A "stock option" permits the purchase of shares at a later date.

Question 20

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 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

A majority, but not all, of the states impose a cash flow test on the payment of dividends and other distributions.

Question 26

Under the Revised Act, Hartzell, a director who is a member of the board that declares an illegal dividend, may be but is not under all circumstances personally liable to the company for the amount that is illegal even if she personally voted for the distribution contrary to the company's charter.

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

"Investment grade" refers to the top-ten bond ratings and is a term meant to help potential investors judge the probability that the bond issuer will repay the principal at maturity and make scheduled interest payments.

Question 29

When a corporation issues no par value stock, the entire consideration received constitutes stated capital except that amount allocated in a manner permitted by law to capital surplus or paid-in surplus.

Question 30

The Revised Act does not consider a transfer of its own stock by ZYX Corporation to its stockholders a distribution.

Question 31

Debt securities represent an ownership interest in the corporation.

Question 32

A corporation may purchase its own shares only out of earned surplus unless the articles of incorporation or the shareholders permit purchase out of capital surplus.

Question 33

The MBCA as amended in 1980 and the Revised Act have adopted a net asset test for the issuance of dividends.

Question 34

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

Question 35

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

Question 36

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 37

Shares without par value may be issued for any amount set by the board or the shareholders.

Question 38

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

Question 39

The earned surplus test for the issuance of dividends by a corporation is less restrictive than the surplus test.

Question 40

A prospectus is a detailed explanation of how a corporation is reinvesting its profits, and its purpose is to justify a decision to not pay a dividend.

Question 41

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 42

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 43

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

A) The purpose of the split may be to decrease the value per share of the stock.
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 44

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 45

Caverun Co. has two classes of stock. The company may:

A) issue stock warrants, which are short-term options to buy shares.
B) issue stock rights, which are long-term options to buy shares.
C) not use stock options to make one class of stock more attractive than the other.
D) use stock options and warrants, the form and content of which are determined by the board of directors, to supplement compensation plans for directors, officers, and employees.
E) Both issue stock warrants, which are short-term options to buy shares  and also  issue stock rights, which are long-term options to buy shares.

Question 46

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) A corporation cannot issue stock for higher than the par value.

Question 47

The "cash flow test" for the payment of dividends and other distributions is also known as the:

A) equity insolvency test.
B) balance sheet test.
C) surplus test.
D) net assets test.

Question 48

Max buys shares of newly issued Z Corp. stock for $30 per share and pays $1,000 cash, a car worth $2,000, and a promissory note for $3,000. Under the Revised Act, how many shares of stock could validly be sold?

A) 100
B) 33
C) 200
D) 133

Question 49

The board of directors cannot declare dividends when the corporation:

A) is insolvent.
B) is merging with another corporation.
C) is the subject of a takeover bid.
D) issues new stock.

Question 50

If Class A preferred shares provide only for a cumulative dividend of $3 per share, what will be the consequence on liquidation?

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

Question 51

The Revised Act, the 1980 Amendments to the MBCA, and over half of the states have eliminated the concept of:

A) par value.
B) stated capital.
C) capital surplus.
D) All of these.

Question 52

As amended in 2002, the Revised Act permits the creation of classes or series of shares with terms that vary among holders of the same class or series so long as the variations are expressly set forth in the articles of incorporation.

Question 53

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:

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

Question 54

__________, usually called debentures, have only the obligation of the corporation behind them.

A) Secured bonds
B) Income bonds
C) Unsecured bonds
D) None of these are correct.

Question 55

The Ajax Corporation issues bonds that pay a minimum of 6% interest but that can pay more if corporate earnings reach certain specified levels. The holder of the bond 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 56

The directors of Premier Glass Company authorize the issuance of 100 shares of common stock for $25 per share to Justin for property the directors value at $2,500. The valuation:

A) is, in all jurisdictions, a matter of opinion on the part of the directors and their valuation is conclusive.
B) if incorrect, whether or not made in good faith, subjects Justin to liability for the difference between the valuation and the actual worth of the property.
C) under the Revised Act, depends on the directors' determination of the consideration's "adequacy."
D) if fraudulent, subjects the directors to liability to Premier for the difference between the fraudulent valuation and the actual worth of the property.

Question 57

Allen owns 50 of the 500 shares outstanding of General Myopics. GM plans to issue 500 new shares. If Allen has preemptive rights, he may:

A) buy all 500 shares before anyone else.
B) buy 500 shares at the same price he paid for the other stock.
C) buy 5 shares at a discount of 10%.
D) buy 50 of the 500 new shares.

Question 58

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

A) The acquisition of such shares by the corporation is a distribution to shareholders with an effect similar to that of a dividend.
B) Under the Revised Act, treasury shares are unauthorized but issued.
C) The 1980 amendments to the MBCA eliminated the concept of treasury shares.
D) Treasury shares are issued and outstanding.

Question 59

The Revised Act explicitly requires a corporations's charter to authorize:

A) one or more classes of shares that have limited voting rights.
B) one or more classes of shares that together are entitled to receive the net assets of the corporation upon dissolution.
C) Both are correct.
D) nothing. The Revised Act only recommends, not requires, the charter contents.

Question 60

Yukon Corporation purchases 1,000 shares of its own stock from Jones at a price of $50 a share. These shares, which are now issued but not outstanding, are known as:

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

Question 61

How does the Revised Act define the term "distribution"?

Question 62

What are the principal sources for corporate financing?

A) Debt.
B) Equity investment securities.
C) Retained earnings.
D) All of these.

Question 63

What are the two major issues regarding payment for shares?

Question 64

Discuss preemptive rights. Are preemptive rights more important in a closely held corporation or in a publicly held corporation? Explain.

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 then 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 are correct.
D) None of these are correct.

Question 66

What right does a share confer on its owner in regard to an 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 are conferred.

Question 67

The first federal statute for the regulation of securities offered for sale and sold through interstate commerce was passed in:

A) 1916.
B) 1933.
C) 1934.
D) 1954.

Question 68

Discuss the use of and types of stock options.

Question 69

The most customary type of dividend is a:

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

Question 70

Once properly declared, the effect of a distribution is:

A) it is revocable until actually paid.
B) that it is considered a debt the corporation owes to the shareholders.
C) it imposes personal liability on the directors who vote for it.
D) it imposes personal liability on the shareholders of a solvent corporation.

Question 71

Under the Revised Act, if the charter simply states that the corporation elects to have preemptive rights, the shareholders have no preemptive rights with respect to:

A) shares issued as compensation to directors, officers, and employees.
B) shares issued within six months of incorporation.
C) the corporation's unissued shares.
D) Shares issued as compensation to directors, officers, and also employees and  shares issued within six months of incorporation.

Question 72

State laws that regulate the issuance and sale of securities are known as:

A) the Uniform Commercial Code.
B) the MBCA.
C) Blue Sky Laws.
D) None of these.

Question 73

Jerry received a check from McGregory Corporation as a dividend on his preferred shares. Two days later, one of the corporate directors called him and said he would have to return the check since it was erroneously declared and the company would not be able to pay its day-to-day expenses. Jerry would:

A) have to return the check because the company would be insolvent.
B) have to return the check since it was erroneously declared.
C) not have to return the check because Jerry acted innocently.
D) not have to return the check because the board acted in good faith.

Question 74

Participating preferred stock will:

A) share with common stock in excess earnings after preferred payments and specified payments to common stock.
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 75

The 2016 RMBCA provides a statutory ratification procedure for shares that may have been improperly issued. Upon the effectiveness of the ratification, the overissued shares are valid shares as of

A) the date  originally  issued.
B) the date  of the ratification .
C) whatever time set forth in the bylaws has passed.
D) the date the overissue is discovered.

Question 76

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

A) Ownership interest.
B) Voting rights.
C) Redeemability.
D) Convertibility.

Question 77

Redemption of shares is not permitted if the corporation:

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

Question 78

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 79

If The Raintree Company has accumulated earnings each year but the directors have not declared dividends for five years, the shareholders may:

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

Question 80

ReGen, Inc. would like to pay a dividend to its shareholders. It has only been in business a two years and does not yet have any retained earnings. However, it has a new product, which is breaking all sales records. This quarter, it anticipates about $3 million in earned surplus. It should be able to pay all of its bills as they become due. Under which of the following tests would ReGen be able to pay a dividend? Explain each test.
a. Earned surplus test
b. Surplus test
c. Net asset test