Deck 34: Financial Structure of Corporations

Question 1

Debentures are the same as indentures.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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.

Question 14

An indenture is a debt agreement.

Question 15

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 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

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 18

Treasury stock is issued but not outstanding.

Question 19

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 20

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 21

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 22

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 23

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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 32

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

Question 33

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

Question 34

Debt securities represent an ownership interest in the corporation.

Question 35

"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 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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 41

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

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

Question 42

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

Question 43

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

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

Question 44

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) 33
B) 133
C) 100
D) 200

Question 45

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

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

Question 46

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

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

Question 47

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 48

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

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

Question 49

The board of directors cannot declare dividends when the corporation:

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

Question 50

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

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

Question 52

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

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

Question 53

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 fraudulent, subjects the directors to liability to Premier for the difference between the fraudulent 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 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.

Question 54

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

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

Question 55

Allen owns 500 of the 5000 shares outstanding of General Myopics.GM plans to issue 600 new shares.If Allen has preemptive rights, he may:

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

Question 56

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

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

Question 57

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

Question 58

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 59

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

A) issue stock rights, which are long-term options to buy shares.
B) issue stock warrants, which are short-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 60

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

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

Question 61

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

Question 62

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) 1954.
D) 1934.

Question 63

What right does a share confer on its owner in regard to an interest in the corporation?

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

Question 64

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 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

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

Question 67

Participating preferred stock will:

A) share with common stock in excess earnings after preferred payments and specified payments to common stock.
B) participate in earnings only to the extent that all other classes do.
C) participate in earnings to the same extent as common stock.
D) accumulate dividends that will be paid later.

Question 68

What are the principal sources for corporate financing?

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

Question 69

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

Question 70

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

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

Question 71

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

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

Question 72

What are the two major issues regarding payment for shares?

Question 73

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

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

Question 74

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

Question 75

Once properly declared, the effect of a distribution is:

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

Question 76

Redemption of shares is not permitted if the corporation:

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

Question 77

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 within six months of incorporation.
B) shares issued as compensation to directors, officers, and employees.
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 78

Discuss the use of and types of stock options.

Question 79

A distribution may be in the form of:

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

Question 80

The most customary type of dividend is a:

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