Deck 15: Long-Term Financing

Question 1

The written agreement between a corporation and its bondholders is called:

A) the collateral agreement.
B) the deed.
C) the indenture.
D) the deed of conveyance.
E) None of these.

Answer 1

the indenture.

Question 2

Corporations try to create hybrid securities that look like equity but are called debt because:

A) debt interest expense is tax deductible.
B) bankruptcy costs are eliminated or reduced.
C) these securities have lower risk than debt.
D) Both debt interest expense is tax deductible; and these securities have lower risk than debt.
E) Both debt interest expense is tax deductible; and bankruptcy costs are eliminated or reduced.

Answer 2

Both debt interest expense is tax deductible; and bankruptcy costs are eliminated or reduced.

Question 3

If a group other than management solicits the authority to vote shares to replace management,a _____ is said to occur.

A) proxy fight
B) stockholder derivative action
C) tender offer
D) vote of confidence
E) None of these.

Answer 3

proxy fight

Question 4

The market value of the ownership of the firm equals:

A) the market price of the stock times the number of shares outstanding.
B) the sum of the market price of the bonds and the stock.
C) the par value of the stock times the number of shares outstanding.
D) the market price of the stock minus the retained earnings.
E) None of these.

Question 5

A standard arrangement for the orderly retirement of long-term debt calls for the corporation to make regular payments into a(n):

A) custodial account.
B) sinking fund.
C) retirement fund.
D) irrevocable trustee fund.
E) None of these.

Question 6

The book capital of a corporation is determined by:

A) the sum of the capital in excess of par and the retained earnings.
B) the par value of preferred stock.
C) the sum of the treasury stock and the preferred stock.
D) the number of shares issued multiplied by the par value of each share.
E) the market price of the company's debt.

Question 7

If cumulative voting is permitted:

A) the total number of votes a shareholder has is equal to the number of shares owned.
B) the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.
C) the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.
D) the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.
E) None of these.

Question 8

Shares of stock that have been repurchased by the corporation are called:

A) treasury stock.
B) undistributed capital stock.
C) retained equity.
D) capital surplus shares.
E) None of these.

Question 9

If you own 1,000 shares of stock and you can cast only 1,000 votes for a particular director,then the stock features:

A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
E) None of these.

Question 10

The book value of the shareholders' ownership is represented by:

A) the sum of the par value of common stock, the capital surplus and the accumulated retained earnings.
B) the total assets minus the net worth.
C) the sum of the preferred stock, debt and the capital surplus.
D) the sum of the total assets minus the current liabilities.
E) None of these.

Question 11

The market-to-book value ratio is implies growth and success when it is:

A) greater than 0.
B) less than 10.
C) less than 0.
D) less than 1.
E) greater than 1.

Question 12

Unsecured corporate debt is called a(n):

A) indenture.
B) debenture.
C) bond.
D) mortgage.
E) None of these.

Question 13

There are 3 directors' seats up for election. If you own 1,000 shares of stock and you can cast 3,000 votes for a particular director,this is illustrative of:

A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
E) None of these.

Question 14

A grant of authority allowing someone else to vote shares of stock that you own is called:

A) a power-of-share authorization.
B) a proxy.
C) a share authority grant (SAG).
D) a restricted conveyance.
E) None of these.

Question 15

Which of the following statements is false?

A) Creditors do not have voting power.
B) Payment on interest on debt in considered an expense, while payment of dividends is a return on capital.
C) Unpaid debt is a liability of the firm, and if not paid, can result in liquidation of the firm. Unpaid common stock dividends cannot force liquidation.
D) One of the costs of issuing equity is the possibility of financial distress, while no financial distress is associated with debt.
E) None of these.

Question 16

The amount of loan a person or firm borrows from a lender is the:

A) creditor.
B) indenture.
C) debenture.
D) principal.
E) amortization.

Question 17

If a long-term debt instrument is perpetual,it is called a(n):

A) secured debt issue.
B) subordinated debt issue.
C) consol.
D) capital debt issue.
E) indenturE.

Question 18

Debt that may be extinguished before maturity is referred to as:

A) sinking-fund debt.
B) debentures.
C) callable debt.
D) indenture debt.
E) None of these.

Question 19

Different classes of stock usually are issued to:

A) maintain ownership control by holding the class of stock with greater voting rights.
B) pay less in dividends between the classes of stock.
C) fool investors into thinking that equity is equity and there is no difference in control or value features.
D) extract perquisites without the other class of stockholders knowing.
E) None of these.

Question 20

Shareholders usually have which of the following right(s)?

A) To elect board members, the authorizing of new shares and other matters of great importance to shareholders such as being acquired.
B) To share proportionally in regular and liquidating dividends.
C) To share proportionally in any new stock sold.
D) All of these.
E) None of these.

Question 21

If a debenture is subordinated,it:

A) has a higher priority status than specified creditors.
B) is secondary to equity.
C) must give preference to the specified creditor in the event of default.
D) has been issued because the company is in default.
E) None of these.

Question 22

Which of the following statements about preferred stock is true?

A) Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-deductible expense.
B) Unpaid dividends on preferred stock are a debt of the corporation.
C) If preferred dividends are non-cumulative, then preferred dividends not paid in a particular year will be carried forward to the next year.
D) There is no difference in the voting rights of preferred and common stockholders.
E) None of these.

Question 23

Calhoun Computech used internal financing as a source of long-term financing for 80% of its total needs in 2011. The company borrowed an additional 15% of its total needs in the long-term debt markets in 2011. What were Calhoun's net new stock issues,in percentage terms,for 2011?

A) -10%
B) -5%
C) 5%
D) 10%
E) 15%

Question 24

Technically speaking,a long-term corporate debt offering that features a specific attachment to corporate property is generally called:

A) a debenture.
B) a bond.
C) a long-term liability.
D) a preferred liability.
E) None of these.

Question 25

The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2011. The company borrowed an additional 27% of its total needs in the long-term debt markets in 2011. What were Lory's net new stock issues in that year?

A) -20%
B) -7%
C) 7%
D) 20%
E) 27%

Question 26

Not paying the dividends on a cumulative preferred issue may result in:

A) preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid.
B) voting rights are granted to preferred stockholders if preferred dividends are in arrears.
C) no payment of dividends to common shareholders.
D) Both preferred dividend arrears that can be eliminated by the common shareholders only after common dividends are paid; and voting rights are granted to preferred stockholders if preferred dividends are in arrears.
E) Both voting rights are granted to preferred stockholders if preferred dividends are in arrears; and no payment of dividends to common shareholders.

Question 27

Holden Bicycles has 2,000 shares outstanding each with a par value of $0.50. If they are sold to shareholders at $12 each,what would the capital surplus be?

A) $1,000
B) $12,000
C) $15,000
D) $23,000
E) $24,000

Question 28

Financial deficits are created when:

A) profits and retained earnings are greater than the capital-spending requirement.
B) profits and retained earnings are less than the capital-spending requirement.
C) profits and retained earnings are equal to the capital-spending requirement.
D) All of these.
E) None of these.

Question 29

Corporate financial officers prefer to use book values when measuring debt ratios because:

A) book values are more stable than market values.
B) debt covenant restrictions are usually expressed in book value terms.
C) rating agencies measure debt ratios in book values terms.
D) All of these.
E) None of these.

Question 30

If a firm retires or extinguishes a debt issue before maturity,the specific amount they pay is:

A) the amortization amount.
B) the call price.
C) the sinking fund amount.
D) the spread premium.
E) None of these.

Question 31

Preferred stock has both a tax advantage and a tax disadvantage. These two are:

A) in default there are no taxes and dividends are taxed in corporate hands at 70%.
B) corporate dividends are taxed on 30% of the dividends received and expenses are deductible.
C) dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.
D) dividends are fully tax deductible but are not equity capital.
E) None of these.

Question 32

The Lory Bookstore used internal financing as a source of long-term financing for 85% of its total needs in 2011. The company borrowed an additional 25% of its total needs in the long-term debt markets in 2011. What were Lory's net new stock issues in that year?

A) -20%
B) -10%
C) 10%
D) 20%
E) 30%

Question 33

Financial economists prefer to use market values when measuring debt ratios because:

A) market values are more stable than book values.
B) market values are a better reflection of current value than historical value.
C) market values are readily available and do not have to be calculated like book values.
D) market values are more difficult to calculate which makes financial economists more valuable.
E) None of these.

Question 34

Holden Bicycles has 1,000 shares outstanding each with a par value of $0.10. If they are sold to shareholders at $10 each,what would the capital surplus be?

A) $100
B) $900
C) $9,900
D) $10,000
E) $11,000

Question 35

There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s. Some of this was due to the repurchasing of stock. The market value ratio of debt to debt and equity exhibited no upward trend. This can be explained by:

A) the change in the accounting rules of the period.
B) the difference between tax accounting and accounting for financial accounting purposes.
C) a large increase in the market value of equity that was greater than the increase in debt.
D) All of these.
E) None of these.

Question 36

Preferred stock may be desirable to issue for which of the following reason(s)?

A) If there is no taxable income, preferred stock does not impose a tax penalty.
B) The failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.
C) Preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.
D) Both the failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy; and preferred dividends are not tax deductible and therefore will not provide a tax shield but will reduce net income.
E) Both if there is no taxable income, preferred stock does not impose a tax penalty; and the failure to pay preferred dividends, cumulative or noncumulative, will not cause bankruptcy.

Question 37

If a debt issue is callable,the call price is generally ____ par.

A) greater than
B) less than
C) equal to
D) unrelated to
E) It varies widely based on the risk of the firm.

Question 38

The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a(n):

A) maintenance of security provision.
B) collateral restriction.
C) affirmative indenture.
D) restrictive covenant.
E) None of these.

Question 39

Michael's Motor Scooters has 1,000 shares outstanding each with a par value of $0.05. If they are sold to shareholders at $5 each,what would the capital surplus be?

A) $4,400
B) $4,500
C) $4,750
D) $4,950
E) $5,000

Question 40

Preferred stock may exist because:

A) losses before income taxes prevent a company from enjoying the tax advantages of debt interest while there is no tax advantage for preferred dividends.
B) an advantage exists for the firm; preferred shareholders cannot force the company into bankruptcy because of unpaid dividends.
C) corporations get a 70% tax exemption on preferred dividends received.
D) All of these.
E) None of these.

Question 41

Preferred Stock,as a hybrid security,presents somewhat of a puzzle as to why they are issued. What elements give rise to the puzzle and how is it explained?

Question 42

James Yachts has 2,000 shares outstanding each with a par value of $0.07. If they are sold to shareholders at $7 each,what would the capital surplus be?

A) $10,000
B) $12,140
C) $13,250
D) $13.860
E) $14,000

Question 43

Information on shareholder's equity as currently shown on the books of the Eaton Corporation is given as:
Rework the shareholder's equity as it appears on the books if the company issues 40,000 new shares of common at $70 per share.

Question 44

Different countries have different sources of funds. For example,in the United States,internally generated funds count for over 4/5 of all funds while in Japan,it is about ½ with externally generated funds making up the remainder. The disparities are less in the United Kingdom and Germany,with about 2/3 of funds coming from internal sources. Discuss this disparity and why it might exist.

Question 45

Information on shareholder's equity as currently shown on the books of the Eaton Corporation is given as:
From this information,calculate Eaton's book value per share.

Question 46

Mike's Mopeds used internal financing as a source of long-term financing for 70% of its total needs in 2011. The company borrowed an additional 20% of its total needs in the long-term debt markets in 2011. What were Calhoun's net new stock issues,in percentage terms,for 2011?

A) -10%
B) -5%
C) 5%
D) 10%
E) 15%