Deck 14: Introduction to Corporate Financing and Governance

Question 1

Corporate investors are indifferent between investing in common and preferred shares.

Answer 1

False

Question 2

A convertible bond generally has a higher market value than a comparable non-convertible bond.

Answer 2

True

Question 3

The gap between internally generated cash and the cash that the company needs is called the financial deficit.

Answer 3

True

Question 4

The price at which new shares are sold to investors almost always exceeds par value.The difference is entered into the company's accounts as additional paid-in capital,or capital surplus.

Question 5

A corporation cannot default on funded debt.

Question 6

Companies sometimes sell the cash flows from a bundle of loans.Such bonds are known as asset-backed bonds.

Question 7

A majority of a firm's directors must be independent of the firm's management.

Question 8

If an incompetent management team controls a large block of votes,it may use these votes to stay in control.

Question 9

Only a portion of the board of directors are up for election in any given year when a firm has a classified board.

Question 10

If you are concerned with maintaining the market value of your preferred stock,you should purchase floating-rate preferred shares.

Question 11

Firms have the right to resell any Treasury stock they own.

Question 12

Dividends represent an important component of a firm's net book value.

Question 13

Suppose a firm needs fresh capital,but its management does not want to give up its controlling interest.The existing shares could be labeled Class A,and then Class B shares with limited voting rights could be issued to outside investors.

Question 14

Shares of stock that have been issued and subsequently repurchased by the issuer are known as treasury stock.

Question 15

Historically,internally generated cash covers less than half of the non-financial firms' capital requirements in the U.S.

Question 16

Ford Motor Company and Google have issued two classes of shares with different voting rights to allow their firms to obtain fresh capital without giving up their management's controlling rights.

Question 17

In proxy contests,outsiders compete with the firm's existing management and directors for control of the corporation.

Question 18

Firms tend to issue more debt when internal funds are low.

Question 19

If shareholders do not like the policies that management pursues,they can vote in a different board of directors.

Question 20

Different classes of stock often have different voting rights.

Question 21

Any capital surplus shown by a firm on its balance sheet results from:

A) not paying out all net income as dividends.
B) repurchasing shares for treasury stock.
C) issuing stock at a price higher than par value.
D) retained earnings.

Question 22

The price at which new shares are issued is referred to as the par value of the stock.

Question 23

Floating-rate bonds appeal to investors who are worried about fluctuations in interest rates.

Question 24

A eurobond is defined as any bond that is denominated in euros.

Question 25

Callable bonds may be repurchased by the issuing firm before maturity at the specified call price.

Question 26

A capital surplus is created when the selling price of new shares is greater than the par value.

Question 27

When firms retain cash,they are generating funds internally thereby decreasing the amount of external funds needed.

Question 28

The call provision of callable bonds comes at the expense of bond holders,for it limits their capital gain potential.

Question 29

Which one of the following equity concepts would you expect to be least important to a financial analyst?

A) Par value per share
B) Additional paid-in capital
C) Retained earnings
D) Net common equity

Question 30

Declassification of a firm's board tends to increase the market value of the firm's stock.

Question 31

The term "senior debt" refers only to debt that was issued in the more distant past.

Question 32

A stock's par value is the:

A) maturity value of the stock.
B) price at which each share is recorded.
C) price at which an investor could sell the stock.
D) price received by the firm when the stock was issued.

Question 33

Bonds with the callable feature tend to sell at lower prices than bonds without such a feature.

Question 34

Privately placed debt must be held until maturity and can never be resold.

Question 35

If a corporation issues 1,000 shares of $1 par value stock for $10 per share,then retained earnings will:

A) increase by $1,000.
B) increase by $9,000.
C) decrease by $9,000.
D) remain unchanged.

Question 36

Holders of callable bonds know that the company will wish to buy the issue back if interest rates fall,and therefore the price of the bond will not rise above the call price.

Question 37

How much will be recorded as a firm's additional paid-in capital if the firm issues 1 million shares that have a $5 par value for $15 per share?

A) $0
B) $5 million
C) $10 million
D) $15 million

Question 38

Additional paid-in capital refers to:

A) a firm's retained earnings.
B) a firm's treasury stock.
C) the difference between the issue price and the par value.
D) funds borrowed from a bank or bondholders.

Question 39

For most firms,the majority of their funding is from external sources.

Question 40

In a bankruptcy situation,funded debt will be repaid while unfunded debt will not.

Question 41

What is the book value per share of equity for a firm with $1 million in net common equity,$50,000 in authorized share capital,25,000 shares issued,and 20,000 shares outstanding?

A) $38.00
B) $40.00
C) $47.50
D) $50.00

Question 42

Preferred stock dividends:

A) have preference over bond interest payments.
B) are guaranteed to be paid at least annually.
C) are excluded from the taxable income of their recipients.
D) have priority over common stock dividends.

Question 43

Bonds that have been sold only to a limited number of institutional investors are considered:

A) secured bonds.
B) convertible bonds.
C) private placements.
D) indexed bonds.

Question 44

Assume a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio.In this case retained earnings will:

A) increase by $15,000.
B) increase by $50,000.
C) decrease by $15,000.
D) decrease by $50,000.

Question 45

Warrants:

A) allow their holder to purchase shares at the current market price.
B) have a guaranteed maturity value.
C) grant the option to purchase either stocks or bonds at the holders discretion.
D) have an expiration date.

Question 46

A corporation's net worth is composed of the:

A) book value of common equity plus par value of debt.
B) par value plus additional paid-in capital.
C) retained earnings less treasury stock.
D) book value of common equity plus preferred stock.

Question 47

If a corporation receives $50,000 in preferred stock dividends,how much tax does it pay on these dividends? The corporate tax rate is 35%.

A) $0
B) $5,250
C) $12,250
D) $17,500

Question 48

What happens in the case of a bond selling for $1,000 that can be converted to 20 shares of stock that are currently selling for $45 per share?

A) The bondholders will choose to convert.
B) The stock will go up to $50 per share.
C) The bond's price will go down to $900.
D) Bondholders will not convert.

Question 49

Assume a corporation has cumulative voting and there are two directors up for election.What is the minimum number of votes a shareholder who owns 100 shares can cast for Candidate Jones if there are a total of 5 candidates?

A) 0
B) 20
C) 40
D) 100

Question 50

Which one of these accounts represents internal funding?

A) Retained earnings
B) Common stock
C) Bonds payable
D) Preferred stock

Question 51

Convertible bonds resemble a combination of which two types of securities?

A) Investment grade bonds and junk bonds
B) Bonds and common stock
C) Bonds and warrants
D) Bonds and preferred stock

Question 52

Assume a corporation has cumulative voting and there are two directors up for election.What is the maximum number of votes a shareholder who owns 100 shares can cast for Candidate Jones if there are a total of 5 candidates?

A) 20
B) 40
C) 100
D) 200

Question 53

What happens in the case of a bond selling for $1,000 that can be converted to 20 shares of stock that are currently selling for $80 per share?

A) The bondholder will lose $100.
B) The stock will go down to $50 per share.
C) The bond's price will go down to $900.
D) The bondholder will choose to convert.

Question 54

Which one of these terms applies to the bundling of a group of loans with the subsequent sale of the cash flows from those loans?

A) Convertible bond
B) Warrants
C) Asset-backed bond
D) Preferred bond

Question 55

Which one of the following statements about floating-rate preferred stock is correct?

A) Its dividends increase as interest rates increase.
B) Its market price increases at a set rate annually.
C) It is the only stock issued without a par value.
D) Its dividends are deductible for tax purposes by the paying corporation.

Question 56

Eurobonds are long-term,corporate liabilities that:

A) are issued by European firms.
B) must be held inside the United States by foreigners.
C) are marketed in many countries.
D) are repaid in U.S. dollars.

Question 57

A warrant grants its holder the right to do which one of these prior to a specified date?

A) Convert debt into a specified number of shares
B) Sell common shares at a predetermined price
C) Exchange stock for bonds at a specified price
D) Purchase shares at a predetermined price

Question 58

The purpose of a sinking fund is to:

A) reduce the par value of stock over time.
B) take advantage of the tax break on preferred stock.
C) periodically retire debt prior to final maturity.
D) allow risky corporations to avoid bankruptcy.

Question 59

Funded debt refers to those liabilities that:

A) have established a sinking fund for repayment.
B) are not callable at the option of the firm.
C) are secured by specific collateral.
D) have a maturity of more than one year remaining.

Question 60

A proxy contest is typically one in which:

A) the Board attempts to gain control from the shareholders.
B) management attempts to gain control from the Directors.
C) outsiders attempt to gain control from management.
D) the Board attempts to gain control from the Directors.

Question 61

When new shares of stock are sold at a price greater than par value,the excess over par is recorded as:

A) capital surplus.
B) retained earnings.
C) treasury stock.
D) authorized capital.

Question 62

The system of electing a board of directors where each director is voted on separately is known as:

A) majority voting.
B) supermajority voting.
C) cumulative voting.
D) proxy voting.

Question 63

Wheat's Market just issued 17,500 new shares of common stock at a price of $20 a share.How will this transaction affect the equity accounts on the firm's balance sheet if the par value is $1 per share?

A) The common stock account will increase by $350,000.
B) The common stock account will decrease by $17,500.
C) Paid in surplus will increase by $332,500.
D) Paid in surplus will increase by $350,000.

Question 64

What is the after-tax cost to a corporation in the 35% tax bracket of paying $50,000 in preferred stock dividends?

A) $17,500
B) $32,500
C) $50,000
D) $76,923

Question 65

One way in which control of a corporation can be removed from the current board of directors is to:

A) take away the directors' stock.
B) give voting power to management.
C) remove the Board's voting power.
D) fight a proxy contest.

Question 66

Which statement correctly describes the company's dividend decision?

A) The dividend payment is set by shareholders at the annual general meeting.
B) The dividend payment is the sole responsibility of the company's management.
C) The dividend payment must be approved by the board of directors.
D) The dividend payment is set by the company's bondholders together with the shareholders.

Question 67

One common reason for issuing two distinct classes of common stock is to:

A) sell different classes to increase profits.
B) allow one stock to increase in price while the other class declines.
C) restrict voting privileges from some shareholders.
D) conserve cash by offering dividends to only one class of stockholders.

Question 68

Which one of the following statements is correct?

A) A convertible bondholder is forced to convert no later than a pre-specified time.
B) The convertible option on a bond gives the owner the right to buy shares from a company at a pre-determined cash price.
C) The owner of a warrant has an option to convert the warrant into convertible bonds.
D) The owner of a warrant will benefit if the firm's stock does well.

Question 69

Corporations generally need shareholder approval to do which one of the following?

A) Select a new CEO
B) Increase the number of authorized shares
C) Purchase Treasury stock
D) Pay a regular dividend

Question 70

All of the following are true of retained earnings except:

A) They are the difference between paid-in capital and the total dividends paid.
B) They represent the amount of new capital shareholders have indirectly contributed.
C) They are equal to the cumulative earnings less dividends.
D) They are the amount of earnings plowed back into the firm.

Question 71

Which one of the following statements is correct?

A) Common stock dividends cannot be paid if preferred stock dividends are in arrears.
B) Preferred stock dividends cannot be paid if common stock dividends are in arrears.
C) Common and preferred dividends must be paid simultaneously.
D) No dividends on the common stock can be paid without specific shareholder approval.

Question 72

The value of retained earnings on the corporate balance sheet represents the amount of earnings:

A) not paid out in dividends this period.
B) that are being held in cash.
C) over and above corporate income taxes.
D) reinvested in the firm since its inception.

Question 73

Jay's Jams Inc.was just established with an investment of $3 million.Jay expects his company to generate free cash flow of $800,000 a year for the next 10 years.If Jay's cost of capital is 15%,find the market value and book value of his company.

A) Market value = $8.0 million; book value = $3.0 million
B) Market value = $3.0 million; book value = $4.0 million
C) Market value = $4.0 million; book value = $3.0 million
D) Market value = $8.0 million; book value = $4.0 million

Question 74

Which one of the following statements is typically correct for a going-concern firm?

A) Book value of equity exceeds market value of equity.
B) Market value of equity exceeds book value of equity.
C) Book value of equity equals market value of equity.
D) No typical relationship exists between book and market values of equity.

Question 75

An investor might prefer floating-rate debt if she thought that:

A) interest rates would rise.
B) interest rates would decline.
C) its bond rating might be lowered.
D) its bonds were going to be converted into equity.

Question 76

A firm just issued 15,000 new shares of stock with a market price of $14 per share and par value of $2 per share.Which one of these correctly states the resulting change in the equity accounts?

A) Capital surplus will increase by $180,000.
B) Retained earnings will decrease by $210,000.
C) Common stock will increase by $15,000.
D) Common stock will increase by $210,000.

Question 77

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes will the shareholder cast for Director "A" if four directors are to be elected and the maximum number of votes are cast for "A"?

A) 25
B) 100
C) 200
D) 400

Question 78

A company's board of directors is primarily an agent of the company's:

A) management.
B) employees.
C) shareholders.
D) management and employees.

Question 79

What is the most commonly bundled type of loan in the asset-backed bond category?

A) Automobile loans
B) Mortgages
C) Credit card receivables
D) Student loans

Question 80

If net equity issues have been negative,

A) more shares have been repurchased than newly issued.
B) new shares have been sold at less than par value.
C) issuing stock has been a negative NPV transaction.
D) dividend payments have exceeded net income.