Deck 7: Stock Valuation

Question 1

Key differences between common stock and bonds include all of the following EXCEPT

A) common stockholders have a voice in management; bondholders do not.
B) common stockholders have a junior claim on assets and income relative to bondholders.
C) bonds have a stated maturity but stock does not.
D) dividends paid to bondholders are tax-deductible but interest paid to stockholders is not.

Answer 1

dividends paid to bondholders are tax-deductible but interest paid to stockholders is not.

Question 2

Interest paid to bondholders is tax deductible but dividends paid to stockholders is not.

Answer 2

True

Question 3

In the case of liquidation, bondholders are paid first, followed by preferred stockholders, followed by common stockholders.

Answer 3

True

Question 4

Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid in additional shares of preferred stock prior to the payment of dividends to common stockholders.

Question 5

Unlike equity holders, creditors are owners of the firm.

Question 6

Key differences between common stock and bonds include all of the following EXCEPT

A) common stockholders have a voice in management; bondholders do not.
B) common stockholders have a senior claim on assets and income relative to bondholders.
C) bonds have a stated maturity but stock does not.
D) interest paid to bondholders is tax-deductible but dividends paid to stockholders are not.

Question 7

Holders of equity have claims on both income and assets that are secondary to the claims of creditors.

Question 8

Holders of equity capital

A) own the firm.
B) receive interest payments.
C) receive guaranteed income.
D) have loaned money to the firm.

Question 9

Unlike creditors, equity holders are owners of the firm.

Question 10

Equity capital can be raised through

A) the money market.
B) the NYSE bond market.
C) retained earnings and the stock market.
D) a private placement with an insurance company as the creditor.

Question 11

Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.

Question 12

In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders.

Question 13

Which of the following terms typically applies to common stock but not to preferred stock?

A) Par value.
B) Dividend yield.
C) Legally considered as equity in the firm.
D) Voting rights.

Question 14

The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

Question 15

Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.

Question 16

The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.

Question 17

As a form of financing, equity capital

A) has a maturity date.
B) is only liquidated in bankruptcy.
C) is temporary.
D) has priority over bonds.

Question 18

If bankruptcy were to occur, stockholders would have prior claim on assets over

A) preferred stockholders.
B) secured creditors.
C) unsecured creditors.
D) no one.

Question 19

Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.

Question 20

Interest paid to bondholders is tax deductible but interest paid to stockholders is not.

Question 21

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

Question 22

Like bonds, common stock is usually sold with a par value.

Question 23

Common stock can be either privately or publicly owned.

Question 24

A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is leftthe residualafter all other claims on the firm's income and assets have been satisfied.

Question 25

Although preferred stock provides added financial leverage in much the same way as bonds, it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.

Question 26

The advantages of issuing preferred stock from the common stockholder's perspective include all of the following EXCEPT

A) seniority of preferred stockholder's claim over common stockholders.
B) flexibility.
C) use in mergers.
D) increased leverage.

Question 27

The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.

Question 28

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends are subject to a maximum tax rate of 20 percent.

Question 29

Like bonds, the par value on a common stock is used as a basis for determining its fixed dividend.

Question 30

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, dividends are subject to a maximum tax rate of 15 percent.

Question 31

The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock.

Question 32

Preferred stockholders are often referred to as residual claimants.

Question 33

Common stockholders are often referred to as residual claimants.

Question 34

From the corporation's point of view, the advantages of issuing preferred stock include all of the following EXCEPT

A) its increased financial leverage.
B) its flexible dividend policy.
C) its excellent merger security.
D) its difficulty to retire.

Question 35

Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.

Question 36

One advantage of preferred stock is its ability to increase leverage, which in turn will magnify the effects of increased earnings on common stockholders' returns.

Question 37

Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.

Question 38

Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are

A) cumulative.
B) noncumulative.
C) participating.
D) convertible.

Question 39

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.

A) $4.00
B) $8.00
C) $8.80
D) $80.00

Question 40

________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.

A) Preferred stockholders
B) Common stockholders
C) Bondholders
D) Creditors

Question 41

Small business investment companies (SBICs) are corporations chartered by the federal government that can borrow at attractive rates from the U.S. Treasury and use the funds to make venture capital investments in private companies.

Question 42

Which of the following is false?

A) The common stock of a corporation can only be publicly owned.
B) Firms often issue common stock with no par value.
C) Preemptive rights help to prevent a dilution of ownership on the part of existing shareholders.
D) A firm's corporate charter indicates how many authorized shares it can issue.

Question 43

C. Edward Accounting Services has an outstanding issue of 1,000 shares preferred stock with a $100 par value, an 8 percent annual dividend, and 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the last two years, how much must preferred stockholders be paid prior to paying dividends to common stockholders?

Question 44

Which of the following is NOT typically a feature of preferred stock?

A) Most preferred pay dividends that grow at a constant rate.
B) Most preferred stock is cumulative.
C) Preferred stock is generally callable.
D) Preferred stock is typically convertible.

Question 45

A violation of preferred stock restrictive covenants usually permits preferred shareholders to

A) force the company into bankruptcy.
B) sell their shares.
C) force the retirement of the preferred stock at or above its par value.
D) force the company to repurchase the shares at a stated amount below par.

Question 46

All of the following are characteristics of preferred stock EXCEPT

A) it is often considered quasi-debt due to fixed payment obligation.
B) it has less restrictive covenants than debt.
C) it gives the holder voting rights which permit selection of the firm's directors.
D) its holders have priority over common stockholders in the liquidation of assets.

Question 47

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.

Question 48

The cost of preferred stock is

A) lower than the cost of long-term debt.
B) higher than the cost of common stock.
C) higher than the cost of long-term debt and lower than the cost of common stock.
D) lower than the cost of convertible long-term debt and higher than the cost of common stock.

Question 49

An ADR is

A) a claim issued by a U.S. bank representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank and is issued in dollars to U.S. investors.
B) a claim issued by a foreign bank representing ownership of shares of a foreign company's stock held on deposit by the foreign bank and is issued in dollars to U.S. investors.
C) a claim issued by a U.S. bank representing ownership of shares of a U.S. company's stock held on deposit by the U.S. bank and is issued in dollars to U.S. investors.
D) none of the above.

Question 50

Which of the following is false?

A) The common stock of a corporation can be either privately or publicly owned.
B) Firms often issue common stock with no par value.
C) Preemptive rights often result in a dilution of ownership.
D) A firm's corporate charter indicates how many authorized shares it can issue.

Question 51

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made.

Question 52

The claims of equity holders on the firm's income can not be paid until the claims of all creditors have been satisfied. But, the claims of the equity holders on the firm's assets have priority over the claims of creditors because the equity holders are the owners of the firm.

Question 53

Corporate venture capital funds are subsidiaries of financial institutions, particularly banks, set up to help young firms grow and, it is hoped, become major customers of the institutions.

Question 54

All of the following features may be characteristic of preferred stock EXCEPT

A) callable.
B) no maturity date.
C) tax-deductible dividends.
D) convertible.

Question 55

A proxy statement is

A) a statement giving the votes of a stockholder to the CEO.
B) a statement giving the votes of a stockholder to the board of directors.
C) a statement giving the votes of a stockholder to another party.
D) none of the above.

Question 56

Preferred stockholders

A) do not have preference over common stockholders in the case of liquidation.
B) do have preference over bondholders in the case of liquidation.
C) do not have preference over bondholders in the case of liquidation.
D) Two of the above are true statements.

Question 57

Which of the following is usually a right of a preferred stockholder?

A) Right to convert shares to common stock on demand.
B) Preemptive right to participate in the issuance of new common shares.
C) Right to receive dividend payments before any dividends are paid to common stockholders.
D) Right to sue company in bankruptcy proceedings if promised preferred dividends are not paid.

Question 58

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders?

A) $ 8,000
B) $16,000
C) $24,000
D) $25,000

Question 59

Which of the following is NOT typically a feature of common stock?

A) Most common stock is callable.
B) Most common stock is cumulative.
C) Common stock may or may not pay dividends.
D) More than one of the above statements is not true of common stock.

Question 60

A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. The preferred stockholders must be paid ________ prior to paying the common stockholders.

A) $ 0/share
B) $12/share
C) $24/share
D) $36/share

Question 61

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm's earnings than previously.

Question 62

Another term sometimes applied to a common shareholder is a

A) fundamental or basic owner of the firm.
B) residual owner of the firm.
C) net owner of the firm.
D) reciprocal owner of the firm.

Question 63

An underwritten issue of common stock is one in which the firm purchases insurance to cover unexpected losses suffered by shareholders.

Question 64

________ is hired by a firm to find prospective buyers for its new stock or bond issue.

A) A securities analyst
B) A trust officer
C) A commercial loan officer
D) An investment banker

Question 65

Regarding the tax treatment of payments to securities holders, it is true that ________, while ________.

A) interest and preferred stock dividends are not tax-deductible; common stock dividends are tax deductible
B) interest and preferred stock dividends are tax-deductible; common stock dividends are not tax-deductible
C) common stock dividends and preferred stock dividends are tax-deductible; interest is not tax-deductible
D) common stock dividends and preferred stock dividends are not tax-deductible; interest is tax-deductible

Question 66

A common stockholder has no guarantee of receiving any cash inflows, but receives what is left after all other claims on the firm's income and assets have been satisfied.

Question 67

Preemptive rights allow existing shareholders to maintain voting control and protect against the dilution of their ownership.

Question 68

A prospectus is another term for a firm's annual report showing the firm's prospects for the coming year.

Question 69

Treasury stock is generally reclassified as class B common stock and has voting rights.

Question 70

Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation.

Question 71

Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity.

Question 72

Common stockholders expect to earn a return by receiving

A) semiannual interest.
B) fixed periodic dividends.
C) dividends.
D) annual interest.

Question 73

A prospectus is a portion of the security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.

Question 74

American Depositary Receipts (ADRs) are claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.

Question 75

Preferred stock that provides for dividend payments based on certain formulas allowing preferred stockholders to participate with common stockholders in the receipt of dividends beyond a specified amount is called cumulative preferred stock.

Question 76

Shares of stock currently owned by the firm's shareholders are called

A) authorized.
B) issued.
C) outstanding.
D) treasury shares.

Question 77

The free cash flow valuation model can be used to determines the value of an entire company as the present value of its expected free cash flows discounted at the firm's weighted average cost of capital.

Question 78

Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.

Question 79

If a firm has class A and class B common stock outstanding, it means that

A) each class receives a different dividend.
B) the par value of each class is different.
C) the dividend paid to one of the classes is tax deductible by the corporation.
D) one of the classes is probably non-voting stock.

Question 80

All of the following are examples of marketable securities EXCEPT

A) common stock.
B) a Treasury bill.
C) commercial paper.
D) a negotiable certificate of deposit.