Deck 17: Common and Preferred Stock Financing

Question 1

When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to receive a right to purchase future stock.

Answer 1

True

Question 2

Common stockholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place.

Answer 2

False

Question 3

Under majority voting, it is easier for minority stockholders to elect directors to the board.

Answer 3

False

Question 4

Stock classes may differ in voting rights, dividend rights, and claims to income during company elimination.

Question 5

Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to elect three of nine directors to the board.

Question 6

Stock classes are similar to bond ratings in that they are used to rank the performance of different corporations' stock.

Question 7

Each common stockholder has the ability to vote, and may assign a proxy if they desire to pass the voting right along.

Question 8

Stockholders always have preemptive rights when new issues of stock are offered.

Question 9

Common stockholders have a legal claim to dividend income.

Question 10

Bondholders never have any control over the actions of a firm.

Question 11

After a rights offering, the common stock price will sell at the subscription price.

Question 12

Hewlett-Packard's capital stock has recovered from the loss of confidence brought about by the failure to find a successful CEO and the multimillion-dollar severance packages the ousted executives received.

Question 13

A rights offering may be of limited value to shareholders.

Question 14

The increasing sophistication of individual investors has decreased the role of institutional investors in the stock market.

Question 15

Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income.

Question 16

The particular type of shareholder voting used has become less important with the influence of takeovers, leveraged buy-outs, and other challenges to management control.

Question 17

Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund expansions.

Question 18

Under majority voting, any group of stockholders owning over 50 percent of the common stock may elect all of the directors.

Question 19

Common stockholders have a residual claim to income; in other words they are last in line during an elimination of the company.

Question 20

A common stockholder cannot force a company into bankruptcy for eliminating the dividend.

Question 21

If the current market value of Markowitz Corp stock is $61 and 10 rights are required to buy one additional share of Markowitz at the subscription price of $50, then the rights are worth $1.00.

Question 22

American Depository Receipts (ADRs) are certificates that give foreign stockholders a legal claim on U.S. companies' foreign stock.

Question 23

Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level.

Question 24

Preferred stock generally has a lower after-tax cost than debt to the corporation.

Question 25

Participating preferred stock is advantageous to common stockholders because it receives more dividends.

Question 26

Some preferred stocks are "participating preferreds," allowing for an increase in the preferred stock dividend when additional profits are available after common stock dividends have been paid.

Question 27

To the individual recipient, preferred stock dividends offer no tax advantage over bonds.

Question 28

Stock purchased through a rights offering may carry lower margin requirements.

Question 29

If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the year.

Question 30

Preferred stock dividends are a tax-deductible expense for a corporation.

Question 31

To the security holder, preferred stock usually offers higher risk and lower after-tax return compared to bonds.

Question 32

The difference between the rights-on and ex-rights common stock price is equal to the value of a right to purchase future stocks, all other things being equal.

Question 33

The ex-rights date usually takes place after the end of the subscription period.

Question 34

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.

Question 35

The after-tax cost of debt is usually cheaper than issuing preferred stock to the corporation, all things being equal.

Question 36

Although American Depository Receipts (ADRs) are traded in the U.S. in dollars, U.S. investors may still incur foreign currency risk.

Question 37

Generally, the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors.

Question 38

A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids.

Question 39

The "convertible exchangeable" feature of preferred shares gives companies the sole right to force preferred stock holders to exchange for common stock.

Question 40

The margin requirement specifies the amount of cash or equity that must be deposited with a brokerage house or a bank, with the balance of funds eligible for borrowing.

Question 41

A proxy is

A) a device for circumventing regular voting procedures.
B) a coupon attached to each share of stock and used by the shareholder in casting their vote on current issues.
C) an authorization of a registered stockholder to another person to act in their place at the meeting.
D) a warrant allowing a stockholder to purchase a specified number of additional shares at a given price.

Question 42

The purpose of cumulative voting is

A) to maintain majority control of the board of directors.
B) to allow minority stockholders the possibility of a voice on the board of directors.
C) to obstruct unfriendly mergers and takeover efforts.
D) to prevent the dilution of common stock through preemptive rights offerings.

Question 43

Under normal operating conditions, the board of directors is elected by

A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the options are true.

Question 44

If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes more attractive than normal, relative to a debt issuance.

Question 45

When comparing common stock of the same company, it is fair to say that

A) all shares, no matter how many classes, are all created with the same equal rights.
B) companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C) the Securities and Exchange Commission allows only one class of common stock.
D) investors are indifferent between class A and class B shares.

Question 46

Dutch Auction preferred stocks, unlike standard preferred stocks, are typically used as short-term instruments.

Question 47

Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.

Question 48

A rights offering is generally financially advantageous to the investor because it provides them with additional shares of stock.

Question 49

Due to the 2017 Tax Cuts and Jobs Act, for companies owning between 20 and 80 percent of another company, any dividends received from that company are taxed at 35 percent, however most companies don't fall into this category.

Question 50

American Depository Receipts (ADRs) are subject to foreign exchange risk unlike direct methods of investing in the foreign exchange market.

Question 51

Which of the following is not a true statement?

A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.

Question 52

The floating rate feature on preferred stock causes more volatility in its price.

Question 53

An increasing proportion of shares in the U.S. are owned by

A) individual investors.
B) corporations (Treasury stock).
C) institutions.
D) governments.

Question 54

The market price of "floating rate" preferred stock is less volatile than that of regular preferred stock.

Question 55

Due to the 2017 Tax Cuts and Jobs Act, for companies owning less than 20 percent of another company, the tax exclusion was reduced from 70 to 50 percent.

Question 56

Participating preferred stock gives its owners voting rights.

Question 57

Investors are usually in favor of poison pills because they prevent takeovers.

Question 58

Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend based on the firm's success.

Question 59

Floating rate preferred stock would be ideal to have when the stock price fluctuates and when there are tax benefits to owning preferred stock.

Question 60

Which of the following statements is true with respect to cumulative voting?

A) Cumulative voting permits multiple votes for a single director.
B) Cumulative voting gives minority shareholders a better chance of being represented on the board of directors.
C) If six directors are to be elected and you own 100 shares, you may vote all 600 votes for one director and none for the others.
D) All of these options are true.

Question 61

A rights offering

A) gives the firm a built-in market for new securities.
B) will likely lead to considerably higher distribution costs.
C) will increase the shareholder's total valuation.
D) is the most expensive way to raise capital.

Question 62

The subscription rate of a new offering is generally ________ than the rights-on price and ________ than the ex-rights price.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 63

The effect of a rights offering on a stockholder is

A) the right to sell stocks, in which the stockholder's wealth only increases if the stock is sold.
B) the right to own more stocks, in which the stockholder's wealth increases only if the new stock is purchased.
C) the right to own more shares at a cheaper price, while the wealth of the stockholder's original shares goes up.
D) the right to own more shares at a cheaper price, but the wealth of the stockholder's original shares goes down.

Question 64

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative and 100,000 common stock outstanding. The preferred dividend is $3.00 per share and has not been paid for three years. If Kuhns earned $1 million this year, what could be the maximum payment to the preferred stockholders on a per share basis?

A) $9.00 per share
B) $15.00 per share
C) $6.00 per share
D) $5.00 per share

Question 65

Coase Corp. has 10,000,000 outstanding shares. There are 11 directors on the firm's board. The Becker family owns 2,300,000 shares of Coase Corp. How many directors can the Becker family be assured of electing by themselves if Coase Corp. uses majority voting?

A) Zero
B) One
C) Two
D) Three

Question 66

Which of the following best represents a benefit of a rights offering?

A) Rights offerings increase return on equity.
B) Rights offerings substantiate higher debt-to-equity ratios.
C) Rights offerings have lower margin requirements.
D) None of these options are true.

Question 67

If a corporate charter includes a provision for preemptive rights, the original stockholders

A) must sell their stock to the company.
B) get first option to buy additional issues of common stock.
C) may purchase existing treasury stock.
D) cannot utilize cumulative voting procedures.

Question 68

Which of the following actions will provide the greatest increase in wealth to shareholders when a company conducts a rights offering?

A) Exercise the right to buy new shares to increase wealth.
B) Sell the rights themselves and hold existing shares and cash.
C) Exercise the rights and sell the shares to increase wealth.
D) None of these options are true.

Question 69

Seven rights are necessary to purchase one share of Fogel stock at $34. The ex-rights value of Fogel stock is $48. The right sells for $________.

A) $14
B) $11
C) $48
D) $2

Question 70

A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called

A) a preemptive right.
B) a poison pill.
C) ex-rights.
D) rights-on.

Question 71

Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is Tricki's expected price when it begins trading ex-rights?

A) $47.23
B) $44.00
C) $44.09
D) $45.00

Question 72

A possible advantage to a rights offering is that

A) current shareholders are protected against dilution.
B) the firm has a built-in market of knowledgeable investors.
C) distribution costs are lower than a public offering.
D) All of these options are true.

Question 73

The most important feature of the preemptive right is that the rights

A) may be sold for profit.
B) possibly protect the stockholders' shares against dilution.
C) may accumulate more votes.
D) are nontransferable.

Question 74

Sharpe Products has one million outstanding shares and seven directors to be elected. Cumulonimbus Holdings owns 200,000 shares of Sharpe. How many directors can Cumulonimbus elect with cumulative voting?

A) 0
B) 1
C) 2
D) 3

Question 75

Which one of the following statements is false?

A) Poison pills encourage current owners to purchase more stock in the company.
B) Poison pills discourage potential high takeover bids.
C) Stockholders have to approve the acceptance of poison pill strategies before a corporation can use them.
D) Many institutional investors are opposed to the poison pill.

Question 76

North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are required to purchase one share. The value of a right is ________.

A) $0.11
B) $1.11
C) $1.00
D) $1.50

Question 77

Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for $4. The ex-rights value of Fogel stock is ________.

A) $70
B) $46
C) $74
D) $50

Question 78

Given that there are 4,000,000 shares outstanding in Miller Corp., how many shares will be required for a minority group of stockholders to elect two of the nine members on the board of directors? (Assume cumulative voting is required.)

A) 800,001
B) 1,000,001
C) 1,090,910
D) 888,889

Question 79

"Preemptive rights" means that

A) existing shareholders can prevent management from issuing additional common stock.
B) common shareholders can "preempt" preferred shareholders for dividends.
C) existing shareholders are guaranteed an opportunity to retain their proportional share of ownership.
D) management can preempt the right of shareholders to receive dividends if earnings are down.

Question 80

A stock is said to sell "ex-rights"

A) when the period in which the subscription privilege is to be exercised has expired.
B) when the stockholder buys the stock, they no longer get a right toward the future purchase of stock.
C) after the rights have all been exercised and the new issue is completely sold.
D) after the terms of the subscription have been made public.