Question 1

Share classes may differ in both voting rights and dividend rights.

Accepted Answer

A) True 
 B)False  True

Question 2

If the shareholder is no better off in terms of total valuation, why undertake a rights offering? What are the advantages of a rights offering?

Accepted Answer

There are a number of possible advantages.
1. By giving current shareholders a first option to purchase new shares, we protect their current position in regard to voting rights and claims to earnings.
2. The use of a rights offering gives the firm a built-in market for new security issues.
3. Because of this built-in base, distribution costs are likely to be considerably lower than under a straight public issue in which investment dealers must underwrite the full risk of distribution. Investment dealers may assist in a rights offering but with a lower expected fee.
4. A rights offering may generate more interest in the market than would a straight public issue. There is a market not only for the stock, but also for the rights. Because the subscription price is normally set 15 to 25 percent below current value, there is the False appearance of a bargain, creating further interest in the offering.

Question 3

Preferred stock dividends are a deductible expense for a corporation.

Accepted Answer

A) True 
 B)False  False

Question 4

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

Accepted Answer

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 commissions allow only one class of common stock.
D)   investors are indifferent between class A and class B shares.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Firm Y has 5,000,000 outstanding shares. There are 11 directors on the firm's board. The Bubba family owns 20% the firm's stock. How many directors can the Bubba family elect by themselves if firm Y uses majority voting?

Accepted Answer

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

Question 7

A proxy is

Accepted Answer

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

Question 8

All of the following statements are true except

Accepted Answer

A)   poison pills discourage hostile takeovers.
B)   poison pills discourage potential high takeover bids.
C)   shareholders 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 9

A firm has 200,000 outstanding shares and 11 directors. Doug owns 15,500 shares of this firm. How many directors can Doug elect with cumulative voting?

Accepted Answer

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

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Rights offerings have raised less than 5 percent of new equity on the TSX over the last decade.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

The disadvantage of a rights offering is

Accepted Answer

A)   current shareholders are not protected against dilution.
B)   the firm has a built-in market of knowledgeable investors.
C)   distribution costs are higher than a public offering.
D)   all of the other answers are correct

Question 14

A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. The value of a right is

Accepted Answer

A)   $5.50.
B)   $0.50.
C)   $5.00.
D)   $0.57.

Question 15

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Participating preferred stock gives its owners voting rights.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 17: Common and Preferred Stock Financing

Share classes may differ in both voting rights and dividend rights.

If the shareholder is no better off in terms of total valuation, why undertake a rights offering? What are the advantages of a rights offering?

Preferred stock dividends are a deductible expense for a corporation.

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

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

Firm Y has 5,000,000 outstanding shares. There are 11 directors on the firm's board. The Bubba family owns 20% the firm's stock. How many directors can the Bubba family elect by themselves if firm Y uses majority voting?

A proxy is

All of the following statements are true except

A firm has 200,000 outstanding shares and 11 directors. Doug owns 15,500 shares of this firm. How many directors can Doug elect with cumulative voting?

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

Rights offerings have raised less than 5 percent of new equity on the TSX over the last decade.

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

The disadvantage of a rights offering is

A stock sells for $45 rights-on, the subscription price is $41. Seven rights are required to purchase one share. The value of a right is

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N.

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

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

Participating preferred stock gives its owners voting rights.

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

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