Deck 17: Common and Preferred Stock Financing

Question 1

The difference between the rights-on and ex-rights common stock price is equal to the value of a right.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Preferred stock generally carries a higher interest rate than debt.

Answer 3

False

Question 4

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

Question 5

Preferred stock dividends are a deductible expense for a corporation.

Question 6

Since the late 1970s preferred stock has been trading at slightly higher yields than comparable bonds.

Question 7

The aftertax cost of debt is cheaper than preferred stock to the issuing corporation.

Question 8

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

Question 9

A rights offering may be of limited value to shareholders.

Question 10

To the security holder, preferred stock offers the highest risk and the lowest return.

Question 11

If the market value of a stock when the shares are trading ex-rights is $57 and 9 rights are required to buy one share of stock at the subscription price of $45, then the rights are worth $1.33.

Question 12

Common shareholders have a residual claim to income, in other words they are last in line.

Question 13

Because of tax considerations, corporations are able to issue preferred stock at a slightly lower yield than debt.

Question 14

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

Question 15

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

Question 16

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

Question 17

Participating preferred stock is advantageous to common shareholders.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

Convertible exchangeable preferreds give the holder the sole right to exchange their preferred shares for common shares.

Question 24

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

Question 25

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

Question 26

The dividend rate paid on floating rate preferred stock will be equal to the market rate at the time dividends are paid.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

The type of shareholder voting has become less important with the influence of takeover, leveraged buyouts, and other challenges to management control.

Question 32

Participating preferred stock gives its owners voting rights.

Question 33

Share classes are similar to bond ratings in that they are used to rank the performance of different corporation's stock.

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

Common shareholders have a legal claim to dividend income.

Question 41

Preferred stock may be good for a company because it

A) expands the capital base of the firm without diluting the common stock ownership.
B) does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid.
C) is not as costly as common stock or bonds.
D) gives up no control even when dividend payments are missed.

Question 42

If a preferred stock is of the cumulative type

A) dividends must be paid on an equal basis with common so long earnings permit.
B) dividends cannot be passed if they are earned.
C) the cumulative voting rule applies in the exercise of the voting privilege.
D) unpaid dividends of one period must be carried forward and paid in subsequent periods before anything can be paid to common shareholders.

Question 43

Which of the following is not a true statement?

A) Common shareholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common shareholders 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 44

Which of the following is not true about preferred stock?

A) 100% of dividends are nontaxable to other corporations which hold preferred stock
B) the aftertax cost is higher than debt with the same yield
C) dividends are legal obligations of the firm
D) preferred stocks are often cumulative in respect to dividends

Question 45

Preferred stock is the least used of all long-term securities because

A) investors can get higher returns after taxes in other investments.
B) preferred dividends are considered regular (fixed) obligations but are not tax-deductible.
C) flotation costs are extremely high compared to bonds.
D) All of these

Question 46

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

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

Question 47

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 6 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 the other answers are correct

Question 48

Which of the following actions will provide the shareholders with the most total wealth when a company makes a rights offering?

A) exercise the rights for new shares
B) sell the rights themselves and hold existing shares and cash
C) exercise the rights and sell the shares
D) None of these

Question 49

The subscription price 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 50

Given that there are 4,000,000 shares outstanding in a corporation, how many shares will be required for a minority group of shareholders to elect 3 of the 11 members on the board of directors? (Assume cumulative voting required)

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

Question 51

Some preferred shares are participating preferreds and this may allow for an increase in the preferred share dividend when the common share dividend equals the preferred share dividend.

Question 52

The purpose of cumulative voting is

A) to maintain majority control of the board of directors.
B) to allow minority shareholders 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 pre-emptive rights offerings.

Question 53

A share is said to sell "ex-rights"

A) when the period in which the subscription privilege is to be exercised has expired.
B) when transfer of share ownership no longer carries with it the privilege of subscription.
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.

Question 54

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

A) may be sold for profit.
B) afford shareholders protection against dilution.
C) may be cumulatively voted.
D) are nontransferable.

Question 55

Advantages that the American Depository Receipts (ADRs) have over investing in actual shares of a foreign stock include all but the following;

A) ADRs are an effective barrier to foreign currency risk.
B) Unlike direct foreign stock, ADRs have financial statements presented in a GAAP format.
C) Dividends are paid in dollars and easier to collect than actual shares of foreign stock.
D) ADRs are more liquid and less expensive than buying foreign stock directly.

Question 56

Ten rights are necessary to purchase one share of stock $84. A right sells for $6.30. The ex-rights value of the stock is

A) $147.
B) $105.
C) $63.
D) $154.

Question 57

If a corporate charter includes a provision for preemptive rights, the shareholders

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

Question 58

"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 of the firm.
D) management can preempt the right of shareholders to receive dividends if earnings are down.

Question 59

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 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 60

The effect of a rights offering on a shareholder is

A) to increase his/her wealth.
B) to increase his/her wealth only if the new stock is purchased.
C) to decrease his/her wealth unless the stock is purchased.
D) to decrease his/her wealth if nothing is done.

Question 61

The following are primary purchasers of preferred stock except

A) corporate investors.
B) insurance companies.
C) pension funds.
D) individual investors.

Question 62

Preferred stock is often sold by companies

A) wanting to balance their capital structures.
B) that have a large amount of debt relative to equity.
C) looking for the taxable advantages of preferred dividends over common share dividends.
D) two of the other answers are correct

Question 63

Firm X has 150,000 outstanding shares and 9 directors. Joe Stone owns 37,500 shares of firm X. How many directors can Joe elect with cumulative voting?

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

Question 64

Dutch auction preferred stock

A) is issued first to the bidder willing to accept the lowest yield.
B) matures every seven weeks and is re-auctioned at a subsequent bidding.
C) allows corporate investors to take advantage of preferred stock tax benefits.
D) all of the other answers are correct.

Question 65

To the corporate investor, preferred stock offers which of the following advantages

A) a slightly higher yield than debt.
B) 25% of preferred dividends are tax-exempt.
C) 100% of preferred dividends are tax-exempt.
D) two of the other answers are correct

Question 66

Which of the following is not true about rights trading on organized exchanges?

A) rights trade at low prices
B) continuous trading of a right for long periods of time (similar to stocks)
C) rights trading tends to surge during bull markets
D) all the other answers are true

Question 67

Which of the following statements about floating rate preferred stock is true?

A) the dividend rate changes quarterly
B) the price of the stock will fluctuate with the market
C) the dividend rate is tied to the inflation rate
D) more than one of the above are true

Question 68

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 69

A coattail provision is

A) an anti-takeover device.
B) designed to bring all shareholders a similar price offer.
C) a motivational tool for employees.
D) a means of placing shares in friendly hands.

Question 70

The advantage of a rights offering is

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 the other answers are correct.

Question 71

A rights offering

A) gives a 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 least expensive way to raise capital.

Question 72

Under normal operating conditions the board of directors elected by

A) the common shareholders.
B) the preferred shareholders.
C) the bondholders.
D) two of the other answers are correct

Question 73

The floating rate feature on preferred stock allows the shareholders

A) to receive more dividends than the quoted yield when the firm enjoys a good year.
B) to pay lower taxes when the dividend yield increases.
C) to receive dividends which the corporation did not pay in previous years.
D) to receive a higher or lower dividend yield depending on current competitive market conditions.

Question 74

The Jersey Corp. is considering four investments. Which provide the highest aftertax return for Jersey Corp. If it is in the 40% tax bracket?

A) Government of Canada bonds at 12.0%
B) corporate bonds at 13.2%
C) municipal bonds at 8.4%
D) preferred stock at 10.8%

Question 75

Which of the following is the correct order of corporate issues based on risk and return? (most risk-return to least risk-return)

A) common stock, subordinated debentures, secured debt, treasury bills
B) preferred stock, common stock, subordinated debentures, secured debt
C) common stock, long-term government bonds, secured debt, subordinated debt
D) common stock, secured debt, subordinated debentures, preferred stock

Question 76

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns earned $3 million this year, what could be the maximum payment to the preferred shareholders on a per share basis?

A) $19.50 per share
B) $15.00 per share
C) $13.00 per share
D) $6.50 per share

Question 77

Which of the following is not a very common feature of preferred stock?

A) cumulative dividends
B) voting rights
C) call feature
D) conversion feature

Question 78

All of the following statements are true except

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 79

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) 0
B) 1
C) 2
D) 3

Question 80

XYZ corporation is issuing preferred stock yielding 10%, and ABC Corporation is considering buying the stock. XYZ's tax rate is 20% and ABC's tax rate is 34%. What is the aftertax preferred yield for ABC?

A) 3.4%
B) 10.0%
C) 6.6%
D) 8.98%