Deck 14: Introduction to Corporate Financing

Question 1

Retained earnings will decrease when stock is repurchased as treasury stock.

Answer 1

True

Question 2

The issued and repurchased shares are held in a company's treasury and are known as treasury stock.

Answer 2

True

Question 3

In a situation of bankruptcy,only the funded debt will be repaid.

Answer 3

False

Question 4

Historically,internally generated cash covers less than half of a firm's capital requirements.

Question 5

All large corporations have little debt; it is a necessary condition for maximizing growth.

Question 6

If an idle or incompetent management has a large block of votes,it may use these votes to stay in control.

Question 7

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 8

When bonds are selling at par value,the bonds are known as fixed-rate bonds.

Question 9

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

Question 10

Typically,the book debt ratio exceeds the market debt ratio for the nonfinancial corporate sector.

Question 11

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 12

Differences in classes of stock often appear in their right to vote.

Question 13

The CEO has "ultimate" control over the company's affairs.

Question 14

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 15

If shareholders do not like the policies that management pursues,their easiest solution is to vote in a different board of directors.

Question 16

Dividends represent an important component of the firm's net common equity.

Question 17

A eurobond (a bond that is sold internationally)is always denominated in euro.

Question 18

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

Question 19

Dividends are deductible for purposes of calculating a corporation's taxable income.

Question 20

Since preferred stock dividends are not deductible for tax purposes,few corporations own preferred stock.

Question 21

How does competition in financial markets compare to the competition that can be found in product markets?

A) Financial markets are much more competitive.
B) Financial markets are much less competitive.
C) Both markets are similar in competition.
D) Financial markets are not competitive, due to regulation.

Question 22

When securities are priced fairly,then financing at current market rates is a positive NPV transaction.

Question 23

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

Question 24

For most firms,the majority of their funding is generated internally.

Question 25

A corporation cannot default on debt that is funded.

Question 26

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

Question 27

Subordinated debt is an example of short-term debt for a firm.

Question 28

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 29

Which of the following would be considered a eurodollar deposit?

A) Dollars deposited in a U.S. bank
B) Yen deposited in a European bank
C) Dollars deposited in a Japanese bank
D) Marks deposited in a German bank

Question 30

Limiting the size of dividends paid is an example of a protective covenant.

Question 31

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

Question 32

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

Question 33

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 34

Corporations are less likely to repurchase callable bonds when market interest rates have risen.

Question 35

To state that financing at current market terms is a zero-NPV transaction indicates that:

A) firms should avoid these methods of financing.
B) there is no cost involved in the financing.
C) the market has not set financing terms correctly.
D) there are no "bargains" when financing at current terms.

Question 36

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

Question 37

When firms retain cash,they are generating funds internally by increasing shareholder investment.

Question 38

One way in which financing decisions are easier than investment decisions is:

A) it is more difficult to lose money through foolish financing decisions.
B) financial markets are not competitive due to regulations.
C) it is easier to make a lot of money through smart financing decisions.
D) all of these

Question 39

With floating-rate preferred stock,dividends are linked to interest rates.

Question 40

Which of the following statements is true with respect to financial and product markets?

A) In product markets, companies rarely find investments that yield a positive NPV.
B) Financial markets face fast-moving competition.
C) Competition in financial markets is not as thorough as in product markets.
D) Competition in product markets is more intense than in financial markets.

Question 41

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:

A) $15,000.
B) $30,000.
C) $35,000.
D) $50,000.

Question 42

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 43

Which of the following is a source of cash for a firm?

A) Retained earnings
B) Issuing new debt
C) Issuing new equity
D) All of these

Question 44

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 45

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 46

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 47

An efficient capital market is one in which:

A) all securities that investors want are offered.
B) all transactions are closed within 2 days.
C) current prices reflect all current information.
D) the lowest interest rates are offered.

Question 48

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 49

If financial markets were not efficient,it would be more likely for producers to:

A) finance investments in a zero-NPV transaction.
B) finance investments in a positive NPV transaction.
C) avoid the need for financing investments.
D) find desirable securities for financing investments.

Question 50

Which 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 51

What type of voting does a corporation have if there are two directors to elect and Director Jones received 50 votes from a shareholder who owns 100 shares?

A) Majority voting
B) Cumulative voting
C) Supermajority voting
D) Cannot tell voting type from given information

Question 52

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

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

Question 53

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

A) $0
B) $5,000,000
C) $10,000,000
D) $15,000,000

Question 54

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 55

The true value of a security is:

A) the value of that security at some future date.
B) the sum of all future dividends.
C) the amount that a fundamental analyst will pay.
D) the price that incorporates all currently available information.

Question 56

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 57

A stock's par value is represented by:

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

Question 58

If a corporation uses cumulative voting,then ______ of a shareholder's votes _____ be cast for one candidate.

A) some; must
B) none; can
C) all; can
D) all; must

Question 59

What tax liability is created by a corporation in the 35% tax bracket that receives $50,000 in preferred stock dividends?

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

Question 60

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 61

To state that net equity issues have been negative indicates that:

A) more shares have been purchased 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.

Question 62

Which 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 63

Which of the following forms of debt would be likely to offer debtholders the lowest interest rate?

A) Secured debt that is not callable.
B) Secured debt with a sinking fund.
C) Subordinated debt that is callable.
D) Subordinated debt with a sinking fund.

Question 64

When corporations default on their debt:

A) bondholders may receive the firm's assets.
B) bondholders will suffer a loss.
C) the Board of Directors is liable for the payments.
D) the corporation is forced to default on its stock also.

Question 65

Which 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 66

Which of the following is the holder of a warrant allowed to do 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 67

All of the following are true of retained earnings except:

A) it is the difference between paid-in capital and the total dividends paid.
B) it represents the amount of new capital shareholders indirectly contribute.
C) it is equal to earnings times the quantity one minus the payout ratio.
D) it is the amount of earnings plowed back into the firm.

Question 68

Ray's Jams Inc.was just established with an investment of $5 million in stereo equipment.Ray expects his company to generate $800,000 a year for the next 200 years.If Ray's cost of capital is 15%,find the market value and book value of his company.

A) market value = $9.0 million; book value = $5.0 million
B) market value = $5.0 million; book value = $5.3 million
C) market value = $5.33 million; book value = $5.0 million
D) market value = $7.0 million; book value = $5.0 million

Question 69

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 70

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 remains in cash.
C) over and above corporate income taxes.
D) reinvested in the firm since its inception.

Question 71

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 72

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 73

Jay's Jams Inc.was just established with an investment of $5 million in stereo equipment.Jay expects his company to generate $800,000 a year for the next 10 years,followed by $1 million a year for the following 10 years.If Jay's cost of capital is 15%,find the market value and book value of his company.

A) market value = $9.0 million; book value = $5.0 million
B) market value = $5.0 million; book value = $5.3 million
C) market value = $5.3 million; book value = $5.0 million
D) market value = $18.0 million; book value = $5.0 million

Question 74

When new shares 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 75

Which of the following statements is incorrect?

A) Companies may take advantage of structural changes (e.g., Marriott) to evade the constraints of protective covenants.
B) Bonds with protective covenants sell at a higher price than otherwise equivalent bonds without such protection for their investors.
C) Protective covenants are offered for the benefit of common stockholders.
D) Protective covenants are offered for the benefit of bondholders.

Question 76

Which of the following balance-sheet accounts will not be affected when there is a reduction in the number of outstanding shares?

A) Retained earnings
B) Additional paid-in capital
C) Common shares (valued at par value)
D) Treasury shares at cost

Question 77

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 $55 per share?

A) All the bondholders will choose to convert.
B) The stock will go down to $50 per share.
C) The bond's price will go down to $900.
D) Some of the bondholders will choose to convert.

Question 78

Which of the following balance-sheet accounts will be affected when the company buys back some of its outstanding shares?

A) Retained earnings
B) Additional paid-in capital
C) Treasury shares at cost
D) All of these

Question 79

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 $55 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 80

Protective covenants prevent bond issuers from irresponsible overborrowing behavior and are offered for the benefit of:

A) common shareholders.
B) preferred shareholders.
C) bondholders.
D) both common and preferred shareholders.