Deck 30: Financing the Corporation and the Role of the Shareholders

Question 1

Which of the following statements best describes preferred stock?

A) Preferred stock cannot be converted into common stock.
B) Preferred stock holders are usually granted the right to vote only in the event that dividends due are fully paid to stockholders.
C) Redemption of preferred stocks is allowed irrespective of whether the cost would make the corporation insolvent or not.
D) If a corporation's articles allow redemption, the corporation can buy back preferred stocks even if the holders do not wish to sell.

Answer 1

D
Explanation: Preferred stock can be redeemed-that is, paid off and canceled by the corporation-if the articles permit. Redemption permits the corporation to buy back the shares even if the holders do not wish to sell.

Question 2

The rights of preferred shareholders may vary from corporation to corporation.

Answer 2

True

Question 3

All states require a written proxy.

Answer 3

False

Question 4

The value assigned to shares in the articles of incorporation is referred to as _____.

A) stated value
B) par value
C) fair value
D) capital surplus

Question 5

A corporation must issue some common stock.

Question 6

The Model Business Corporation Act (MBCA) gives holders of a nonvoting class of stock the right to vote on extraordinary corporate transactions.

Question 7

The revised Model Business Corporation Act (MBCA) does not permit promises of future services and promissory notes to be exchanged for shares.

Question 8

Dividends on cumulative preferred stock, if not paid in any year, will be payable later when funds are available.

Question 9

If a corporation has only one class of stock, it is _____ stock.

A) common
B) preferred
C) cumulative
D) convertible

Question 10

Debentures may not have a term of more than thirty (30) years.

Question 11

If a corporation has only one class of stock, it is preferred stock.

Question 12

Sometimes a value is assigned to the shares in the articles of incorporation. This arbitrary amount is known as projected value.

Question 13

Shareholders are not usually able to sue to enforce a right of the corporation.

Question 14

A shareholder is permitted to bring suit as a representative of the corporation only if the directors refuse or have a conflict of interest that is likely to keep them from suing.

Question 15

Dividends must always be paid in cash.

Question 16

Which of the following arises through the sale of ownership interests in the business in the form of shares of corporate stock?

A) Bond securities
B) Debt securities
C) Equity securities
D) Proxies

Question 17

Par value and stated value reflect the maximum amount of consideration for which the shares can be issued.

Question 18

It is very common for a corporation to issue preferred shares subject to redemption at the option of the corporation.

Question 19

Kirby subscribed to purchase 10,000 shares of stock to be issued by Globule Inc., an existing corporation. Globule accepted the subscription. The price set forth in the subscription agreement was $10 per share. When the time came for Kirby to pay the amount of his subscription, Kirby paid only $6 per share, claiming that such an amount represented the fair value of the shares. Globule delivered the stock certificates to Kirby for $6 per share. Is Kirby liable to Globule for the other $4 per share?

A) No, because regardless of what the subscription price was, he cannot be forced to pay more than the fair market value of the shares.
B) Yes, because Globule's stock does not have a par value.
C) Yes, because regardless of the fair value, a purchaser is liable for stocks issued for less than the par value.
D) No, but he is liable for another $2 per share.

Question 20

Presently, most states follow the old Model Business Corporation Act (MBCA) approach, which requires that shares be issued only for money, tangible or intangible property, and services already performed for the corporation.

Question 21

Under SEC rules, a proxy document must:

A) prevent management and other shareholders from soliciting proxies.
B) include information on any material transaction between a nominee and the corporation.
C) state whether or not the proxy is coupled with an interest.
D) grant the proxy holder rights to purchase or sell shares on behalf of the shareholder.

Question 22

Under the Model Business Corporation Act (MBCA), a corporate official who denies a proper demand by a shareholder to inspect the shareholder list is:

A) liable for a penalty of 10 percent of the value of the shares of the demanding shareholder.
B) liable for a penalty of 30 percent of the value of the shares of the demanding shareholder.
C) not subject to any liability.
D) liable for a penalty of 15 percent of the value of the shares of the demanding shareholder.

Question 23

Which of the following shareholders are entitled to vote?

A) Someone who owns common stock and has it listed in his or her name
B) Someone who has sold his or her stock to a relative
C) A stockbroker without a proxy from the shareholder
D) An officer of the corporation who does not give an oral or written proxy

Question 24

Which of the following is true about the rights of shareholders?

A) Shareholders have the rights to make managerial decisions within the corporation.
B) Shareholders' rights are aimed at protecting only the interests of major shareholders.
C) Shareholders have the rights to be informed about their investments.
D) Shareholders do not have the rights to put ceilings on the salaries of top executives.

Question 25

Which of the following is true of notice of meetings for shareholders?

A) Meeting notices need to be given only to those who own a class of stock entitling them to vote.
B) Actions taken in shareholder meetings are effective even if no notice is given.
C) Shareholders who do not get proper notice may waive notice.
D) Shareholders cannot attend a meeting only to object the absence of a notice.

Question 26

One type of stock enables the shareholder to get his or her usual dividend. Then, after the common shareholders receive their normal dividend, he or she is able to share in any additional income with the common shareholders. This type of stock is _____.

A) cumulative preferred
B) noncumulative preferred
C) participating preferred
D) cumulative to the extent earned

Question 27

Short-term debt instruments are called _____.

A) par mechanisms
B) notes
C) debentures
D) bonds

Question 28

A shareholder's functions includes:

A) election of investors.
B) approval of mergers or a voluntary dissolution.
C) approval of loans taken by the corporation.
D) approval of stock option plans for other shareholders.

Question 29

Stock splits:

A) are a type of dividend.
B) decrease the number of shares outstanding.
C) change the par value of the shares.
D) change the retained earnings account.

Question 30

Dividends on _____ stock, if not paid in any year, will be payable later when funds are available.

A) cumulative preferred
B) noncumulative preferred
C) participating preferred
D) cumulative to the extent earned

Question 31

Under the Model Business Corporation Act (MBCA), a subscription to buy stock in a corporation that is not yet in existence is usually treated as a(n) _____ until incorporation is completed.

A) offer
B) promissory bid
C) acceptance
D) illegal bond

Question 32

Long-term, secured debt securities are called _____.

A) bonds
B) indentures
C) debentures
D) notes

Question 33

Romano, a shareholder of Specific General Inc., wishes to communicate with other shareholders concerning matters related to the corporation. So he requests the management to provide him with a list of all shareholders of the corporation. Citing administrative burden, the management informed Romano that shareholders could not review such records. The management turns down repeated requests citing the same reason. In this scenario, Romano:

A) can bring suit to enforce his right to examine the shareholder list as he has proper purpose.
B) cannot hold Specific General liable because the Model Business Corporation Act (MBCA) discourages the disclosure of shareholder information.
C) should appeal for amendment of the corporation's laws to make public all shareholder information.
D) will be penalized 10 percent of value of his shares if he loses an appeal against the management.

Question 34

One can become a shareholder:

A) by buying newly issued shares which have not been underwritten.
B) only by subscribing to shares that are being issued by an existing corporation.
C) only by buying shares that are being sold by an investment banker.
D) by subscribing to shares in a new corporation and having them accepted by the board of directors after incorporation.

Question 35

To appoint a proxy, the Model Business Corporation Act (MBCA) requires:

A) a court order.
B) a written document.
C) the board of directors to acknowledge the proxy.
D) a vote of approval from other shareholders.

Question 36

Which of the following statements about debt securities is true?

A) They can be issued only if the power to do so appears in the articles of incorporation.
B) They are used to transfer an ownership interest in an organization.
C) They arise in the form of notes, debentures, or bonds.
D) They are similar to equity securities in that the terms do not exceed three years.

Question 37

Under the Model Business Corporation Act (MBCA), a corporation does not need shareholder approval to purchase securities out of _____ surplus.

A) equity
B) unrestricted earned
C) capital
D) restricted earned

Question 38

Distributions of shares in the corporation itself are called _____.

A) stock dividends
B) cash dividends
C) property dividends
D) equity securities

Question 39

Which of the following is true for debentures?

A) They seldom have terms in excess of five years.
B) They are long-term secured debt instruments.
C) They are secured debt securities, unlike bonds.
D) They have indentures to protect holders' rights.

Question 40

Turner Corporation is holding a meeting of its shareholders to elect directors to its board. The corporation permits shareholders to cumulate their votes. A group of shareholders are looking to elect a director who would represent their concerns on the board. If 400 shares are being voted and four directors are to be elected, how many shares does the group need to elect its preferred candidate as director?

A) 100
B) 101
C) 80
D) 81

Question 41

When is a shareholder permitted to sue as a representative of a corporation?

Question 42

The directors of Acme Corp. unanimously approved a merger agreement between Acme and Generic Inc. The Model Business Corporation Act (MBCA) is in effect in the state where both corporations are incorporated. The two corporations begin performing the various duties set out in the merger agreement. Certain shareholders of Acme then institute suit in an effort to block the merger. The shareholders maintain that the proposed merger should have been submitted to them for approval. Nothing in Acme's articles of incorporation requires the directors to submit such matters to the shareholders. The directors claim that the merger was carefully considered and is in the best interests of the corporation. Under these circumstances, _____.

A) the directors will prevail if they can prove that the merger was in the corporation's best interests
B) the shareholders will be successful in their suit because under the MBCA, approval of all classes of shares is required for a merger or consolidation
C) the directors will prevail because the MBCA gives them the right to overrule the shareholders' decisions in mergers
D) the shareholders will not be successful in their suit because the directors have acted in the best interests of the corporation

Question 43

Which of the following must exist before a shareholder can bring a derivative action?

A) The shareholder must also be an officer or director.
B) The shareholder must have owned shares at the time of the wrong against the corporation.
C) A majority of the common shareholders must support the action.
D) The shareholder should not be an employee of the firm.

Question 44

Under which of the following conditions would a shareholder be liable to the corporation or its creditors?

A) If he or she buys stock that was fully paid for when issued.
B) If he or she deals only with dividends and not shares.
C) If he or she is involved in "watered stock" situations.
D) If he or she was unaware of the illegality of the dividends.

Question 45

Under the Model Business Corporation Act, what types of corporate documents does a shareholder have a right to inspect?

Question 46

Acme Corp. made a public offering of its shares. Stein bought 100 shares at $10 each. Three months later, Acme announced that it planned to merge with another company. Under the terms of the merger, Acme shareholders would receive $14 per share, which was $1 more than the market price on the day prior to the announcement. Acme's shareholders approved the merger. Stein did not vote for or against the merger, but he turned in his shares and received $14 for each share. Stein later argued that Acme's directors acted improperly in approving the merger. He also believed the price he and other shareholders received was grossly inadequate. Will Stein be able to enforce his appraisal rights?

Question 47

What requirements must be met if a shareholder meeting is to be conducted remotely?

Question 48

When a number of people have a right or claim against the same defendant growing out of essentially the same set of facts, a(n) _____ may be brought by any one of them.

A) class action
B) derivative action
C) litigation
D) appellate

Question 49

A _____ occurs when two or more corporations become part of a new corporation.

A) merger
B) takeover
C) partnership
D) consolidation

Question 50

Explain what debt securities are, and describe the various types of debt securities.