GBG 333- Review Questions Chapter 17
Common and Preferred Stock Financing
(1) A residual claim to income means:
(a) common shareholders are the last in priority to receive the firm's net income after tax.
(b) that dividends are always paid to preferred stockholders.
(c) that bondholders receive interest payments after common shareholders receive dividends.
(d) that the Board of Directors receives all income that is not distributed to the common stockholders.
(2) A proxy is:
(a) an issue of stock to ensure that the company's founders may retain at least some control of the company.
(b) an issue of new preferred stock.
(c) going on a date with your roommate's girlfriend's sister.
(d) a power assigned by a common shareholder to another to vote on their behalf.
(3) Under majority voting, which statement is not true.
(a) Minority groups of stockholders (those with less than 50 percent of shares) have great difficulty in successfully nominating anyone to the Board of Directors.
(b) Those groups of stockholders (those with more than 50 percent of shares) have almost unlimited power in nominating members to the Board of Directors.
(c) Minority groups with a critical minimum number of shares do have an opportunity to nominate a limited number of members to the Board of Directors.
(d) Takeover bids are minimized under majority voting relative to cumulative voting schemes.
(4) A pre-emptive right:
(a) allows bondholders to be paid before preferred stockholders.
(b) exists for husbands to go out with buddies to the bar on Friday nights.
(c) allows holders of common stock to be given the first opportunity to purchase new shares issued by a firm.
(d) allows common stockholders to veto any appointments to the Board of Directors.
(5) Which one of the following statements about a rights offering is incorrect?
(a) Existing common stockholders can buy new shares at a lower subscription price for a certain period.
(b) Existing common stockholders are first in line to buy new shares of a company, before outside investors.
(c) Rights offerings provide an advantage to the company in terms of obtaining new share capital at lower distribution costs.
(d) Existing common stockholders have an unlimited period during which new shares can be purchased at a lower subscription price.
(6) During the period in which a stock trades "rights on", the price of the common stock:
(a) still reflects the old market price prior to dilution by the new shares issued.
(b) reflects the new market price with dilution.
(c) does not include the value of the right to buy additional stock at the subscription price.
(d) reflects the state of the stock after the end of the subscription period.
(7) During the "ex rights" period:
(a) your ex-wife or ex-husband may have access to your bank account.
(b) the market assumes that dilution has already occurred.
(c) the value of the common stock includes the value of the right.
(d) the market assumes that dilution has not occurred yet.
(8) A margin requirement:
(a) ensures that you do not write on the left or right border of the page.
(b) is the amount of cash or equity deposited at a bank or broker as a deposit in purchasing a security, with the balance of the funds required to be delivered later.
(c) is the value of a right granted to a common stockholder.
(d) the required dividend to be paid to a preferred stockholder every year.
(9) A poison pill:
(a) is a necessary ingredient for all murder mystery books.
(b) is required to remove members of the Board of Directors who are no longer effectively functioning.
(c) is a defensive mechanism making it more difficult for another firms or outside group of investors to take over ownership and control of the company.
(d) is a means for minority stockholder groups to obtain control of a company.
(10) ADR's are:
(a)
certificates issued in
(b) dollar-denominated deposits held at European banks.
(c) dollar-denominated deposits held at Japanese banks.
(d)
certificates that allow the stock of foreign companies to be traded in the
(11) As a corporate investor, preferred stock has:
(a) an advantage over bonds as only 30 percent of preferred stock dividends are taxable, and the tax rate after that is only 15 percent.
(b) a disadvantage with respect to bonds, as all bond interest is tax free.
(c) the advantage of tax free status over other securities.
(d) an advantage of common stock as only 30 percent of preferred stock dividends are taxable, and the tax rate after that is only 15 percent.
(12) Which of the following are not provisions or features commonly associated with preferred stock:
(a) rights offerings.
(b) call features.
(c) cumulative dividends.
(d) floating rates.
(13) Rank common stock (CS), preferred stock (PS), and bonds (B) with respect to two criteria: obligation to provide a return; and from lowest to highest risk/return.
(a) PS, CS, B: PS, B, CS.
(b) B, CS, PS; B, PS, CS.
(c) B, PS, CS; B, PS, CS.
(d) CS, PS, B; PS, B, CS
(14) Why is the cumulative feature of preferred stock important to preferred stockholders?
(a) It guarantees that all cash flow will eventually return to the preferred stockholders.
(b) It provides some security that if preferred stock dividends are not paid now, that at least the dividends with be cumulated and become an obligation of the firm to be honored for compensation in the future.
(c) It provides assurance that preferred stockholders will be paid before bondholders.
(d) It reduces the default risk to zero.
(15) What is so attractive to an investor about a floating rate for preferred stock?
(a) It guarantees that I will always be paid a dividend every year as promised.
(b) It has a provision to buy common stock at a preferred, lower price.
(c) It provides protection to the investor in case interest rates rise.
(d) It allows the investor to re-finance at a lower interest rate.
(16) The call feature for preferred stock can involve:
(a) the participation by preferred stockholders in sharing profits with common shareholders during really successful earning years of the company.
(b) auctioning stock to the market, with the lowest rate winning.
(c) the par value of the stock.
(d) retiring the preferred stock issue early by the company at some small premium over par.