Deck 17: Common and Preferred Stock Financing

Question 1

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

Answer 1

False

Question 2

Stockholders always have pre emptive rights when new issues of stock are offered.

Answer 2

False

Question 3

Stock classes are similar to bond ratings in that they are used to rank the performance of different corporations' stock.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

Each common stockholder has the ability to vote, and may assign a proxy if they desire to pass the voting right along.

Question 8

Common stockholders have a legal claim to dividend income.

Question 9

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

Question 10

Stock classes may differ in voting rights, dividend rights, and claims to income during company elimination.

Question 11

A rights offering may be of limited value to shareholders.

Question 12

Under majority voting, it is easier for minority stockholders to elect directors to the board.

Question 13

The particular type of shareholder voting used has become less important with the influence of takeovers, leveraged buy-outs, and other challenges to management control.

Question 14

Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to elect three of nine directors to the board.

Question 15

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

Question 16

Common stockholders have a residual claim to income; in other words they are last in line during an elimination of the company.

Question 17

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

Question 18

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.

Question 19

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

Question 20

Hewlett-Packard's capital stock has largely recovered from the loss of confidence brought about by the failure to find a successful CEO and the multimillion-dollar severance packages the ousted executives received.

Question 21

If the current market value of Markowitz Corp stock is $61 and 10 rights are required to buy one additional share of Markowitz at the subscription price of $50, then the rights are worth $1.00.
Based on Formula 17-3: (61 - 50)/(10 + 1) = $1

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

Some preferred stocks are "participating pre ferreds," allowing for an increase in the preferred stock dividend when additional profits are available after common stock dividends have been paid.

Question 28

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

Question 29

Participating preferred stock is advantageous to common stockholders because it receives more dividends.

Question 30

Although American Depository Receipts (ADRs) are traded in the U.S. in dollars, U.S. investors may still incur foreign currency risk.

Question 31

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

Question 32

Preferred stock dividends are a tax-deductible expense for a corporation.

Question 33

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

Question 34

The after-tax cost of debt is usually cheaper than issuing preferred stock to the corporation, all things being equal.

Question 35

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

Question 36

American Depository Receipts (ADRs) are certificates that give foreign stockholders a legal claim on U.S. companies' foreign stock.

Question 37

The difference between the rights-on and ex-rights common stock price is equal to the value of a right to purchase future stocks, all other things being equal.

Question 38

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

Question 39

The "convertible exchangeable" feature of preferred shares gives companies the sole right to force preferred stock holders to exchange for common stock.

Question 40

Preferred stock generally carries a higher interest rate than debt.

Question 41

Given that there are 4,000,000 shares outstanding in Miller Corp., how many shares will be required for a minority group of stockholders to elect two of the nine members on the board of directors? (Assume cumulative voting is required.)

A) 800,001
B) 1,000,001
C) 1,090,910
D) 888,889

Question 42

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

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 and Exchange Commission allows only one class of common stock.
D) investors are indifferent between class A and class B shares.

Question 43

An increasing proportion of shares in the U.S. are owned by

A) individual investors.
B) corporations (Treasury stock).
C) institutions.
D) governments.

Question 44

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 six 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 these options are true.

Question 45

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 pre emptive right.
B) a poison pill.
C) ex-rights.
D) rights-on.

Question 46

A rights offering is generally financially advantageous to the investor because it provides them with additional shares of stock.

Question 47

Under normal operating conditions, the board of directors is elected by

A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the options are true.

Question 48

Investors are usually in favor of poison pills because they prevent takeovers.

Question 49

Floating rate preferred stock would be ideal to have when the stock price fluctuates and when there are tax benefits to owning preferred stock

Question 50

Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.

Question 51

If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes more attractive relative to a debt issuance.

Question 52

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

Question 53

Dutch Auction preferred stocks, unlike standard preferred stocks, are typically used as short-term instruments.

Question 54

The purpose of cumulative voting is

A) to maintain majority control of the board of directors.
B) to allow minority stockholders 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 55

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 their vote on current issues.
C) an authorization of a registered stockholder to another person to act in their place at the meeting.
D) a warrant allowing a stockholder to purchase a specified number of additional shares at a given price.

Question 56

Coase Corp. has 10,000,000 outstanding shares. There are 11 directors on the firm's board. The Becker family owns 2,300,000 shares of Coase Corp. How many directors can the Becker family be assured of electing by themselves if Coase Corp. uses majority voting?

A) Zero
B) One
C) Two
D) Three

Question 57

American Depository Receipts (ADRs) are subject to foreign exchange risk unlike direct methods of investing in the foreign exchange market.

Question 58

Participating preferred stock gives its owners voting rights.

Question 59

Sharpe Products has one million outstanding shares and seven directors to be elected. Cumulonimbus Holdings owns 200,000 shares of Sharpe. How many directors can Cumulonimbus elect with cumulative voting?

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

Question 60

Which of the following is not a true statement?

A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders 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 61

If a corporate charter includes a provision for pre emptive rights, the original stockholders

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

Question 62

Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is Tricki's expected price when it begins trading ex-rights?

A) $47.23
B) $44.00
C) $44.09
D) $45.00

Question 63

Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for $4. The ex-rights value of Fogel stock is _______.

A) $70
B) $46
C) $74
D) $50

Question 64

A possible advantage to a rights offering is that

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 these options are true.

Question 65

Which of the following best represents a benefit of a rights offering for a company?

A) Rights offerings increase return on equity.
B) Rights offerings substantiate higher debt-to-equity ratios.
C) Rights offerings have lower margin requirements.
D) None of these options are true

Question 66

While of the following is FALSE about the board of directors (BOD) of a firm:

A) are unbiased individuals that help with high-end decisions within the firm.
B) represent the owners of the corporation.
C) make frequent operating decisions.
D) are elected by the shareholders.

Question 67

Which one of the following statements is false?

A) Poison pills encourages current owners to purchase more stock in the company.
B) Poison pills discourage potential high takeover bids.
C) Stockholders 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 68

The most important feature of the pre emptive right is that the rights

A) may be sold for profit.
B) possibly protect the stockholders' shares against dilution.
C) may accumulate more votes.
D) are non transferable.

Question 69

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative and 100,000 common stock outstanding. The preferred dividend is $3.00 per share and has not been paid for three years. If Kuhns earned $1 million this year, what could be the maximum payment to the preferred stockholders on a per share basis?

A) $9.00 per share
B) $15.00 per share
C) $6.00 per share
D) $5.00 per share

Question 70

A stock is said to sell "ex-rights"

A) when the period in which the subscription privilege is to be exercised has expired.
B) when the stockholder no longer has the ability to transfer stock ownership.
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 71

North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are required to purchase one share. The value of a right is ________.

A) $0.11
B) $1.11
C) $1.00
D) $1.50 

Question 72

Which one of the following is NOT an advantage that American Depository Receipts (ADRs) have over investing in actual shares of a foreign stock?

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 are easier to collect than actual shares of foreign stock.
D) ADRs are more liquid and less expensive than buying foreign stock directly.

Question 73

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

Question 74

American Depository Receipts

A) have annual reports and financial statements presented in English.
B) pay dividends in dollars.
C) are more liquid and less expensive to buy than foreign stock.
D) all of these answers are true.

Question 75

The subscription rate of a new offering 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 76

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

A) Exercise the right to buy new shares to increase wealth.
B) Sell the rights themselves and hold existing shares and cash.
C) Exercise the rights and sell the shares to increase wealth.
D) None of these options are true.

Question 77

A rights offering

A) gives the 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 78

American Depository Receipts (ADRs) are

A) receipts sent to foreign stockholders who own American companies.
B) proof of ownership for Eurodollar deposits held by Americans.
C) certificates that have a legal claim on an ownership interest in a foreign company's common stock.
D) certificates in U.S. companies that allow foreign investors to buy shares of American companies.

Question 79

Seven rights are necessary to purchase one share of Fogel stock at $34. The ex-rights value of Fogel stock is $48. The right sells for $______.

A) $14
B) $11
C) $48
D) $2

Question 80

The effect of a rights offering on a stockholder is

A) the right to sell stocks, in which the stockholder's wealth only increases if the stock is sold.
B) the right to own more stocks, in which the stockholder's wealth increases only if the new stock is purchased.
C) the right to own more shares at a cheaper price, while the wealth of the stockholder's original shares goes up.
D) the right to own more shares at a cheaper price, but the wealth of the stockholder's original shares goes down.