Deck 7: Stock Valuation

Question 1

Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________.

A) fixed dividend payments
B) greater returns from their investment in the firm's stock
C) all profits to be paid out in dividends
D) warrants to be attached to the stock issue

Answer 1

greater returns from their investment in the firm's stock

Question 2

The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.

Answer 2

False

Question 3

Holders of equity capital ________.

A) own the firm
B) receive interest payments
C) receive guaranteed income
D) have loaned money to the firm

Answer 3

own the firm

Question 4

Unlike equityholders, creditors are owners of the firm.

Question 5

Common stockholders are often referred to as residual claimants.

Question 6

Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.

Question 7

Interest paid to bondholders is tax deductible.

Question 8

If bankruptcy were to occur, ________ would have the first claim on assets.

A) preferred stockholders
B) unsecured creditors
C) equity stockholders
D) secured creditors

Question 9

Common stock can be either privately owned by private investors or publicly owned by public investors.

Question 10

The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock.

Question 11

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, currently dividends are subject to a maximum tax rate of 8 percent.

Question 12

The market value of common stock is related to its par value because both are sensitive to the reactions of investors to new information.

Question 13

Holders of equity have claims on both income and assets that are secondary to the claims of creditors.

Question 14

The par value on a common stock is used as a basis for determining its fixed dividend.

Question 15

Dividends paid to stockholders is tax deductible.

Question 16

Unlike creditors, equityholders are owners of the firm.

Question 17

The market value of common stock is completely unrelated to its par value.

Question 18

Which of the following is a difference between common stock and bonds?

A) Bondholders have a voice in management; common stockholders do not.
B) Bondholders have a senior claim on assets and income relative to stockholders.
C) Stocks have a stated maturity but bonds do not.
D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.

Question 19

The tax deductibility of interest lowers the cost of debt financing, thereby causing the cost of debt financing to be lower than the cost of equity financing.

Question 20

Which of the following is an advantage for a firm to issue common stock over long-term debt?

A) the cost of equity financing being less than the cost of debt financing
B) the primary claim of equityholders on income and assets in the event of liquidation
C) no maturity date on which the par value of the issue must be repaid
D) the tax deductibility of dividends which lowers the cost of equity financing

Question 21

Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.

Question 22

Although preferred stock provides added financial leverage in much the same way as bonds, it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.

Question 23

Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.

Question 24

Common stockholders are sometimes referred to as ________.

A) non preemptive right holders
B) managers
C) creditors
D) residual owners

Question 25

Which of the following typically applies to common stock but not to preferred stock?

A) par value
B) dividend yield
C) legally considered as equity in the firm
D) voting rights

Question 26

Equity capital can be raised through ________.

A) the money market
B) the NYSE bond market
C) the stock market
D) a private placement with an insurance company

Question 27

Which of the following is true of common stock ?

A) It is often considered quasi-debt due to fixed payment obligation.
B) It has less restrictive covenants than debt.
C) It gives the holder voting rights which permit selection of the firm's directors.
D) Its holders have priority over preferred stockholders in the event of liquidation of assets.

Question 28

Preferred stockholders are often referred to as residual claimants.

Question 29

Which of the following is true of equity?

A) equityholders do not have voting rights.
B) It does not mature, so repayment is not required.
C) It is a temporary form of financing for a firm.
D) Equity financing is obtained from creditors.

Question 30

Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.

Question 31

Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm's creditors.

Question 32

Which of the following is true of common stocks?

A) The common stock of a corporation can be either privately or publicly owned.
B) Firms often issue common stock with no par value.
C) Preemptive rights often result in a dilution of ownership.
D) A firm's corporate charter indicates the rate at which dividends are paid.

Question 33

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

Question 34

A proxy statement is a statement transferring ________.

A) the ownership of a bondholder to another party
B) the votes of a bondholder to the another party
C) the votes of a stockholder to another party
D) the ownership of a stockholder to another party

Question 35

A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left-the residual-after all other claims on the firm's income and assets have been satisfied.

Question 36

No-par preferred stock has no stated face value, but its annual dividend is stated as a percentage of the market value.

Question 37

In the case of liquidation, common stockholders are paid first, followed by preferred stockholders, followed by bondholders.

Question 38

The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.

Question 39

In the case of liquidation, bondholders are paid first, followed by preferred stockholders, followed by common stockholders.

Question 40

Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation.

Question 41

A violation of preferred stock restrictive covenants usually permits preferred shareholders to ________.

A) force the company into bankruptcy
B) suit against the shareholders
C) force the retirement of the preferred stock at or above its par value
D) force the company to repurchase the shares at a stated amount below par

Question 42

Which of the following is typically a feature of common stock?

A) Most common stocks are callable.
B) Most common stocks are cumulative.
C) Common stocks have a maturity value.
D) Common stocks may or may not pay dividends.

Question 43

From a corporation's point of view, a disadvantage of issuing preferred stock is ________.

A) that it increases financial leverage
B) that it has to give fixed payments as well as voting rights to the holders
C) its excellent merger security
D) that the dividends are not tax-deductible

Question 44

________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.

A) Preferred stockholders
B) Common stockholders
C) Bondholders
D) Creditors

Question 45

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when new issues are made.

Question 46

ADRs are ________.

A) securities, backed by American depositary shares (ADSs), that permit U.S. investors to hold shares of non-U.S. companies and trade them in U.S. markets
B) securities, backed by Securities Exchange Commission (SEC), that permit all investors to hold shares of U.S. companies and trade them in U.S. markets
C) securities, backed by American depositary shares (ADSs), that permit non-U.S. investors to hold shares of U.S. companies and trade them in U.S. markets
D) securities, backed by Securities Exchange Commission (SEC), that permit U.S. investors to hold shares of non-U.S. companies and trade them in international markets.

Question 47

Which of the following is usually a right of a preferred stockholder?

A) right to convert shares to common stock on demand
B) preemptive right to participate in the issuance of new common shares
C) right to receive dividend payments before any dividends are paid to common stockholders
D) right to sue company in bankruptcy proceedings if promised preferred dividends are not paid

Question 48

The claims of the equityholders on a firm's assets have priority over the claims of creditors because the equityholders are the owners of the firm.

Question 49

Which of the following is true of preferred stocks?

A) Preferred stock with a conversion feature allows holders to change each share into a stated number of shares of common stock.
B) Like bonds, preferred stocks are due for payment on a fixed maturity date along with interest.
C) Restrictive covenants of preferred stocks include provisions about listing of stocks on the securities exchange and determining the price of stock.
D) A firm's bond indenture indicates how many authorized preferred shares and bonds it can issue.

Question 50

The cost of preferred stock is ________.

A) lower than the cost of long-term debt.
B) higher than the cost of common stock.
C) higher than the cost of long-term debt and lower than the cost of common stock.
D) lower than the cost of convertible long-term debt and higher than the cost of common stock.

Question 51

Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective?

A) There is a seniority of preferred stockholder's claim over common stockholders.
B) The preferred stockholders have superior voting rights in the selection of board of directors.
C) The preferred stockholders are always paid a higher proportion of dividend payments.
D) Issuance of preferred stocks will result in a higher risk, to the disadvantage of common stockholders.

Question 52

Edward Accounting Services has an outstanding issue of 1,000 shares preferred stock with a $100 par value, an 9 percent annual dividend, and 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the last two years, how much must preferred stockholders be paid prior to paying dividends to common stockholders?

Question 53

Identify whether the key characteristic describes common stock (CS) or preferred stock (PS).
________ 1. Source of financing which places minimum constraints on the firm
________ 2. Used by young firms receiving investment funds from venture capital firms
________ 3. Potential dilution of earnings and voting power
________ 4. Fixed financial obligation
________ 5. Increases the firm's borrowing power
________ 6. May have cumulative and participating features
________ 7. May be convertible into another type of security
________ 8. Last to receive earnings or distribution of assets in the event of bankruptcy
________ 9. Frequently includes a call feature

Question 54

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders at the end of third year?

A) $8,000
B) $16,000
C) $24,000
D) $25,000

Question 55

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.

A) $4.00
B) $8.00
C) $8.80
D) $80.00

Question 56

Preferred stockholders ________.

A) do not have preference over common stockholders in the case of liquidation
B) have preference over bondholders in the case of liquidation
C) do not have preference over bondholders in the case of liquidation
D) have preference over creditors in the case of liquidation

Question 57

Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.

A) cumulative
B) nonparticipating
C) participating
D) convertible

Question 58

A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend. For the past two years, the board of directors has decided not to pay a dividend. At the end of the current year, the preferred stockholders must be paid ________ prior to paying the common stockholders.

A) $0/share
B) $12/share
C) $24/share
D) $36/share

Question 59

Which of the following is typically a feature of preferred stocks?

A) They are settled prior to common stocks during liquidation.
B) They are mostly noncumulative in nature.
C) They are paid dividends that grow at a constant rate.
D) They carry voting rights and have maturity date.

Question 60

Preferred stock is characterized by ________.

A) voting rights
B) maturity date
C) quasi-debt nature
D) preemptive rights

Question 61

Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity.

Question 62

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm's earnings than previously.

Question 63

Treasury stock is generally reclassified as class B common stock and has voting rights.

Question 64

If a firm has class A and class B common stock outstanding, it means that ________.

A) each class receives a different dividend
B) the par value of each class is different
C) the dividend paid to one of the classes is tax deductible by the corporation
D) one of the classes is probably nonvoting stock

Question 65

Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation.

Question 66

Which of the following is a marketable security?

A) mutual funds
B) Treasury bill
C) provident fund
D) forward contracts

Question 67

Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.

Question 68

Small business investment companies (SBICs) are corporations chartered by the federal government that can borrow at attractive rates from the U.S. Treasury and use the funds to make venture capital investments in private companies.

Question 69

American Depositary Receipts (ADRs) are claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.

Question 70

Which of the following is true of outstanding shares?

A) A firm cannot sell more shares than the outstanding shares mentioned in the charter.
B) Authorized shares become outstanding shares when they are issued or sold to investors.
C) Outstanding shares are indicated in a firm's corporate charter.
D) Outstanding shares are the shares repurchased by the firm.

Question 71

A prospectus is another term for a firm's annual report showing the firm's prospects for the coming year.

Question 72

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.

Question 73

An underwritten issue of common stock is one in which a firm purchases insurance to cover unexpected losses suffered by shareholders.

Question 74

Corporate venture capital funds are subsidiaries of financial institutions, particularly banks, set up to help young firms grow and, it is hoped, become major customers of the institutions.

Question 75

A prospectus is a portion of the security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.

Question 76

Venture capitalists invest in promising early-stage companies in exchange for a portion of the firm's equity.

Question 77

A common stockholder has no guarantee of receiving any cash inflows, but receives what is left after all other claims on the firm's income and assets have been satisfied.

Question 78

Regarding the tax treatment of payments to securities holders, it is true that ________.

A) interest and preferred stock dividends are not tax-deductible ,while common stock dividends are tax deductible
B) interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductible
C) common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductible
D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible

Question 79

Shares of stock currently owned by a firm's shareholders are called ________.

A) authorized shares
B) issued shares
C) outstanding shares
D) treasury shares

Question 80

Preemptive rights allow existing shareholders to maintain voting control and protect themselves against the dilution of their ownership.