Question 1

Dutch auction preferred stock:

Accepted Answer

The answer of Dutch auction preferred stock:
...

Question 2

A rights offering:

Accepted Answer

A rights offering gives current shareholders the opportunity to purchase new securities at a discounted price, creating a built-in market for the new securities. This can help reduce distribution costs and tends to be less expensive than other methods of raising capital, although it may not necessarily lead to an immediate increase in shareholder valuation.

Question 3

Firm Y has 5,000,000 outstanding shares. There are 11 directors on the firm's board. The Bubba family owns 20% the firm's stock. How many directors can the Bubba family elect by themselves if firm Y uses majority voting?

Accepted Answer

The answer of Firm Y has 5,000,000 outstanding shares. There...

Question 4

Which of the following is not true about rights trading on organized exchanges?

Accepted Answer

Rights trading is usually limited to a short period of time, typically four to six weeks after the ex-rights date. It is not continuous trading like stocks.

Question 5

To the corporate investor, preferred stock offers which of the following advantages?

Accepted Answer

The answer of To the corporate investor, preferred stock offers...

Question 6

Which of the following statements about floating rate preferred stock is true?

Accepted Answer

Floating rate preferred stock has a dividend rate that changes periodically based on a benchmark, usually money market rates. The price of the stock may fluctuate, but it is not directly tied to the market. It is not convertible, so there is no conversion rate. It is also not tied to inflation.

Question 7

All of the following statements are true except:

Accepted Answer

Shareholders do not have to approve the acceptance of poison pill strategies before a corporation can use them. Poison pills are typically put in place by a corporation's board of directors without shareholder approval.

Question 8

XYZ corporation is issuing preferred stock yielding 10%, and ABC Corporation is considering buying the stock. XYZ's tax rate is 20% and ABC's tax rate is 34%. What is the aftertax preferred yield for ABC?

Accepted Answer

The answer of XYZ corporation is issuing preferred stock yielding...

Question 9

A coattail provision is:

Accepted Answer

The answer of A coattail provision is:
...

Question 10

The following are primary purchasers of preferred stock except:

Accepted Answer

Preferred stock is typically purchased by corporate investors, insurance companies, and pension funds due to its dividend advantages and lower risk compared to common stock. Individual investors are less likely to be primary purchasers of preferred stock, as they might prefer stocks or investments with higher growth potential.

Question 11

Firm X has 150,000 outstanding shares and 9 directors. Joe Stone owns 37,500 shares of firm X. How many directors can Joe elect with cumulative voting?

Accepted Answer

The answer of Firm X has 150,000 outstanding shares and...

Question 12

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:

Accepted Answer

A poison pill is a tactic used by a company to thwart or discourage an unwanted takeover attempt by making the target company less attractive or more difficult to acquire. One example of a poison pill is the use of a rights offer, which gives existing shareholders the right to purchase additional shares at a discounted price, making it more expensive for the acquiring firm to gain control of the company. This tactic is meant to make the acquisition less attractive and deter the acquiring firm from proceeding with the takeover attempt. Therefore, a rights offer made for this purpose is called a poison pill.

Question 13

The disadvantage of a rights offering is:

Accepted Answer

The disadvantage of a rights offering is that shareholders who do not exercise or sell their rights will have their ownership diluted.

Question 14

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

Accepted Answer

Companies can have different classes of shares with varying rights to dividends and votes. This is often seen with Class A and Class B shares, where Class A shares have more voting rights but may receive lower dividends, while Class B shares have fewer voting rights but may receive higher dividends. Investors should carefully consider the differences between the classes before deciding which to invest in.

Question 15

The floating rate feature on preferred stock allows the shareholders:

Accepted Answer

The floating rate feature on preferred stock allows the shareholders to receive a higher or lower dividend yield depending on current competitive market conditions. This means that if the market conditions are favorable, the shareholders can receive a higher payout than the quoted yield, and vice versa.

Question 16

Under normal operating conditions the board of directors elected by:

Accepted Answer

The board of directors is elected by the common shareholders, who are the owners of the company and have voting rights. They have the power to elect and remove members of the board of directors, as well as to vote on important business decisions. Preferred shareholders and bondholders do not have voting rights and therefore cannot elect the board of directors.

Question 17

Which of the following is not a very common feature of preferred stock?

Accepted Answer

Voting rights are not a very common feature of preferred stock. Preferred stockholders typically do not have voting rights, unlike common stockholders who have the right to vote on company matters.

Question 18

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns retained earnings and after tax income this year total $3 million, what could be the maximum payment to the preferred shareholders on a per share basis?

Accepted Answer

Since the preferred stock is cumulative, all past missed dividends must be paid before any current dividends can be paid to common shareholders. Therefore, the total amount of missed dividends is 3 years * $6.50 per share * 200,000 shares = $3.9 million. Since Kuhns only has $3 million in after-tax income, it cannot fully pay all past missed dividends to preferred shareholders. However, it can pay a portion of the past missed dividends and a current dividend. The maximum payment per share to preferred shareholders would be ($3 million - $2 million for past missed dividends) / 200,000 shares = $5 per share for past missed dividends and $6.50 per share for the current dividend, for a total of $11.50 per share. Therefore, the correct answer is B.

Question 19

The Jersey Corp. is considering four investments. Which provide the highest aftertax return for Jersey Corp. If it is in the 40% tax bracket?

Accepted Answer

The answer of The Jersey Corp. is considering four investments....

Question 20

Which of the following is the correct order of corporate issues based on risk and return? (Most risk-return to least risk-return)

Accepted Answer

Common stock has the highest risk and potential return among the given options. Subordinated debentures have higher risk compared to secured debt, but offer higher potential return. Treasury bills have the lowest risk but also the lowest return. Therefore, the correct order based on risk-return is A) Common stock, subordinated debentures, secured debt, treasury bills.

Quiz 17: Common and Preferred Stock Financing