Question 1

Preferred shares that give the shareholders the option of exchanging their preferred shares for common shares at a specified rate are known as
A)Participating preferred shares
B)Callable preferred shares
C)Cumulative preferred shares
D)Convertible preferred shares
E)Noncumulative preferred shares

Accepted Answer

Convertible preferred shares give the shareholders the option to convert their preferred shares into common shares at a specified rate. Participating preferred shares provide additional dividends to shareholders beyond the stated dividend rate in the event of company profitability. Callable preferred shares can be redeemed by the issuer at a specified date or price. Cumulative preferred shares accumulate unpaid dividends that must be paid before common shareholders receive any dividends. Non-cumulative preferred shares do not accumulate unpaid dividends. However, none of these options include the option of exchanging preferred shares for common shares, which is only available with convertible preferred shares.

Question 2

The total amount of shares that a corporation's charter allows it to issue is
A)Authorized
B)Issued
C)Outstanding
D)Common
E)Preferred

Accepted Answer

The authorized shares refer to the maximum number of shares that a corporation is legally allowed to issue through its charter or articles of incorporation. It does not necessarily mean that all of these shares have been issued or are outstanding.

Question 3

The type of share that can be bought back by the company at a specified time and price is
A)Cumulative preferred share
B)Callable common share
C)Redeemable preferred share
D)Participating preferred share
E)Convertible preferred share

Accepted Answer

Redeemable preferred shares are the type of shares that can be bought back by the company at a specified time and price. This feature provides the company with more flexibility in managing their capital structure and allows them to reduce their liabilities when the share is redeemed. Cumulative preferred shares provide a fixed dividend payment, callable common shares provide the company the option to repurchase shares from shareholders, participating preferred shares have a right to dividend payments before common shareholders, and convertible preferred shares can be converted into common shares at a predetermined ratio.

Question 4

The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors is called
A)Financial leverage
B)Contributed capital
C)No par value
D)Preemptive right
E)Capital gain

Accepted Answer

This is known as financial leverage, as the corporation is using the preferred shareholders' or creditors' assets to generate a higher return for common shareholders.

Question 5

If a corporation that has only one class of shares,or if there is more than one class,the class that has no preference over the other classes of shares,is called
A)Preferred shares
B)Common shares
C)Convertible preferred shares
D)Cumulative preferred shares
E)Participating preferred shares

Accepted Answer

Common shares are the class of shares that have no preference over any other class of shares in a corporation. Preferred shares have priority over common shares in terms of dividends and liquidation preferences, while convertible preferred shares can be converted into common shares and participating preferred shares have the right to receive additional dividends if the company exceeds certain profit thresholds. Cumulative preferred shares have the right to accumulate unpaid dividends if the company does not make dividend payments in a certain period.

Question 6

The largest number of shares specified by a corporation are known as
A)Convertible
B)Authorized
C)Issued
D)Outstanding
E)Non-convertible

Accepted Answer

The largest number of shares specified by a corporation are the authorized shares, as specified in the corporation's articles of incorporation.

Question 7

The category of equity for a corporation which represents the cumulative profits less losses and dividends is called
A)Contributed capital
B)Preferred shares
C)Retained earnings
D)Financial leverage
E)The income statement

Accepted Answer

Retained earnings represent the cumulative profits less losses and dividends that a corporation has retained over time. It is a category of equity that reflects the amount of money the company has earned and kept, rather than distributed to shareholders. Contributed capital refers to the funds that shareholders have invested in the company, while preferred shares represent a type of stock that gives shareholders priority over common shareholders when it comes to dividends and liquidation proceeds. Financial leverage refers to the use of debt to finance a company's operations, and the income statement is a financial statement that shows a company's revenues and expenses over a period of time.

Question 8

Owners of preferred shares often do not have
A)Ownership rights to assets of the corporation
B)Voting rights
C)Preference to dividends
D)The right to sell their shares
E)Rights in liquidation

Accepted Answer

Preferred shareholders typically do not have voting rights, which are usually reserved for common shareholders.

Question 9

The costs of bringing a corporation into existence,including legal fees,promoters' fees,and amounts paid to the government are called
A)Minimum legal capital
B)Contributed capital
C)Organization costs
D)Financial leverage
E)Prepaid expenses

Accepted Answer

These costs are commonly referred to as organization costs, which are incurred by a corporation during its incorporation process. They include fees paid to lawyers, accountants, promoters, and government agencies for filing articles of incorporation, obtaining permits and licenses, and other legal formalities. These costs are amortized over a period of time, typically no more than 60 months, and are reported as a separate intangible asset on the balance sheet. Therefore, choice C is the best answer. Choices A, B, D, and E are not relevant in this context.

Question 10

The preemptive right is the right of preferred shareholders to
A)Actively participate in the company decision making process
B)Share proportionately in any new sale of shares
C)Share in the profits and losses of the company
D)Receive dividends before the common shareholders receive
E)None of the choices

Accepted Answer

The answer of The preemptive right is the right of...

Question 11

The payment of a dividend will reduce the following two accounts
A)Common shares and cash
B)Cash and dividends payable
C)Equity and retained earnings
D)Retained earnings and dividends payable
E)Equity and cash

Accepted Answer

When a company pays a dividend, it reduces the cash balance as it pays out cash to its shareholders. At the same time, it reduces the dividends payable account, as it is no longer obligated to pay that amount to its shareholders. Therefore, the correct choice is B, as it includes both cash and dividends payable being reduced.

Question 12

For preferred shares to increase the return earned by common shareholders,the preferred dividend rate as a percentage of the capital raised must be
A)Equal to the rate of return on common and preferred equity combined
B)Lower than the rate of return on common and preferred equity combined
C)Higher than the rate of return on common and preferred equity combined
D)Both equal to and lower than the rate of return on common and preferred equity combined
E)None of these

Accepted Answer

For preferred shares to increase the return earned by common shareholders (a concept known as financial leverage), the cost of preferred equity (i.e., the preferred dividend rate as a percentage of the capital raised) must be lower than the overall rate of return the firm earns on its investments (which includes both common and preferred equity). This allows the company to earn more on the funds than it pays out in dividends, thereby increasing the return to common shareholders.

Question 13

The date a board of directors votes to pay a dividend is called the
A)Date of the annual shareholders meeting
B)Date of declaration
C)Date of record
D)Date of payment
E)Liquidating date

Accepted Answer

The date of declaration is when the board of directors officially declares that a dividend will be paid to shareholders. This is the first step in the process of paying a dividend, and it sets the date of record and the date of payment, which are the other two important dates in the process. The date of the annual shareholders meeting is not necessarily related to the payment of a dividend, and the liquidating date is not commonly used in relation to dividends.

Question 14

The financial statement that shows the changes to a corporation's contributed capital is called
A)Balance Sheet
B)Statement of Changes in Equity
C)Income Statement
D)Statement of Contributed Capital
E)None of these

Accepted Answer

The Statement of Changes in Equity is the financial statement that shows the changes to a corporation's contributed capital. It also includes other changes to shareholder equity, such as dividends and net income. The Balance Sheet shows the corporation's assets, liabilities, and equity at a specific point in time. The Income Statement shows the corporation's revenue, expenses, and net income over a specific period of time. The Statement of Contributed Capital is not a commonly used financial statement.

Question 15

Legal costs incurred to get a corporation up and running should be accounted for by debiting
A)Retained earnings
B)Share capital
C)Organization costs
D)Cash
E)Common shares

Accepted Answer

Legal costs incurred to get a corporation up and running should be accounted for by debiting organization costs. This is because organization costs include expenses that are incurred during the formation of a corporation, such as legal fees, filing fees, and incorporation fees. These costs are not considered to be a part of the company's ongoing operating expenses and are instead capitalized as an asset on the balance sheet and amortized over time.

Question 16

A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared is a
A)Participating preferred share
B)Callable preferred share
C)Cumulative preferred share
D)Convertible preferred share
E)Noncumulative preferred share

Accepted Answer

Noncumulative preferred shares do not accumulate missed dividend payments, meaning that if a dividend is not declared in a given year, shareholders do not have the right to receive those missed dividends in the future. This is different from cumulative preferred shares, which do accumulate missed dividends, and participating preferred shares, which have the ability to receive additional dividends if the company's earnings exceed a certain threshold. Callable preferred shares can be redeemed by the issuing company at a specified price, while convertible preferred shares can be converted into common shares of the company.

Question 17

The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional shares of common shares issued by the corporation is called
A)Preemptive right
B)Proxy
C)Right to call
D)Financial leverage
E)Voting right

Accepted Answer

The right described in the question is known as preemptive right. This means that common shareholders have the first option to purchase additional shares of common stock issued by the corporation in order to protect their proportionate ownership in the company.

Question 18

Preferred shares that the issuing corporation,at its option,may retire by paying a specified amount to the preferred shareholders plus any dividends in arrears are called
A)Convertible preferred shares
B)Callable preferred shares
C)Private shares
D)Cumulative preferred shares
E)Participating preferred shares

Accepted Answer

Preferred shares that the issuing corporation may retire by paying a specified amount to the preferred shareholders plus any dividends in arrears are called callable preferred shares. This means that the corporation can choose to buy back the shares at a predetermined price, giving them more control over their capital structure.

Question 19

Brian's Stereo Ltd issued preferred shares that have a $10 dividend.This means that
A)Preferred shareholders have a guaranteed dividend.
B)The amount of the dividend is $10 per year per share.
C)Preferred shareholders are entitled to 10% of the annual profit.
D)The market price is $100 per share.
E)The market price is $10 per share.

Accepted Answer

Preferred shares with a $10 dividend typically mean that each share receives a $10 dividend annually, not a percentage of profits or a specific market price.

Question 20

A dividend preference for preferred shares means that
A)Preferred shareholders are allocated their dividends before any dividends are allocated to common shareholders
B)Preferred shareholders are guaranteed dividend
C)Dividends are paid quarterly
D)Only preferred shareholders will receive dividends
E)All of these

Accepted Answer

A dividend preference for preferred shares means that preferred shareholders are allocated their dividends before any dividends are allocated to common shareholders. This does not guarantee dividends for preferred shareholders, but it does mean that they get paid first when dividends are distributed. Dividends may be paid quarterly, but this is not necessarily related to the preferred share dividend preference. Option D is incorrect, as it suggests that only preferred shareholders will receive dividends, which is not true; common shareholders may receive dividends as well, but after preferred shareholders have been paid.

Quiz 4: Organization and Operation of Corporations

Preferred shares that give the shareholders the option of exchanging their preferred shares for common shares at a specified rate are known as

The total amount of shares that a corporation's charter allows it to issue is

The type of share that can be bought back by the company at a specified time and price is

The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors is called

If a corporation that has only one class of shares,or if there is more than one class,the class that has no preference over the other classes of shares,is called

The largest number of shares specified by a corporation are known as

The category of equity for a corporation which represents the cumulative profits less losses and dividends is called

Owners of preferred shares often do not have

The costs of bringing a corporation into existence,including legal fees,promoters' fees,and amounts paid to the government are called

The preemptive right is the right of preferred shareholders to

The payment of a dividend will reduce the following two accounts

For preferred shares to increase the return earned by common shareholders,the preferred dividend rate as a percentage of the capital raised must be

The date a board of directors votes to pay a dividend is called the

The financial statement that shows the changes to a corporation's contributed capital is called

Legal costs incurred to get a corporation up and running should be accounted for by debiting

A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared is a

The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional shares of common shares issued by the corporation is called

Preferred shares that the issuing corporation,at its option,may retire by paying a specified amount to the preferred shareholders plus any dividends in arrears are called

Brian's Stereo Ltd issued preferred shares that have a $10 dividend.This means that

A dividend preference for preferred shares means that