Question 1

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.)

Accepted Answer

The answer of Given that there are 4,000,000 shares outstanding...

Question 2

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

Accepted Answer

Companies sometimes have two different classes of shares with unequal rights to dividends and votes. This means that not all common stock shares have the same equal rights.

Question 3

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

Accepted Answer

There has been a trend of institutional investors, such as mutual funds, pension funds, and hedge funds, increasing their ownership of shares in the U.S. market. This reflects a shift towards more professional management of investment portfolios and a movement away from individual investors owning stocks directly.

Question 4

Which of the following statements is true with respect to cumulative voting?

Accepted Answer

A) Cumulative voting allows shareholders to cast multiple votes for a single director, so this statement is true.
B) Cumulative voting is often used to help minority shareholders get representation on the board of directors, so this statement is also true.
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, so this statement is also true. Therefore, all three options are true.

Question 5

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 make itself less attractive to a potential acquirer. A rights offer is a type of poison pill where the company offers existing shareholders the right to purchase additional shares at a discounted price, making it more expensive for a potential acquirer to gain a controlling stake.

Question 6

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

Accepted Answer

A rights offering allows existing shareholders to purchase additional shares at a discount, but whether it's financially advantageous depends on several factors, including the company's performance and the investor's strategy. It doesn't inherently guarantee financial benefit.

Question 7

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

Accepted Answer

Under normal operating conditions, the board of directors is elected by the common stockholders. They have the right to elect the board because they are the owners of the company and have voting rights during the annual general meeting. Preferred stockholders and bondholders do not have this right.

Question 8

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

Accepted Answer

Poison pills are designed to deter or complicate takeovers, but investors often view them unfavorably because they can prevent shareholders from receiving premium offers for their shares.

Question 9

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

Accepted Answer

Floating rate preferred stock typically has a variable dividend rate that is tied to an underlying benchmark, such as LIBOR or the prime rate. This allows the dividend to adjust according to changes in interest rates, making it attractive to investors during periods of market volatility. Additionally, preferred stock often comes with tax advantages, such as a lower tax rate on dividends compared to ordinary income. Therefore, floating rate preferred stock can be a good option for investors looking for both income and the potential for capital appreciation.

Question 10

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

Accepted Answer

Preferred stock typically offers a higher before-tax yield than secured debt because it carries greater risk, including being subordinate to debt in the event of a liquidation.

Question 11

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

Accepted Answer

If a corporation is losing money and paying no taxes, it means that it doesn't have any taxable income to benefit from the tax-deductible interest payments on debt. Therefore, a preferred stock issuance, which pays dividends that are not tax-deductible but are still not subject to taxes at the corporate level, may be more attractive to investors than a debt issuance.

Question 12

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

Accepted Answer

The floating rate feature on preferred stock typically reduces price volatility because the dividend payments adjust with market interest rates, making the stock's income and value more stable compared to fixed-rate preferred stocks.

Question 13

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

Accepted Answer

Dutch Auction preferred stocks are usually used as short-term instruments because they are sold through an auction process in which the price starts high and decreases until the market clears, thus allowing investors to purchase them at a discount. This means that holders of Dutch Auction preferred stocks can quickly sell them for a profit if the market value increases, making them attractive investments for short-term gains.

Question 14

The purpose of cumulative voting is

Accepted Answer

Cumulative voting is used to give minority shareholders a better chance of electing a director to the board. It achieves this by allowing shareholders to pool their votes and cast them all for one candidate. This can prevent a majority shareholder from dominating the board and drowning out the voices of minority shareholders.

Question 15

A proxy is

Accepted Answer

A proxy is an authorization of a registered stockholder to another person to act on their behalf at a stockholder meeting. This allows the designated person to be able to vote and make decisions on behalf of the original stockholder. Options A, B, and D do not accurately describe a proxy.

Question 16

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?

Accepted Answer

With majority voting, directors are elected one at a time, each requiring more than half of the votes to be elected. The Becker family, owning 2,300,000 out of 10,000,000 shares, does not have more than 50% of the shares to guarantee electing even one director by themselves.

Question 17

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

Accepted Answer

The answer of American Depository Receipts (ADRs) are subject to...

Question 18

Participating preferred stock gives its owners voting rights.

Accepted Answer

Participating preferred stock typically provides additional dividends beyond the fixed dividend if the company achieves certain financial goals, but it does not inherently grant voting rights; those are usually associated with common stock.

Question 19

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?

Accepted Answer

The answer of Sharpe Products has one million outstanding shares...

Question 20

Which of the following is not a true statement?

Accepted Answer

Common stockholders are not legally entitled to dividends, they only have the potential for dividends if the corporation chooses to distribute them.

Quiz 17: Common and Preferred Stock Financing