Question 1

Which of the following is correct with regard to "par value"?

Accepted Answer

Par value is the minimum price at which a corporation is allowed to sell its shares at the time of issuance. It does not necessarily represent the market value of the stock after it is issued.

Question 2

If Class A preferred shares provide only for a cumulative dividend of $3 per share, what will be the consequence on liquidation?

Accepted Answer

The answer of If Class A preferred shares provide only...

Question 3

Which of the following is correct regarding a two-for-one stock split?

Accepted Answer

A two-for-one stock split is primarily aimed at decreasing the value per share of the stock to make the shares more affordable and increase liquidity in the market. It does not increase the ownership interest, distribute wealth to shareholders, or increase the value of each share.

Question 4

Max buys shares of newly issued Z Corp.stock for $30 per share and pays $1,000 cash, a car worth $2,000, and a promissory note for $3,000.Under the Revised Act, how many shares of stock could validly be sold?

Accepted Answer

Max's total payment is $6,000 ($1,000 cash + $2,000 car + $3,000 promissory note). At $30 per share, he can buy 200 shares ($6,000 / $30 per share).

Question 5

Which of the following determines when to declare dividends and in what amount?

Accepted Answer

The board of directors of a corporation has the authority to declare dividends and decide on the amount to be distributed to shareholders. This decision is typically based on the company's profitability, financial health, and future investment needs.

Question 6

Which of the following is correct with regard to common stock?

Accepted Answer

Common stock generally bears the greatest risk of loss in the event of the failure of the enterprise, does not have any special contract rights or preferences, and the Revised Act has not eliminated the terms "preferred" and "common."

Question 7

The Ajax Corporation issues bonds that pay a minimum of 6% interest but that can pay more if corporate earnings reach certain specified levels.The holder of the bond may exchange it for stock of the corporation.This bond would be a:

Accepted Answer

The bond described in the scenario is a convertible participating bond because it can be exchanged for stock and has the potential for additional earnings based on corporate performance. The fact that it is also convertible makes it different from a regular participating bond because it has the additional option to be converted into stock.

Question 8

The Revised Act, the 1980 Amendments to the MBCA, and over half of the states have eliminated the concept of:

Accepted Answer

The Revised Act, the 1980 Amendments to the Model Business Corporation Act (MBCA), and over half of the states have eliminated the concepts of capital surplus, stated capital, and par value, simplifying corporate finance and share issuance.

Question 9

The board of directors cannot declare dividends when the corporation:

Accepted Answer

The board of directors cannot declare dividends when the corporation is insolvent because it would be unable to meet its financial obligations to creditors, which is a legal requirement. Declaring dividends under insolvency could be considered a breach of fiduciary duty.

Question 10

Bonds subject to a redemption provision, which permits the corporation to redeem, or pay off, all or a part of the issue before maturity at a specified redemption price are known as:

Accepted Answer

Callable bonds are those that can be redeemed by the issuer before their maturity date at a specified price. This feature allows the issuer to take advantage of declining interest rates by refinancing the debt at a lower cost.

Question 11

If 100 shares of $50 par value stock were issued at $75 per share, how much would constitute capital surplus?

Accepted Answer

The par value of the stock is $50 per share, so the actual amount of capital received from the sale of each share is $75 - $50 = $25. Therefore, the total amount of capital received from the sale of 100 shares is $25 x 100 = $2,500. Since the par value of the stock is only $50 per share, the remaining $25 per share constitutes capital surplus. Therefore, the total capital surplus is $25 x 100 = $2,500.

Question 12

The Revised Act explicitly requires a corporations's charter to authorize:

Accepted Answer

The Revised Act requires a corporation's charter to authorize one or more classes of shares that together are entitled to receive the net assets of the corporation upon dissolution. This ensures that upon the dissolution of the corporation, there is a clear directive on how the remaining assets are to be distributed among shareholders.

Question 13

The directors of Premier Glass Company authorize the issuance of 100 shares of common stock for $25 per share to Justin for property the directors value at $2,500.The valuation:

Accepted Answer

The answer of The directors of Premier Glass Company authorize...

Question 14

Which of the following is correct with regard to treasury shares?

Accepted Answer

The 1980 amendments to the Model Business Corporation Act (MBCA) indeed eliminated the concept of treasury shares, aligning with modern corporate governance practices.

Question 15

Allen owns 500 of the 5000 shares outstanding of General Myopics.GM plans to issue 600 new shares.If Allen has preemptive rights, he may:

Accepted Answer

Preemptive rights allow Allen to maintain his proportional ownership by purchasing a percentage of the new shares equal to his current ownership percentage, which is 10% (500 out of 5000). Therefore, he can buy 60 shares, not 600, and none of the options correctly describe this.

Question 16

__________, usually called debentures, have only the obligation of the corporation behind them.

Accepted Answer

Unsecured bonds, often referred to as debentures, are backed solely by the creditworthiness and reputation of the issuing corporation, without specific collateral.

Question 17

Yukon Corporation purchases 1,000 shares of its own stock from Jones at a price of $50 a share.These shares, which are now issued but not outstanding, are known as:

Accepted Answer

When a corporation buys back its own shares, those shares are referred to as treasury shares. They are considered issued but not outstanding, meaning they don't have voting rights or pay dividends.

Question 18

As amended in 2002, the Revised Act permits the creation of classes or series of shares with terms that vary among holders of the same class or series so long as the variations are expressly set forth in the articles of incorporation.

Accepted Answer

The statement accurately describes the Revised Act regarding the creation of different classes or series of shares.

Question 19

Caverun Co.has two classes of stock.The company may:

Accepted Answer

Stock options and warrants can be used as part of compensation plans for directors, officers, and employees, and their form and content are typically determined by the board of directors. This allows companies to incentivize and retain key personnel.

Question 20

The "cash flow test" for the payment of dividends and other distributions is also known as the:

Accepted Answer

The "cash flow test" is also known as the equity insolvency test, which assesses whether a company can pay its debts as they come due in the ordinary course of business.

Quiz 34: Financial Structure of Corporations