Question 1

Bondholders and preferred stockholders can be viewed as creditors,whereas the common stockholders are the true owners of the firm.

Accepted Answer

Bondholders and preferred stockholders have priority in the payment of dividends and the distribution of assets in case of bankruptcy, making them similar to creditors. Common stockholders, on the other hand, have residual ownership rights and bear higher risk and potential reward compared to bondholders and preferred stockholders.

Question 2

Common stock cannot be worth less than its book value.

Accepted Answer

Common stock can be worth less than its book value if the market perceives a company's future prospects to be limited or uncertain, resulting in a lower stock price.

Question 3

If a shareholder cannot attend the corporation's annual meeting,the shares may still be voted using

Accepted Answer

A shareholder who is unable to attend the corporation's annual meeting may still vote by appointing a proxy. A proxy is an individual or entity authorized to vote on the shareholder's behalf. The other options (preemptive right, majority voting rules, and cumulative voting right) do not apply to the situation of a shareholder who cannot attend the annual meeting.

Question 4

If a common stockholder cannot personally attend the meeting of shareholders,then their votes are lost.

Accepted Answer

A common stockholder can authorize a proxy or use a mail-in ballot to vote, even if they cannot attend the meeting in person. Therefore, their votes are not necessarily lost.

Question 5

Common stock does not mature.

Accepted Answer

Common stock represents ownership in a corporation and does not have a set maturity date.

Question 6

In theory,shareholders select the board of directors,but in reality,management effectively selects the directors.

Accepted Answer

While shareholders technically vote to elect the board of directors, management often recommends a slate of candidates for the board, making it difficult for shareholders to select an alternative group. Additionally, management often wields significant influence over the board's decisions, leading to the perception that management effectively selects the directors.

Question 7

Under cumulative voting,a 10% shareholder will likely be able to elect 10% of the board of directors.

Accepted Answer

Under cumulative voting, shareholders are able to allocate their votes proportionately among the available seats on the board of directors. This means that a 10% shareholder will have 10% of the voting power for the board seats available, allowing them to likely elect 10% of the board of directors.

Question 8

Consider the following four types of payments that could be made by a normal operating firm: interest,common dividends,income taxes,and preferred dividends.Compared to the other payments mentioned,where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?

Accepted Answer

Common dividend payments would be ranked fourth in terms of order of payment if the firm is liquidating, as they are paid after all other payments, including creditors, employees, income taxes, and preferred dividends.

Question 9

Lithium Lakes Industries preferred stock has a par value of $100 and pays a dividend of $6.00 per share.It presently sells for $87 per share.What do investors require as a rate of return on this stock? Round off to the nearest .10%.

Accepted Answer

The required rate of return is calculated by dividing the annual dividend by the current price: $6 / $87 = 0.0689655, which rounds to 6.9%.

Question 10

Under majority voting,a majority (>50%)shareholder will just be able to elect a simple majority of the board of directors.

Accepted Answer

Under majority voting, a majority (>50%) shareholder can elect all of the board of directors, not just a simple majority, because they can cast more than half of the votes for each board position.

Question 11

Cumulative voting is advantageous to minority shareholders because it may allow them to elect a member of the board of directors.

Accepted Answer

With cumulative voting, minority shareholders can concentrate all their votes on one candidate, increasing their chances of successfully electing a director to represent their interests on the board. This can help to give minority shareholders a greater voice in corporate decision-making.

Question 12

Glacier Inc.preferred stock has a 5% stated dividend percentage,and a $100 par value.What is the value of the stock if your required rate of return is 6% per year?

Accepted Answer

The value of preferred stock is calculated by dividing the annual dividend by the required rate of return. The annual dividend is 5% of $100, which is $5. Dividing $5 by the required rate of return of 6% (0.06) gives a value of $83.33.

Question 13

Which of the following is NOT true regarding common stock?

Accepted Answer

Dividend payments for common stock are not fixed and can fluctuate depending on the company's performance and management decisions. Interest payments for bonds, on the other hand, are typically fixed.

Question 14

Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.

Accepted Answer

Convertibility is a feature more commonly associated with preferred shares or bonds, allowing them to be converted into common stock, not the other way around.

Question 15

If Neal O'Danny preferred stock pays an annual dividend of $2.80,and investors require a 9% return,what is the value of O'Danny's preferred stock today?

Accepted Answer

The value of O'Danny's preferred stock today, given an annual dividend of $2.80 and a required return of 9%, is calculated using the formula for valuing preferred stock: Price = Dividend / Required Rate of Return. Thus, the value would be $2.80 / 0.09 = $31.11.

Question 16

Shareholders,as owners of the corporation,face unlimited liability for the corporation's debts,while bondholders,as creditors,may only lose the value of their investment if the company goes bankrupt.

Accepted Answer

Shareholders actually have limited liability, meaning they can only lose the value of their investment in the corporation if it goes bankrupt. Bondholders have a higher priority in receiving payment from the corporation's assets in the event of bankruptcy, so they are less likely to lose their investment.

Question 17

Limited liability for a corporation's common shareholders is a protective provision that aids the corporation in raising funds.

Accepted Answer

Limited liability means that the shareholders are not personally responsible for the debts and obligations of the corporation, which increases investor confidence and makes it easier for corporations to raise funds.

Question 18

The market price of a firm's common stock equals the sum of all equity accounts as reported in its balance sheet (common stock + paid-in capital + retained earnings)divided by the number of shares outstanding.

Accepted Answer

The market price of a firm's common stock is determined by supply and demand in the market and may not necessarily reflect the sum of all equity accounts in the balance sheet. The market price is generally influenced by a variety of factors such as the company's financial performance, industry trends, and overall market conditions.

Question 19

Minority shareholders have a greater chance of electing a member to the board of directors if the company uses

Accepted Answer

Cumulative voting allows minority shareholders to pool their votes together and elect a director, even if they own a smaller percentage of the company's shares. Majority voting requires a director to receive more than 50% of the votes to be elected, which can be difficult for minority shareholders to achieve. Minority voting and proxy voting do not necessarily increase the chances of electing a director for minority shareholders.

Question 20

Under majority voting,a majority (>50%)shareholder will be able to elect the entire board of directors.

Accepted Answer

Under majority voting, a majority shareholder is able to elect the entire board of directors as long as they hold more than 50% of the total shares.

Quiz 8: The Valuation and Characteristics of Stock