Question 1

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

Accepted Answer

Dutch Auction preferred stocks are typically short-term instruments because they are designed to be redeemed within a specific period, usually between one and five years. This is different from standard preferred stocks, which do not have a fixed maturity date and can be held indefinitely.

Question 2

The effect of a rights offering on a stockholder is

Accepted Answer

A rights offering gives existing shareholders the right to buy additional shares at a discount. If the shareholder does not exercise their rights, their ownership stake in the company will be diluted, decreasing their wealth.

Question 3

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

Accepted Answer

Companies can have multiple classes of common stock with unequal rights to dividends and votes. This is known as dual-class stock. For example, Class A shares may have voting rights while Class B shares do not, but Class B shares may receive higher dividends. Investors need to be aware of the differences between the classes before investing.

Question 4

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

Accepted Answer

A) Cumulative voting allows shareholders to allocate more than one vote to a single director candidate.
B) This statement is true. Cumulative voting increases the chances of minority shareholders to elect a director to the board.
C) Correct. With cumulative voting, a shareholder may vote all their allotted votes for one candidate.

Question 5

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 6

ADRs are subject to foreign exchange risk unlike direct methods of investing in the foreign exchange market.

Accepted Answer

The answer of ADRs are subject to foreign exchange risk...

Question 7

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 8

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 pays no taxes, it does not benefit from the tax deduction of interest payments on debt. Therefore, a preferred stock issuance, which does not require interest payments, becomes more attractive to investors relative to a debt issuance.

Question 9

The purpose of cumulative voting is

Accepted Answer

Cumulative voting is a voting system that allows minority shareholders to have a voice on the board of directors by giving them the ability to concentrate all their votes on one or a few candidates instead of having to spread them out across all candidates. This increases the chances of minority candidates getting elected.

Question 10

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 11

A proxy is

Accepted Answer

A proxy is an authorization given by a stockholder to another person to act as their representative and vote on their behalf at a meeting. It allows the stockholder to participate in decision-making even if they are unable to attend the meeting in person. Options A, B, and D do not accurately describe what a proxy is.

Question 12

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 13

A possible advantage to a rights offering is that

Accepted Answer

A rights offering has multiple advantages, including:
A) Current shareholders are protected against dilution because they have the right to purchase new shares in proportion to their current holdings.
B) The firm has a built-in market of knowledgeable investors who are already familiar with the company and its stock.
C) Distribution costs are lower than a public offering since the offering is only made to existing shareholders.
Therefore, all of the above options are advantages of a rights offering.

Question 14

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

Accepted Answer

According to recent data, institutions such as pension funds, mutual funds, and insurance companies own the largest proportion of shares in the U.S. stock market. This trend has been driven by the growth of these institutions and their continued investment in equities as a way to diversify their portfolios and achieve long-term growth. Individual investors and corporations also own shares, but their ownership is smaller in comparison to institutional investors. Governments may own shares in specific companies, but they do not own a significant proportion of shares in the overall U.S. stock market.

Question 15

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

Accepted Answer

The board of directors is elected by the common stockholders as they have voting rights in the company. Preferred stockholders do not have voting rights, and bondholders do not have ownership stake in the company and thus do not have voting rights either.

Question 16

Which of the following is not a true statement?

Accepted Answer

Common stockholders are not legally entitled to any dividend. Dividends are only paid at the discretion of the company's board of directors.

Question 17

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 18

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 19

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 form of defense mechanism used by a company to make its shares less attractive to a potential acquirer. One way this can be done is through a rights offer, where existing shareholders are offered the right to buy additional shares at a discounted price, diluting the ownership of the acquirer and making the acquisition more expensive.

Question 20

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.

Quiz 17: Common and Preferred Stock Financing