Question 1

The market value of common stock is related to its par value because both are sensitive to the reactions of investors to new information.

Accepted Answer

The market value of common stock is not related to its par value. The par value is simply the nominal or face value assigned to a share of stock, whereas the market value is determined by supply and demand in the market and reflects investors' perceptions of the company's financial performance and prospects.

Question 2

Holders of equity have claims on both income and assets that are secondary to the claims of creditors.

Accepted Answer

Equity holders have residual claims on income and assets, meaning their claims come after those of creditors.

Question 3

Common stock can be either privately owned by private investors or publicly owned by public investors.

Accepted Answer

Common stock can be owned by private investors who hold shares in non-publicly traded companies or by public investors who purchase shares in publicly traded companies.

Question 4

Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings,they expect ________.

Accepted Answer

Equityholders are considered residual claimants, meaning they receive payment only after all other claims have been satisfied. Therefore, they typically expect greater returns from their investment in the firm's stock, as they bear the most risk.

Question 5

Supervoting shares of common stock provide shareholders with ten times the voting power of ordinary shares of common stock.

Accepted Answer

The answer of Supervoting shares of common stock provide shareholders...

Question 6

Unlike creditors,equityholders are owners of the firm.

Accepted Answer

Equityholders or shareholders of a corporation own a portion of the company and have ownership rights, such as voting on major decisions and receiving a share of profits. Creditors, on the other hand, are lenders to the company and do not have ownership rights.

Question 7

Which of the following is an advantage for a firm to issue common stock over long-term debt?

Accepted Answer

Common stock has no maturity date on which the par value of the issue must be repaid, making it a more flexible long-term financing option compared to long-term debt. A and D are incorrect because the cost of equity financing is typically higher than the cost of debt financing, and dividends are not tax-deductible. B is incorrect because the primary claim of equityholders on income and assets in the event of liquidation is a characteristic of equity, but it is not an advantage over long-term debt.

Question 8

Interest paid to bondholders is tax deductible.

Accepted Answer

Interest paid to bondholders is considered an expense for the issuing company, and therefore is tax deductible.

Question 9

Common stockholders are often referred to as residual claimants.

Accepted Answer

Common stockholders are considered residual claimants because they have a claim on the residual earnings of a company after all other obligations, such as debt payments and preferred stock dividends, have been satisfied.

Question 10

If bankruptcy were to occur,________ would have the first claim on assets.

Accepted Answer

Secured creditors hold a specific claim on particular assets pledged as collateral for a loan. In the event of bankruptcy, secured creditors would have the first claim on those assets. This means they are first in line to receive any proceeds from the sale of those assets to satisfy the outstanding debt. Preferred stockholders, equity stockholders, and unsecured creditors would generally have less priority in a bankruptcy proceeding.

Question 11

Unlike equityholders,creditors are owners of the firm.

Accepted Answer

Creditors are not owners of the firm. They provide loans or credit to the firm, but they do not have ownership rights or voting privileges like equityholders.

Question 12

The market value of common stock is completely unrelated to its par value.

Accepted Answer

The market value of common stock is determined by supply and demand in the market, and can be influenced by a variety of factors such as company performance, industry trends, and economic conditions. Par value is simply the nominal or face value assigned to a share of stock and has no bearing on its market value.

Question 13

Holders of equity capital ________.

Accepted Answer

Holders of equity capital own a portion of the company and have the right to vote on key corporate decisions. They also have the potential to share in the company's profits through dividends or increased stock value, but they do not receive interest payments or have a guaranteed income. They are not loaning money to the firm but rather investing in it for potential returns.

Question 14

The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.

Accepted Answer

The number of outstanding shares of common stock is always less than or equal to the number of authorized shares of common stock. Authorized shares are the total shares a corporation is legally allowed to issue, while outstanding shares are those that have actually been issued and are held by investors.

Question 15

The par value on a common stock is used as a basis for determining its fixed dividend.

Accepted Answer

The par value on a common stock is a nominal amount determined by the company, usually for legal and accounting purposes. It is not used as a basis for determining its dividend. The dividend amount is usually determined by the company's profits and the decision of the board of directors.

Question 16

Dividends paid to stockholders is tax deductible.

Accepted Answer

Dividends paid to stockholders are not tax deductible for the company. However, they may be subject to taxes on the individual level for the stockholders who receive them.

Question 17

The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock.

Accepted Answer

This statement is true. Authorized shares are the total number of shares a company is legally allowed to issue, while outstanding shares are the number of shares that have already been issued and are held by investors. The authorized shares of common stock should always be equal to or greater than the outstanding shares, as the company needs to have the flexibility to issue more shares in the future if needed.

Question 18

The tax deductibility of interest lowers the cost of debt financing,thereby causing the cost of debt financing to be lower than the cost of equity financing.

Accepted Answer

This statement is true. Interest payments on debt are tax deductible, while dividends on equity are not. This means that the after-tax cost of debt financing is lower than the after-tax cost of equity financing.

Question 19

Which of the following is a difference between common stock and bonds?

Accepted Answer

Bondholders have a senior claim on assets and income relative to stockholders, meaning that they are paid back first in the event of bankruptcy or liquidation of the company. Common stockholders do not have this priority claim.

Question 20

Under the Jobs and Growth Tax Relief Reconciliation Act of 2003,currently dividends are subject to a maximum tax rate of 8 percent.

Accepted Answer

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the tax rate on qualified dividends to the same rate as long-term capital gains, which currently has a maximum tax rate of 20 percent (as of 2021).

Quiz 7: Stock Valuation