Deck 15: Corporate Claims

Question 1

At what level of firm value will equity begin to receive a payoff if the firm consists of equity and a single zero coupon bond with a promised payoff of $100 million?

A)when the value exceeds $50 million
B)when the value exceeds $100 million
C)when the value exceeds $10 million
D)This cannot be answered without knowing the relative percentages of debt and equity financing.

Answer 1

when the value exceeds $100 million

Question 2

Commercial paper is

A)a long-term debt instrument issued by commercial banks.
B)junior debt of a corporation.
C)long-term collateralized debt.
D)short-term debt of a corporation.

Answer 2

short-term debt of a corporation.

Question 3

The exercise of which of the following would cause dilution?

A)a bond's put feature
B)a bond's convertible feature
C)a bond's sinking fund feature
D)a bond's call feature

Answer 3

a bond's convertible feature

Question 4

A bond feature that allows the bond issuer to buy back the debt from the bondholders at a pre-specified price is called a

A)callability feature.
B)warrant.
C)putability feature.
D)convertibility feature.

Question 5

A firm can retire its debt by

A)exercising its call option on the bond.
B)forcing conversion of the bond.
C)exercising its put option on the bond.
D)Both A and B.

Question 6

All else equal, which of the following bonds would provide the issuer with the lowest cost of debt
Capital?

A)convertible bonds
B)unsecured senior bonds
C)unsecured subordinated bonds
D)callable bonds

Question 7

Which of the following are non-financial claims?

A)pension obligations
B)taxes payable
C)notes payable
D)Both A and B are non-financial claims.

Question 8

Which of the following is a control right?

A)the right of shareholders to elect the members of the board of directors
B)the right of bondholders to receive interest payments
C)the right of shareholders to receive the liquidated value of the assets of the firm after all prior claims are settled.
D)Both B and C are control rights.

Question 9

Which of the following is a cash flow right?

A)the right of bondholders to force a firm into bankruptcy if the firm isn't making the required payments on the bond
B)the right of shareholders to elect the members of the board of directors.
C)the right of shareholders to vote on a proposed merger
D)the right of bondholders to receive interest payments

Question 10

Provide a payoff table for a firm that is financed partly with a zero coupon bond issue
that has a promised payoff of $50 million and partly with common equity.

Question 11

A bond feature that allows the bondholder to sell the debt back to the issuing firm for a pre-specified price is called a

A)sinking fund.
B)callability feature.
C)warrant.
D)putability feature.

Question 12

Which of the following are financial claims?

A)pension obligations
B)bonds
C)equity
D)Both B and C are financial claims.

Question 13

The document that facilitates the creation of financial and non-financial claims for a corporation is called the

A)document of shareholder rights.
B)bond indenture.
C)10K.
D)corporate charter.

Question 14

In the event of insolvency, in which order are the following claims satisfied--from first to last?

A)preferred stockholders, common stockholders, senior bondholders, junior bondholders
B)senior bondholders, preferred stockholders, junior bondholders, common stockholders
C)preferred stockholders, senior bondholders, junior bondholders, common stockholders
D)senior bondholders, junior bondholders, preferred stockholders, common stockholders

Question 15

All else equal, which of the following bonds would offer the highest expected rate of return?

A)collateralized straight bond
B)callable bond
C)convertible bond
D)putable bond

Question 16

A bond feature that allows an investor to exchange debt for shares of common stock is called a

A)sinking fund feature.
B)putability feature.
C)convertibility feature.
D)callability feature.

Question 17

What is the corporate charter, and what types of information does it include?

Question 18

To what does the absolute priority rule refer?

A)It stipulates that the federal bankruptcy court will have full power to modify any decision handed down by a lower bankruptcy court.
B)It stipulates that common shareholders are the only category of a firm's investors that will have voting rights.
C)It stipulates that, in the event of liquidation, senior bondholders are paid first, then junior bondholders, then preferred shareholders, and finally common shareholders.
D)It stipulates that a firm must file for Chapter 11 bankruptcy prior to filing for Chapter 7 bankruptcy to ensure that the common shareholders rights don't get violated.

Question 19

All else equal, which of the following bonds would be expected to sell for the lowest price?

A)putable bond
B)convertible bond
C)collateralized straight bond
D)callable bond

Question 20

A requirement that a firm retire a certain number of its bonds each year is called a

A)warrant requirement.
B)putability requirement.
C)sinking fund requirement.
D)convertibility requirement.

Question 21

A "unit" refers to

A)the number of bonds a firm is required to retire each year as stipulated in the bond covenants.
B)a bundle of multiple types of financial claims that are sold together.
C)each point above prime that a floating rate bond must pay.
D)a single bond in an entire bond issue.

Question 22

Preferred equity differs from common equity in that

A)preferred stockholders have voting rights; common stockholders do not.
B)preferred stock dividends are legal obligations of the corporation while common stock dividends are not.
C)preferred stockholders usually have a prior claim over common shareholders if a firm is liquidated.
D)common shareholders receive a fixed dividend whereas the preferred stock dividends will increase with the earnings of the firm.

Question 23

Which of the following does the CFO of a corporation have the least control over?

A)pension fund obligations
B)bank loans
C)treasury stock
D)commercial paper

Question 24

A zero-coupon, convertible bond promises to pay $1,000 upon maturity and can be converted into 40 shares of common stock at its maturity date. There are 1,000 of these bonds
Outstanding, and the firm has 120,000 shares of stock outstanding. At what level of firm value
Will the bondholders choose to convert?

A)when firm value exceeds $2,500,000
B)when firm value exceeds $4,000,000
C)when firm value exceeds $1,666,667
D)when firm value exceeds $1,000,000

Question 25

What are "non-financial" liabilities of a firm?

Question 26

Which of the following is a short-term liability of a corporation?

A)accounts payable
B)taxes payable
C)commercial paper
D)all of the above

Question 27

Which of the following statements regarding common stock dividends is true?

A)They provide a tax deduction for the corporation paying them, and they are not included in the taxable income of the recipients.
B)They are paid out of the after-tax income of the corporation paying them, and the recipients also pay taxes on this income.
C)They are paid out of the after-tax income of the corporation paying them, so the recipients do not have to pay taxes on the income.
D)They provide a tax deduction for the corporation paying them, but the recipients of the income must pay taxes on the income.

Question 28

A zero-coupon, convertible bond promises to pay $1,000 upon maturity and can be converted into 40 shares of common stock at its maturity date. There are 1,000 of these bonds
Outstanding, and the firm has 100,000 shares of stock outstanding. At what level of firm value
Will the firm's shareholders begin to receive a payoff?

A)when firm value exceeds $400,000
B)when firm value exceeds $40,000,000
C)when firm value exceeds $1,000,000
D)when firm value exceeds $2,500,000

Question 29

Treasury stock refers to

A)stock that has been authorized, but has never been issued.
B)stock owned by preferred shareholders of a corporation.
C)stock that has been repurchased by the corporation.
D)debt of the U.S. government.

Question 30

Which of the following statements regarding the rights of common stockholders is true?

A)A firm's common stockholders collectively, albeit indirectly, own all the firm's assets.
B)A firm's common stockholders, along with the preferred shareholders (if any), elect the members of the board of directors.
C)A firm's common stockholders enjoy unlimited upside potential with limited liability.
D)A firm's common stockholders vote to establish the dividend payout ratio for the firm.

Question 31

A zero-coupon, convertible bond promises to pay $30,000 at maturity and can be converted into 250 shares of the firm's stock. There are 1,000 of these bonds outstanding, and the firm has
500,000 shares of stock outstanding. At what level of firm value will the firm's equity holders
Begin to receive a payout?

A)when firm value exceeds $60,000,000
B)when firm value exceeds $30,000,000
C)when firm value exceeds $7,500,000
D)when firm value exceeds $90,000,000

Question 32

Which of the following current liability accounts would be considered financial debt?

A)taxes payable
B)notes payable
C)deferred income
D)accounts payable

Question 33

Which of the following long-term liability accounts would be considered financial debt?

A)mortgage bonds
B)foreign borrowings
C)pension obligations
D)both A and B

Question 34

Why is preferred stock used less often than debt or common equity as a source of
financing?

Question 35

Assume that a convertible bond has a coupon rate of 10% and a face value of $1,000
and is convertible into 40 shares of the firm's stock. Assume it is also callable at face
plus one year's interest. The current market price of the stock is $30 a share. If the firm
were to call these bonds under this condition, would you accept the call or exchange
your bond for common equity? Explain.

Question 36

A zero-coupon, convertible bond promises to pay $30,000 at maturity and can be converted into 250 shares of the firm's stock. There are 1,000 of these bonds outstanding, and the firm has
500,000 shares of stock outstanding. At what level of firm value will the bondholders choose
To convert?

A)when the firm value exceeds $60 million
B)when the firm value exceeds $90 million
C)when the firm value exceeds $30 million
D)when the firm value exceeds $7.5 million

Question 37

Preferred stock is like a bond in that

A)it has a fixed maturity date.
B)its dividend payments are typically fixed, like the interest payments on a bond.
C)its dividend payments are legal obligations of the corporation.
D)Both A and B are true statements.

Question 38

Which of the following is classified as a long-term liability of a corporation?

A)income taxes payable
B)commercial paper
C)pension obligations
D)both B and C

Question 39

What are the advantages and disadvantages associated with investing in common
stock?

Question 40

Which of the following statements regarding preferred stock is false?

A)Preferred stock typically pays a fixed dividend.
B)Preferred stockholders typically have no voting rights.
C)Like debt, preferred stock may be convertible into shares of common stock.
D)Preferred stockholders can force a firm into bankruptcy if too many dividend payments are missed.

Question 41

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. What was Hasbro's liabilities-to-assets ratio, based on market value of the assets in 2006?

A)55.3%
B)29.3%
C)50.3%
D)17.9%

Question 42

The following information has been collected from the 2006 and 2005 balance sheets of Wellcare Health Plans, Inc.
Refer to the information above What major changes have taken place in Wellcare's
capital structure between 2005 and 2006? Discuss.

Question 43

The following information has been collected from the 2006 and 2005 balance sheets of Wellcare Health Plans, Inc.
Refer to the information above Calculate the 2006 liabilities-to-assets ratios for
Wellcare, based on both book value of assets and market value of assets.

Question 44

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. What was Hasbro's liabilities-to-assets ratio, based on the book value of the assets in 2006?

A)17.9%
B)55.3%
C)50.3%
D)29.3%

Question 45

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. Which of the following statements regarding changes in Hasbro's capital structure from 2005 to 2006 is true?

A)Hasbro's use of short-term financial debt increased in 2006.
B)Hasbro has increased its overall use of debt financing in 2006.
C)Hasbro is using less financial debt and more non-financial debt in 2006.
D)None of the above is a true statement.

Question 46

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. In 2006, the number of shares of Hasbro's stock that was publicly held was

A)519,180,825
B)128,875,455.
C)160,620,415.
D)550,925,785.

Question 47

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. From 2005 to 2006, Hasbro's financial debt

A)decreased by $702.
B)decreased by $18,652.
C)decreased by $37,566.
D)decreased by $13,819.

Question 48

Pensions and other unspecified liabilities accounted for approximately what percentage of IBM's total liabilities from 2001 to 2003?

A)10%
B)33%
C)50%
D)25%

Question 49

How much hybrid financing is Firm A using, if any?

A)$2,770
B)$ 300
C)$2,870
D)Firm A is not using any hybrid financing.

Question 50

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. Hasbro's financial debt-to-capital market value ratio in 2006 was

A)10.4%.
B)24.7%.
C)24.3%.
D)none of the above.

Question 51

Calculate the 2006 financial debt-to-financial capital ratios for Wellcare, based on both
market values and book values.

Question 52

Which of the following statements about IBM's use of debt during the 2001 to 2003 period is true?

A)IBM had maxed out its use of credit lines during this period and had no unused credit lines left.
B)IBM began using more short-term debt and less long-term debt.
C)IBM began using more long-term debt and less short-term debt.
D)Both A and B are true statements.

Question 53

The following information has been collected from Firm A's 2007 annual report:
Refer to the information above. What is the value of Firm A's long-term financial debt?

A)$31,164
B)$12,370
C)$11,800
D)none of the above

Question 54

A firm has 800 million authorized shares, 500 million issued shares, and 100 million in treasury stock. How many shares are in the public's hands?

A)700 million
B)400 million
C)300 million
D)none of the above

Question 55

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. In 2006, the number of shares of Hasbro's stock that were repurchased was

A)920,745.
B)160,620,415.
C)49,074,215.
D)none of the above.

Question 56

The following information has been collected from Firm A's 2007 annual report:
Refer to the information above. What is the value of Firm A's short-term financial debt?

A)$9,500
B)$2,500
C)$3,500
D)$5,500

Question 57

The following information has been collected from the 2006 and 2005 balance sheets of Wellcare Health Plans, Inc.
Refer to the information above How many shares of Wellcare's stock were outstanding
at the end of 2006?

Question 58

A firm has 500 million authorized shares, 300 million issued shares, and 180 million shares outstanding. How many shares does the firm hold in treasury?

A)120 million
B)320 million
C)200 million
D)20 million

Question 59

Most of the change in IBM's capital structure during the 2001 to 2003 period was the result of

A)short-term debt issuance.
B)stock repurchases.
C)changes in the market value of IBM's equity.
D)long-term debt issuance.

Question 60

Below are 2005 and 2006 balance sheets of Hasbro, Inc. (numbers are in thousands of dollars): The market value of Hasbro's shares was $27.25 a share at the end of 2006 and $20.18 a share at the end of 2005.
Refer to the information above. Hasbro's financial debt-to-capital book value ratio in 2006 was

A)24.3%.
B)24.7%.
C)50.3%.
D)none of the above.

Question 61

How might the financial debt-to-assets ratio be misleading?