Deck 7: Stock Valuation

Question 1

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

Answer 1

True

Question 2

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

A)the cost of equity financing being less than the cost of debt financing
B)the primary claim of equityholders on income and assets in the event of liquidation
C)no maturity date on which the par value of the issue must be repaid
D)the tax deductibility of dividends which lowers the cost of equity financing

Answer 2

no maturity date on which the par value of the issue must be repaid

Question 3

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

A)Bondholders have a voice in management; common stockholders do not.
B)Bondholders have a senior claim on assets and income relative to stockholders.
C)Stocks have a stated maturity but bonds do not.
D)Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.

Answer 3

Bondholders have a senior claim on assets and income relative to stockholders.

Question 4

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

Question 5

Common stockholders are often referred to as residual claimants.

Question 6

The tax deductibility of interest lowers the cost of debt financing.

Question 7

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

Question 8

Dividends paid to stockholders are tax deductible.

Question 9

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

Question 10

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

Question 11

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

Question 12

Most investors pay taxes on dividends at the same rate at which their ordinary income is taxed.

Question 13

Interest paid to bondholders is tax deductible.

Question 14

Unlike equityholders,creditors are owners of the firm.

Question 15

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

A)preferred stockholders
B)unsecured creditors
C)equity stockholders
D)secured creditors

Question 16

Unlike creditors,equityholders are owners of the firm.

Question 17

Holders of equity capital ________.

A)own the firm
B)receive interest payments
C)receive guaranteed income
D)have loaned money to the firm

Question 18

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

A)fixed dividend payments
B)greater returns from their investment than the return that bondholders expect
C)all profits to be paid out in dividends
D)warrants to be attached to the stock issue

Question 19

Supervoting shares of common stock provide shareholders with more votes per share compared with ordinary shares of common stock.

Question 20

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

Question 21

Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation.

Question 22

Shares of stock currently owned by a firm's shareholders are called ________.

A)authorized shares
B)issued shares
C)outstanding shares
D)treasury shares

Question 23

A firm issued 5,000 shares of $1 par-value common stock,receiving proceeds of $20 per share.The amount recorded for the paid-in capital in excess of par account is ________.

A)$5,000
B)$95,000
C)$100,000
D)$0

Question 24

The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.

A)hostile takeover
B)bankruptcy proceeding
C)proxy battle
D)management buyout

Question 25

The purpose of nonvoting common stock is to ________.

A)limit the voting power of the management
B)allow the minority interest to elect one director
C)raise capital without giving up any voting control
D)give preference on distribution of earnings to those shareholders who own the stock

Question 26

Which of the following is TRUE of the issuance of nonvoting common stock?

A)It is issued in the event of a hostile takeover to preserve the interests of existing owners.
B)It helps the corporation to raise capital through the sale of common stock,without giving up its voting control.
C)It helps the existing stockholders to automatically transfer their voting rights to new stockholders without any legal proceeding.
D)It tends to result in the dilution of voting rights of current stockholders.

Question 27

A proxy statement gives shareholders the right ________.

A)of one vote for each share owned
B)to give up their vote to another party
C)to maintain their proportionate ownership in the corporation when new common stock is issued
D)to sell their share of stock at a premium

Question 28

A firm issued 10,000 shares of no par-value common stock,receiving proceeds of $40 per share.The amount recorded is ________.

A)$0 in the Common Stock account
B)$0 in the Paid-in Capital in Excess of Par account
C)$400,000 in the Common Stock account
D)$400,000 in the Paid-in Capital in Excess of Par account

Question 29

Regarding the tax treatment of payments to securities holders,it is TRUE that ________.

A)interest and preferred stock dividends are not tax-deductible,while common stock dividends are tax deductible
B)interest and preferred stock dividends are tax-deductible,while common stock dividends are not tax-deductible
C)common stock dividends and preferred stock dividends are tax-deductible,while interest is not tax-deductible
D)common stock dividends and preferred stock dividends are not tax-deductible,while interest is usually tax-deductible

Question 30

In a ________,new shares are sold to the existing shareholders.

A)private placement
B)public offering
C)rights offering
D)direct placement

Question 31

Stock rights provide the stockholder with ________.

A)the right to purchase additional shares in direct proportion to their number of owned shares
B)the right to elect the board of directors
C)cumulative voting privileges over the preference stockholders
D)the opportunity to receive extraordinary earnings

Question 32

A firm issued 10,000 shares of $2 par-value common stock,receiving proceeds of $40 per share.The amount recorded for the paid-in capital in excess of par account is ________.

A)$420,000
B)$380,000
C)$400,000
D)$800,000

Question 33

If a firm has class A and class B common stock outstanding,it usually means that ________.

A)each class receives a different dividend
B)the par value of each class is different
C)the dividend paid to one of the classes is tax deductible by the corporation
D)the classes have different voting rights

Question 34

Which of the following is TRUE of a common stock?

A)It gives voting rights which permit determination of the amount of dividend receivable.
B)It gives claims on income and assets which are superior to the claims of creditors of the firm.
C)Dividends on common stock are fully tax-deductible.
D)There is no fixed dividend payment obligation for the company.

Question 35

Which of the following is TRUE of par value of a common stock?

A)It is determined on the basis of the stock's market value.
B)It is an arbitrary value established for legal purposes in a firm's corporate charter.
C)It indicates the market value at which the stock was originally sold.
D)It allows stockholders to purchase additional shares at a price below the market price.

Question 36

________ allows stockholders to purchase additional shares at a price below the market price,in direct proportion to their number of owned shares.

A)A rights offering
B)Treasury stock
C)Preemptive rights
D)Proxy statements

Question 37

A proxy battle is the attempt by ________.

A)the creditors of a bankrupt corporation to seize assets of the corporation
B)the management to dismiss the board of directors for their incapability to manage the operations
C)a nonmanagement group to unseat the existing management and gain control of the firm
D)the employees to form trade unions to influence decisions on behalf of members

Question 38

Common stockholders expect to earn a return by receiving ________.

A)semiannual interest
B)fixed periodic payments
C)dividends
D)annual interest

Question 39

Which of the following is TRUE of outstanding shares?

A)A firm cannot sell more shares than the outstanding shares mentioned in the charter.
B)Authorized shares become outstanding shares when they are issued or sold to investors.
C)Outstanding shares are indicated in a firm's corporate charter.
D)Outstanding shares are the shares repurchased by the firm.

Question 40

Treasury stock refers to the ________.

A)sale of stock at a price greater than the par value
B)stock issued by the US government
C)repurchase of outstanding stock
D)authorization of additional shares of stock by the board of directors

Question 41

Which of the following is TRUE of common stocks?

A)The common stock of a corporation can be either privately or publicly owned.
B)Firms often issue common stock with no par value.
C)Preemptive rights often result in a dilution of ownership.
D)A firm's corporate charter indicates the rate at which dividends are paid.

Question 42

Which of the following is TRUE of equity?

A)equityholders do not have voting rights.
B)It does not mature,so repayment is not required.
C)It is a temporary form of financing for a firm.
D)Equity financing is obtained from creditors.

Question 43

A firm has the balance sheet accounts,Common Stock and Paid-in Capital in Excess of Par,with values of $10,000 and $250,000,respectively.The firm has 10,000 common shares outstanding.If the firm had a par value of $1,the stock originally sold for ________.

A)$24/share
B)$25/share
C)$26/share
D)$30/share

Question 44

Cumulative preferred stocks are preferred stocks for which all passed (unpaid)dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.

Question 45

The preemptive right gives shareholders the right ________.

A)to caste one vote for each share owned at the annual meeting of the company
B)to give up their vote to another party if they do not attend the annual meeting
C)to maintain their proportionate ownership in the corporation when new common stock is issued
D)to sell their share of stock at a premium in the event of liquidation

Question 46

In the case of liquidation,bondholders are paid before preferred stockholders,who in turn are paid before common stockholders.

Question 47

The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.

Question 48

Because preferred stock is a form of ownership and has no maturity date,its claims on income and assets are secondary to those of the firm's creditors.

Question 49

Although preferred stock provides added financial leverage in much the same way as bonds,it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.

Question 50

A firm has the balance sheet accounts,Common Stock and Paid-in Capital in Excess of Par,with values of $40,000 and $500,000,respectively.The firm has 40,000 common shares outstanding.If the firm had a par value of $1,the stock originally sold for ________.

A)$11.50/share
B)$12.50/share
C)$13.50/share
D)$15.50/share

Question 51

A preferred stockholder is sometimes referred to as a residual owner,since in essence he or she receives what is left-the residual-after all other claims on the firm's income and assets have been satisfied.

Question 52

Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.

Question 53

A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.

Question 54

Common stockholders are sometimes referred to as ________.

A)non preemptive right holders
B)managers
C)creditors
D)residual owners

Question 55

In the case of liquidation,common stockholders are paid before preferred stockholders,who in turn are paid before bondholders.

Question 56

Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.

Question 57

No-par preferred stock has no stated face value,but its annual dividend is stated as a percentage of the market value.

Question 58

Preferred stockholders are often referred to as residual claimants.

Question 59

Which of the following typically applies to common stock but not to preferred stock?

A)par value
B)dividend yield
C)legally considered as equity in the firm
D)voting rights

Question 60

Equity capital can be raised through ________.

A)the money market
B)the NYSE bond market
C)the stock market
D)a private placement with an insurance company

Question 61

Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.

A)cumulative
B)nonparticipating
C)participating
D)convertible

Question 62

Treasury stock generally does not have voting rights,does not earn dividends,and does not have a claim on assets in liquidation.

Question 63

Which of the following is a disadvantage of issuing preferred stock from the common stockholders' perspective?

A)There is a seniority of preferred stockholder's claim over common stockholders.
B)The preferred stockholders have superior voting rights in the selection of board of directors.
C)The preferred stockholders are always paid a higher proportion of dividend payments.
D)Issuance of preferred stocks will result in a higher risk,to the disadvantage of common stockholders.

Question 64

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and,thus,a claim to a larger part of the firm's earnings than previously.

Question 65

Preemptive rights allow common stockholders to maintain their proportionate ownership in the corporation when when the firm sells new shares of stock.

Question 66

The claims of the equityholders on a firm's assets have priority over the claims of creditors because the equityholders are the owners of the firm.

Question 67

A common stockholder has no guarantee of receiving any cash inflows,but receives what is left after all other claims on the firm's income and assets have been satisfied.

Question 68

A proxy statement is a statement transferring ________.

A)the ownership of a bondholder to another party
B)the votes of a bondholder to the another party
C)the votes of a stockholder to another party
D)the ownership of a stockholder to another party

Question 69

________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.

A)Preferred stockholders
B)Common stockholders
C)Bondholders
D)Creditors

Question 70

Which of the following is typically a feature of common stock?

A)Most common stocks are callable.
B)Most common stocks are cumulative.
C)Common stocks have a maturity value.
D)Common stocks may or may not pay dividends.

Question 71

Preemptive rights allow existing shareholders to maintain voting control and protect themselves against the dilution of their ownership.

Question 72

Stock rights allow stockholders to purchase additional shares of stock in direct proportion to the number of shares they own.

Question 73

From a corporation's point of view,a disadvantage of issuing preferred stock is ________.

A)that it increases financial leverage
B)that it has to give fixed payments as well as voting rights to the holders
C)its excellent merger security
D)that the dividends are not tax-deductible

Question 74

Treasury stock is generally reclassified as class B common stock and has voting rights.

Question 75

The risk cost of preferred stock is ________.

A)lower than the cost of long-term debt.
B)higher than the cost of common stock.
C)higher than the cost of long-term debt and lower than the cost of common stock.
D)lower than the cost of convertible long-term debt and higher than the cost of common stock.

Question 76

Preferred stock is characterized by ________.

A)voting rights
B)maturity date
C)quasi-debt nature
D)preemptive rights

Question 77

ADRs are ________.

A)securities,backed by American depositary shares (ADSs),that permit U.S.investors to hold shares of non-U.S.companies and trade them in U.S.markets
B)securities,backed by Securities Exchange Commission (SEC),that permit all investors to hold shares of U.S.companies and trade them in U.S.markets
C)securities,backed by American depositary shares (ADSs),that permit non-U.S.investors to hold shares of U.S.companies and trade them in U.S.markets
D)securities,backed by Securities Exchange Commission (SEC),that permit U.S.investors to hold shares of non-U.S.companies and trade them in international markets.

Question 78

Which of the following is TRUE of common stock?

A)It is often considered quasi-debt due to fixed payment obligation.
B)It pays a fixed dividend.
C)It gives the holder voting rights which permit selection of the firm's directors.
D)Its holders have priority over preferred stockholders in the event of liquidation of assets.

Question 79

A firm has issued cumulative preferred stock with a $100 par value and a 12 percent annual dividend.For the past two years,the board of directors has decided not to pay a dividend.At the end of the current year,the preferred stockholders must be paid ________ prior to paying the common stockholders.

A)$0/share
B)$12/share
C)$24/share
D)$36/share

Question 80

An 8 percent preferred stock with a market price of $110 per share and a $100 par value pays a cash dividend of ________.

A)$4.00
B)$8.00
C)$8.80
D)$80.00