Deck 35: Financial Structure of Corporations

Question 1

Debentures are the same as indentures.

Answer 1

False

Question 2

A "stock option" permits the purchase of shares at a later date.

Answer 2

True

Question 3

If a "liquidation preference" is provided, preferred stock usually has priority over common stock to the extent the articles of incorporation state.

Answer 3

True

Question 4

Treasury shares are shares that have been authorized but have not yet been issued.

Question 5

The state of incorporation, each state in which the shares are issued or sold, and the federal government regulate the issuance of shares.

Question 6

Article 8 of the UCC covers rules applicable to transfers of investment securities.

Question 7

Dividends are ordinarily paid in cash, but may be paid in property.

Question 8

The federal government leaves corporate stock regulation to the states since corporations are state-created entities.

Question 9

The difference between common and preferred stock is that the latter is a debt instrument, whereas the former represents an equity interest in the company.

Question 10

Under the Revised Act, dividends must always be paid in money.

Question 11

Clayton Tile has a secured bond on specific property of Ceramic Creations, Inc.Clayton's claim against Ceramic is enforceable only against that specific property.

Question 12

A shareholder of one-third of all the stock in a corporation would be entitled to one-third of all corporate assets of an ongoing company.

Question 13

A company does not have to issue all of the shares authorized by the corporate charter, but it cannot issue more shares than are authorized.

Question 14

Warrick makes a $10,000 investment in a debenture issued by Wryteway Company.Warrick is now an unsecured creditor of Wryteway Company.

Question 15

A bondholder generally takes less of a financial risk than a shareholder of a corporation.

Question 16

Treasury stock is issued but not outstanding.

Question 17

An indenture is not a debt agreement.

Question 18

Ready Equipment, Inc.authorized and specified in its charter 5,000 shares of stock to be issued.If it later needs to issue stock in excess of 5,000 shares, the charter will have to be amended.

Question 19

Preferred stockholders do not have priority over corporate creditors in liquidation.

Question 20

"Blue Sky Laws" are state laws that regulate corporate stock issuance and sales.

Question 21

The Revised Act does not consider a transfer of its own stock by ZYX Corporation to its stockholders a distribution.

Question 22

A shareholder may be required to repay a dividend paid by the corporation.

Question 23

The earned surplus test does not permit capital surplus to be used for the payment of dividends.

Question 24

An investor has the right to transfer his investment securities by sale, gift, or pledge.

Question 25

Debt securities represent an ownership interest in the corporation.

Question 26

The MBCA as amended in 1980 and the Revised Act have adopted a net asset test for the issuance of dividends.

Question 27

The earned surplus test for the issuance of dividends by a corporation is less restrictive than the surplus test.

Question 28

A majority of the shareholders would have to approve the issuance of corporate bonds.

Question 29

A prospectus is an offer a corporation makes to interest people in buying securities.

Question 30

Holders of preferred stock with a dividend preference must receive dividends at the end of each corporate fiscal period.

Question 31

A corporation may purchase its own shares only out of earned surplus unless the articles of incorporation or the shareholders permit purchase out of capital surplus.

Question 32

With respect to liability for improper dividends, a non-breaching director and an innocent shareholder are both fully protected from any liability for repayment due to their good faith.

Question 33

Under the Revised Act, a director who is a member of the board that declares an illegal dividend is not personally liable to the company for the amount that is illegal.

Question 34

The shareholders normally determine the price for which shares will be issued unless the charter permits the board of directors to set the price.

Question 35

Earned surplus would include undistributed profits, income, gains, and losses from the date of incorporation.

Question 36

A stock split results in a larger proportion of corporate ownership by the shareholder.

Question 37

When a corporation issues no par value stock, the entire consideration received constitutes stated capital unless the board of directors allocates a portion of the consideration to capital surplus.

Question 38

"Capital surplus" would be credited with the excess received over par value for shares issued by the corporation.

Question 39

Even if it has been lawfully and properly declared, a stock dividend may be revoked unless it has been actually distributed.

Question 40

Determining the value to be placed on the consideration that stock purchasers will exchange for shares is the responsibility of the shareholders.

Question 41

Which of the following is correct regarding a two-for-one stock split?

A)The purpose of the split may be to decrease the value per share of the stock.
B)The purpose of the split is to make a distribution to the stockholders.
C)After the split, each stockholder will have greater ownership interest in the corporation.
D)The value of each share of stock will increase as a result of the split.

Question 42

The Revised Act, the 1980 Amendments to the MBCA, and over half of the states have eliminated the concept of:

A)par value.
B)stated capital.
C)capital surplus.
D)All of the above.

Question 43

If Class A preferred shares provide only for a cumulative dividend of $3 per share, upon liquidation Class A Preferred will:

A)receive $3 per share more than common shares.
B)receive 103% of common shares.
C)share pro rata with common shares.
D)be subordinated to the rights of common shares.

Question 44

Par value:

A)indicates the worth of the stock at issue.
B)is the minimum price at which the corporation may sell the stock at issuance.
C)represents the maximum price at which the stock may be sold at issuance.
D)represents the amount for which the stock must be traded.

Question 45

Which of the following determines when to declare dividends and in what amount?

A)The stockholders.
B)The officers of the corporation.
C)The board of directors.
D)The state in which the corporation was chartered.

Question 46

A corporation's proportional distribution of additional shares of the corporation's capital stock to its shareholders is a:

A)stock or share dividend.
B)stock split.
C)redemption.
D)None of the above.

Question 47

The directors of Premier Glass Company authorize the issuance of 100 shares of common stock for $25 per share to Justin for property the directors value at $2,500.The valuation:

A)is, in all jurisdictions, a matter of opinion on the part of the directors and their valuation is conclusive.
B)if incorrect, whether or not made in good faith, subjects Justin to liability for the difference between the valuation and the actual worth of the property.
C)under the Revised Act, depends on the directors' determination of the consideration's "adequacy."
D)if fraudulent, subjects the directors to liability to Premier for the difference between the fraudulent valuation and the actual worth of the property.

Question 48

Allen owns 500 of the 5000 shares outstanding of General Myopics.GM plans to issue 600 new shares.If Allen has preemptive rights, he may buy:

A)all 600 shares before anyone else.
B)600 shares at the same price he paid for the other stock.
C)6 shares at a discount of 10%.
D)None of the above.

Question 49

All states impose a "cash flow test" on the payment of dividends or other distributions.The "cash flow test" is also known as the:

A)equity insolvency test.
B)balance sheet test.
C)surplus test.
D)net assets test.

Question 50

__________, usually called debentures, have only the obligation of the corporation behind them.

A)Secured bonds
B)Income bonds
C)Unsecured bonds
D)None of the above.

Question 51

Max buys shares of newly issued Z Corp.stock for $30 per share and pays $1,000 cash, a car worth $2,000, and a promissory note for $3,000.Under traditional corporate law, how many shares of stock could validly be sold?

A)100
B)33
C)200
D)133

Question 52

In the case of Metropolitan Life Insurance Company v.RJR Nabisco, Inc., the court:

A)considered extrinsic evidence to evaluate the scope of an implied duty of good faith.
B)examined the indentures themselves to determine the agreement of the parties.
C)held that the indentures included an implied duty that prevented the incurring of new debt to facilitate the LBO.
D)Both (a) and (b) are correct.

Question 53

The board of directors cannot declare dividends when the corporation:

A)is insolvent.
B)is merging with another corporation.
C)is the subject of a takeover bid.
D)issues new stock.

Question 54

Bonds subject to a redemption provision, which permits the corporation to redeem, or pay off, all or a part of the issue before maturity at a specified redemption price are known as:

A)secured bonds.
B)income bonds.
C)callable bonds.
D)convertible bonds.

Question 55

If 100 shares of $50 par value stock were issued at $75 per share, how much would constitute capital surplus?

A)$750
B)$7,500
C)$2,500
D)$5,000

Question 56

Yukon Corporation purchases 1,000 shares of its own stock from Jones at a price of $50 a share.These shares, which are now issued but not outstanding, are known as:

A)treasury shares.
B)preemptive shares.
C)preferred stock.
D)no par stock.

Question 57

Which of the following is correct with regard to treasury shares?

A)The acquisition of such shares by the corporation is a distribution to shareholders with an effect similar to that of a dividend.
B)Under the Revised Act, treasury shares are unauthorized but issued.
C)The 1980 amendments to the MBCA eliminated the concept of treasury shares.
D)Treasury shares are issued and outstanding.

Question 58

Which of the following is correct with regard to common stock?

A)The Revised Act has eliminated the terms "preferred" and "common."
B)Common stock does not have any special contract rights or preferences.
C)Common stock generally bears the greatest risk of loss in the event of the failure of the enterprise.
D)All of the above are correct with regard to common stock.

Question 59

The Ajax Corporation issues bonds that pay a minimum of 6% interest but that can pay more if corporate earnings reach certain specified levels.The holder of the bond may exchange it for stock of the corporation.This bond would be a:

A)callable income bond.
B)convertible participating bond.
C)convertible unsecured bond.
D)convertible secured bond.

Question 60

When the articles provide a _____________, preferred stock has priority over common stock to the extent the articles state after a corporation is dissolved and when assets are distributed.

A)stock right
B)liquidation preference
C)dividend preference
D)None of the above.

Question 61

Once properly declared, the effect of a cash dividend is that it:

A)is revocable until actually paid.
B)is considered a debt the corporation owes to the shareholders.
C)imposes personal liability on the directors who vote for it.
D)imposes personal liability on the shareholders of a solvent corporation.

Question 62

The first federal statute for the regulation of securities offered for sale and sold through interstate commerce was passed in:

A)1916.
B)1933.
C)1934.
D)1954.

Question 63

Discuss the use of and types of stock options.

Question 64

If the charter simply states that the corporation elects to have preemptive rights, the shareholders have no preemptive rights with respect to:

A)shares issued as compensation to directors, officers, and employees.
B)shares issued within one year of incorporation.
C)the corporation's unissued shares.
D)All of the above

Question 65

In Klang v.Smith's Food & Drug Centers, Inc., the court found:

A)that the balance sheets of a corporation constitute conclusive evidence of capital impairment regarding a corporation's repurchase of shares.
B)the corporation's repurchase of shares violated a statutory prohibition against impairment of capital.
C)the directors may appropriately revalue corporate assets to reflect current value.
D)criminal negligence existed.

Question 66

Discuss preemptive rights.Are preemptive rights more important in a closely held corporation or in a publicly held corporation? Explain.

Question 67

What are the two major issues regarding payment for shares?

Question 68

How does the Revised Act define the term "distribution"?

Question 69

What right does a share confer on its owner in regard to an interest in the corporation?

A)Right to participate in control.
B)Right to participate in earnings of the corporation.
C)Right to participate in residual assets of the corporation upon dissolution.
D)All of the above.

Question 70

If The Raintree Company has accumulated earnings each year but the directors have not declared dividends for five years, the shareholders may:

A)petition a court of law for redress.
B)override the board by a two-thirds vote.
C)ask for an injunction requiring a dividend to be declared.
D)do nothing but sell their stock.

Question 71

Jerry received a check from McGregory Corporation as a dividend on his preferred shares.Two days later, one of the corporate directors called him and said he would have to return the check since it was erroneously declared and the company would not be able to pay its day-to-day expenses.Jerry would:

A)have to return the check because the company would be insolvent.
B)have to return the check since it was erroneously declared.
C)not have to return the check because Jerry acted innocently.
D)not have to return the check because the board acted in good faith.

Question 72

In which of the following ways do debt and equity securities necessarily differ?

A)Ownership interest.
B)Voting rights.
C)Redeemability.
D)Convertibility.

Question 73

Fyloff, Inc.would like to pay a dividend to its shareholders.It has only been in business a few years and does not yet have any retained earnings.However, it has a new product, which is breaking all sales records.This quarter, it anticipates about $3 million in earned surplus.It should be able to pay all of its bills as they become due.Under which of the following tests would Fyloff be able to pay a dividend? Explain each test.
a.Earned surplus test
b.Surplus test
c.Net asset test

Question 74

The most customary type of dividend is a:

A)stock dividend.
B)cash dividend.
C)property dividend.
D)liquidating dividend.

Question 75

A distribution may be in the form of:

A)declaration of a dividend.
B)a purchase, redemption, or other acquisition of shares.
C)a distribution of indebtedness.
D)All of the above.

Question 76

What are the principal sources for corporate financing?

A)Debt.
B)Equity investment securities.
C)Retained earnings.
D)All of the above.

Question 77

Redemption is not permitted if the corporation:

A)asks for an injunction.
B)would, by that action, reduce total assets below the stated capital amount.
C)has outstanding treasury shares.
D)is likely to be rendered insolvent.

Question 78

The Revised Act permits a corporation to purchase, redeem, or otherwise acquire its own shares unless:

A)the corporation's total assets after the distribution would be less than the sum of its total liabilities and the maximum amount that then would be payable for all outstanding shares having preferential rights in liquidation.
B)the corporation would be unable to pay its debts as they became due in the usual course of its business.
C)Both of the above.
D)None of the above.

Question 79

State laws that regulate the issuance and sale of securities are known as:

A)the Uniform Commercial Code.
B)the MBCA.
C)Blue Sky Laws.
D)None of the above.

Question 80

Participating stock will:

A)share in excess earnings after preferred payments along with common stock.
B)accumulate dividends that will be paid later.
C)participate in earnings only to the extent that all other classes do.
D)participate in earnings to the same extent as common stock.