Question 1

Maggie owns 10% or 50,000 common shares of a small biotech company. Although she has enjoyed a lot of control, Maggie realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Unless she and others exercise preemptive rights,

Accepted Answer

The answer of Maggie owns 10% or 50,000 common shares...

Question 2

Iron Age Metalworks, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent

Accepted Answer

Dividend payments represent a portion of a company's profits that are distributed to its shareholders. Therefore, choice A is the correct answer. Choices B, C, and D do not accurately describe what dividend payments represent.

Question 3

A bond's face value is the same as its

Accepted Answer

A bond's face value is the principal amount that will be paid back to the investor at maturity. It is not related to the bond's risk rating, coupon value, or yield.

Question 4

Dividends on preferred stock are

Accepted Answer

Preferred stock dividends are typically fixed at a specific rate, while common stock dividends are not guaranteed and can fluctuate based on the company's financial performance. Additionally, preferred stock dividends may be paid before or at the same time as common stock dividends, but they are not paid after. Preferred stockholders also have priority over common stockholders in the event of a company's liquidation. However, preferred stock dividends are not guaranteed, and in the event of bankruptcy or financial distress, they may be reduced or suspended.

Question 5

Government bonds can vary in denomination, but most corporate bonds are issued in

Accepted Answer

$1,000 denominations are the most common denomination for corporate bonds. This allows for easier trading and transfer of ownership among investors.

Question 6

Greg purchased 2,000 shares of common stock of the Rite Track Corporation last year. He learned several months later that the stock does not pay a dividend. Greg should proceed to

Accepted Answer

Before investing in any stock, it is important to conduct proper research, including understanding the company's dividend policy. As Greg did not do his research beforehand, the best choice for him now would be to learn from his mistake and be more diligent in his future investments. He should not file a lawsuit or go after the registered representative as they are not responsible for the dividend policy of the company. Selling the shares is an option, but not necessarily the best course of action, especially if the stock has potential for future growth.

Question 7

The cost of a firm borrowing money is called the

Accepted Answer

The cost of borrowing money is typically referred to as the interest rate.

Question 8

After many years as a privately held corporation, Greeley Industries decided to offer stock to the general public. Greeley may discover that stockholders

Accepted Answer

By offering stock to the general public, Greeley Industries would become a publicly traded company, subject to the rules and regulations of the stock exchange. Publicly traded companies are required to hold annual shareholder meetings, and shareholders have the right to vote on major decisions such as electing board members and approving mergers or acquisitions. Shareholders also have the ability to file shareholder proposals and bring attention to certain issues within the company. Therefore, shareholders can exercise a significant impact on company management and policies.

Question 9

Juanita owns stock in Elite Technologies. Her stock provides a priority claim on dividend payments and on the firm's assets in the event of liquidation. However, her ________ stock ownership does not offer her voting rights.

Accepted Answer

Preferred stock provides priority claim on dividends and assets in the event of liquidation, but typically does not offer voting rights. Common stock offers both dividend payments and voting rights. Superior and callable are not types of stock ownership.

Question 10

Hallie owns 20% of the common stock of the Bean Brothers Coffee Company. The company announced plans to offer an additional 10,000 shares of common stock for sale. If Hallie exercises her preemptive rights, Bean Brothers must offer her the opportunity to purchase

Accepted Answer

Preemptive rights allow current shareholders to maintain their proportional ownership in a company when new shares are issued. In this case, Hallie owns 20% of the company's common stock, so she has the right to purchase 20% of the new shares being offered (10,000 shares x 20% = 2,000 shares). Therefore, the correct answer is B, as Bean Brothers must offer Hallie the opportunity to purchase 2,000 shares if she exercises her preemptive rights.

Question 11

Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders?

Accepted Answer

Cumulative preferred stock guarantees that any missed dividends must be paid to preferred stockholders before any dividends are paid to common stockholders. This is because cumulative preferred stockholders are entitled to receive all of the previously unpaid dividends as well as the current dividend, while non-cumulative preferred stockholders only receive the current dividend. Call provision refers to the ability to redeem the stock at a certain price, while participating preferred and convertible preferred refer to other characteristics of preferred stock.

Question 12

Jacob impresses his friends by stating that he just cast four votes in the election of the board of directors of Epic Electronics, indicating that Jacob owns ________ stock in Epic Electronics.

Accepted Answer

The answer of Jacob impresses his friends by stating that...

Question 13

Issuing ________ increases a firm's debt and may adversely affect the financial community's perception of the firm.

Accepted Answer

Issuing bonds increases a firm's debt, which may lead to higher interest payments and lower credit ratings. This may, in turn, negatively impact the firm's financial community perception. Issuing common stock, preferred stock, or retaining earnings do not have the same effect on a firm's debt.

Question 14

The disadvantages of issuing stock to obtain long-term financing include

Accepted Answer

Issuing stock means that the company must give up ownership, which could result in a change in management and policies if a new majority shareholder takes control. This loss of control can be a significant disadvantage for the founding owners. Additionally, there is no legal obligation to pay dividends if a company issues equity, so option A is incorrect. Option B is also incorrect because funds contributed by stockholders do not need to be repaid, but instead represent ownership in the company. Finally, option C is incorrect because issuing stock does not affect the market value of the firm's products, but rather the market value of the company itself.

Question 15

When Ira purchased 500 shares of preferred stock in the Fairlawn Corporation, his certificate indicated the stock had a par value of $50 per share. This means that Ira

Accepted Answer

The par value of the stock is simply the minimum amount that the company is required to pay to the shareholder upon liquidation of the company. It does not necessarily indicate the current market value of the stock. However, it may be used to calculate the dividend payments, so Ira may receive dividends based on this value per share.

Question 16

Which of the following accurately describes an advantage of selling bonds to raise long-term capital?

Accepted Answer

Selling bonds allows companies to raise long-term capital without giving up ownership or control of the company. Interest payments made on the bonds are considered tax-deductible expenses, which can lower the company's tax burden. This can make selling bonds a more attractive option for companies compared to other methods of raising capital, such as issuing stock or taking out loans.

Question 17

Another name for the fixed rate of interest attached to a bond is the

Accepted Answer

The fixed rate of interest attached to a bond is known as the coupon rate. This rate indicates the amount of interest that will be paid to bondholders annually based on the face value of the bond.

Question 18

A share of preferred stock for Marshall Manufacturing currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal

Accepted Answer

The answer of A share of preferred stock for Marshall...

Question 19

The corporate certificate issued to an investor that has loaned money to the corporation or government is called a

Accepted Answer

The corporate certificate issued to an investor that has loaned money to the corporation or government is called a bond. Common and preferred stocks represent ownership in the company, not a loan, and a debt document is a more general term that does not specifically refer to a certificate issued to a bondholder.

Question 20

Issuing bonds to obtain long-term funds legally compels a firm to pay regular ________ payments and repay the ________ at the maturity date.

Accepted Answer

Issuing bonds involves paying regular interest payments (not dividends) to bondholders and repaying the principal amount (not par or maturity value) at the maturity date. Therefore, the best choice is D.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities