Question 1

Preferred shareholders are usually not enti- tled to

Accepted Answer

Preferred shareholders typically do not have voting rights, which are usually reserved for common stock shareholders. This distinguishes them from common stockholders, who generally have the right to vote on corporate matters.

Question 2

The shares provided for in a corporation's arti- cles of incorporation that may be issued to shareholders at a future date are referred to as

Accepted Answer

Authorized shares are the total number of shares that a corporation is legally allowed to issue according to its articles of incorporation. This number sets the limit on how many shares can potentially be issued to shareholders in the future.

Question 3

The trend in modern corporate law is to require a par value of $1.00 per share or more on each share of authorized stock.

Accepted Answer

Modern corporate law trends towards allowing corporations to issue shares with no par value rather than requiring a minimum par value of $1.00 or more. This provides companies with greater flexibility in setting their stock prices.

Question 4

Corporations are usually required by law to pay dividends

Accepted Answer

Dividends are typically paid out of the net earnings or surplus of a corporation, reflecting the company's profitability and financial health. There is no legal requirement for dividends to be paid in cash, quarterly, or on the first day of every month; these aspects can vary based on the company's dividend policy.

Question 5

The rights and preferences of an issued class of stock may be amended by the unanimous consent of the board of directors.

Accepted Answer

The rights and preferences of an issued class of stock typically require approval from the shareholders of that class, in addition to any board of directors' approval, depending on the corporation's governing documents and the laws of the jurisdiction in which the corporation is incorporated.

Question 6

The amount of consideration received in pay- ment of stock in excess of the par value of the shares is referred to as

Accepted Answer

Capital surplus, also known as additional paid-in capital, represents the amount received from investors for stock, over and above the par value of the shares.

Question 7

A stock split

Accepted Answer

A stock split is the proportionate division of all authorized shares of a class of stock into two or more shares, which increases the number of outstanding shares but does not change the capital of the corporation.

Question 8

One advantage to debt financing over equity financing is that

Accepted Answer

Interest paid on debt financing is often tax deductible, which can lower the overall cost of borrowing for a corporation. This is not the case with equity financing, where dividends paid to shareholders are not tax deductible.

Question 9

The most common method of equity financing is the issuance of common stock in exchange for cash.

Accepted Answer

Issuing common stock in exchange for cash is the most common method of equity financing because it allows companies to raise capital without incurring debt, by selling ownership shares to investors.

Question 10

In states following the Model Business Corporation Act, the corporation must have stock issued at all times that guarantees that there are shareholders with the necessary voting rights to take any required corporate actions.

Accepted Answer

Under the Model Business Corporation Act, a corporation is required to have issued stock to ensure there are shareholders with voting rights to make decisions and take necessary corporate actions, maintaining the corporation's functionality and governance.

Question 11

Equity securities are loans from shareholders that must be repaid.

Accepted Answer

Equity securities represent ownership interest in a company and do not have to be repaid like loans.

Question 12

In the event that no designation is made in the articles of incorporation, if there is only one class of stock authorized, that stock is considered to be common stock.

Accepted Answer

In corporate law, if the articles of incorporation do not specify the class of stock, and there is only one class authorized, it is automatically considered common stock, which represents ownership in a company and confers voting rights.

Question 13

Preferred shareholders may be granted a specific preference over common shareholders with regard to the assets of the corporation upon its dissolution.

Accepted Answer

Preferred shareholders often have priority over common shareholders when it comes to the distribution of a corporation's assets upon its dissolution, as part of their preferential rights outlined in the terms of their share agreement.

Question 14

The instrument that represents the right to receive a fraction of a share is referred to as a

Accepted Answer

A scrip is a certificate or document that acknowledges the right to receive something in the future, such as a fraction of a share. It is often issued in lieu of fractional shares that a shareholder is entitled to but cannot receive due to the shares being indivisible.

Question 15

One advantage to the issuance of equity securi- ties over debt securities is that it maintains a lower debt-to-equity ratio for the corporation.

Accepted Answer

Issuing equity securities increases the equity portion without increasing the debt, thus maintaining or lowering the debt-to-equity ratio compared to issuing debt securities.

Question 16

If specified in the articles of incorporation, shares of stock with no voting rights may be issued.

Accepted Answer

Companies can issue shares with different rights attached to them, including shares that do not have voting rights, as long as this is specified in the articles of incorporation.

Question 17

A bondholder is often considered to be more of a creditor than an owner.

Accepted Answer

A bondholder lends money to the issuer of the bond and receives interest payments, making them a creditor, whereas shareholders, who are considered owners, invest capital in exchange for equity in a company.

Question 18

Securities that represent loans to the corporation that must be repaid are referred to as

Accepted Answer

Debt securities are financial instruments that represent a loan made by an investor to a borrower (typically corporate or governmental). These securities, such as bonds, bills, or notes, require the issuer to repay the principal amount at a later date and usually pay interest to the holder.

Quiz 10: The Corporate Financial Structure