Question 1

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.

Accepted Answer

The board of directors is responsible for making decisions regarding when and how much to pay in dividends. They will take into account factors such as the company's profitability, available cash flow, and future growth plans when making this decision. While stockholders may express their views on dividends, they do not have the authority to determine when or how much will be paid. Similarly, officers of the corporation have a role in running the day-to-day operations of the business, but dividend decisions are typically made at a higher level of the organization. The state in which the corporation was chartered may have some rules or regulations around dividend payments, but these are unlikely to be the primary factor driving the decision-making process.

Question 2

Which of the following is correct with regard to "par value"?
A) It indicates the worth of the stock at issue.
B) It is the minimum price at which the corporation may sell the stock at issuance.
C) It represents the maximum price at which the stock may be sold at issuance.
D) It represents the amount for which the stock must be traded.

Accepted Answer

Par value is the minimum price at which the corporation may sell the stock at issuance. It does not indicate the worth of the stock or represent the maximum or required price for trading the stock.

Question 3

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.

Accepted Answer

A two-for-one stock split is primarily aimed at decreasing the value per share of the stock to make the shares more affordable and possibly increase liquidity in the market. It does not distribute additional value to stockholders, increase their ownership interest, or increase the value of each share.

Question 4

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 these are correct with regard to common stock.

Accepted Answer

- The Revised Act has eliminated the distinction between "preferred" and "common" stock, as there is now only "stock" (A).
- Common stock does not have any special contract rights or preferences, as opposed to preferred stock (B).
- Common stock generally bears the greatest risk of loss in the event of the failure of the enterprise, as the owners of common stock are the last in line to receive any assets in the case of liquidation (C). Thus, all options are correct regarding common stock (D).

Question 5

Caverun Co. has two classes of stock. The company may:
A) issue stock warrants, which are short-term options to buy shares.
B) issue stock rights, which are long-term options to buy shares.
C) not use stock options to make one class of stock more attractive than the other.
D) use stock options and warrants, the form and content of which are determined by the board of directors, to supplement compensation plans for directors, officers, and employees.
E) Both issue stock warrants, which are short-term options to buy shares  and also  issue stock rights, which are long-term options to buy shares.

Accepted Answer

Stock options and warrants are both used to make one class of stock more attractive than the other.

Question 6

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) A corporation cannot issue stock for higher than the par value.

Accepted Answer

Capital surplus is calculated as the difference between the issue price and the par value, multiplied by the number of shares. Here, it's ($75 - $50) * 100 = $2,500.

Question 7

The "cash flow test" for the payment of dividends and other distributions is also known as the:
A) equity insolvency test.
B) balance sheet test.
C) surplus test.
D) net assets test.

Accepted Answer

The "cash flow test" is also known as the equity insolvency test, which assesses whether a company can pay its debts as they come due in the ordinary course of business.

Question 8

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 the Revised Act, how many shares of stock could validly be sold?
A) 100
B) 33
C) 200
D) 133

Accepted Answer

Max pays a total of $6,000 ($1,000 cash + $2,000 car + $3,000 promissory note). At $30 per share, he can buy 200 shares ($6,000 / $30 per share).

Question 9

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.

Accepted Answer

A corporation cannot declare dividends when it is insolvent because it does not have sufficient assets to meet its liabilities, making it unable to distribute profits to shareholders.

Question 10

If Class A preferred shares provide only for a cumulative dividend of $3 per share, what will be the consequence on liquidation?
A) Class A Preferred will receive $3 per share more than common shares.
B) Class A Preferred will receive 103% of common shares.
C) Class A Preferred will share equally with common shares.
D) Class A Preferred will be subordinated to the rights of common shares.

Accepted Answer

The answer of If Class A preferred shares provide only...

Question 11

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 these.

Accepted Answer

The Revised Act, the 1980 Amendments to the Model Business Corporation Act (MBCA), and over half of the states have indeed eliminated the concepts of par value, stated capital, and capital surplus, simplifying corporate finance and share issuance processes.

Question 12

As amended in 2002, the Revised Act permits the creation of classes or series of shares with terms that vary among holders of the same class or series so long as the variations are expressly set forth in the articles of incorporation.

Accepted Answer

The Revised Act allows for the creation of classes or series of shares with varying terms among holders within the same class or series, provided these variations are explicitly stated in the articles of incorporation. This flexibility supports the customization of rights, preferences, and limitations to meet specific business needs or investor requirements.

Question 13

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.

Accepted Answer

Callable bonds are those that can be redeemed by the issuer before their maturity date at a specified price. This feature allows the issuer to refinance the debt if interest rates decline.

Question 14

__________, usually called debentures, have only the obligation of the corporation behind them.
A) Secured bonds
B) Income bonds
C) Unsecured bonds
D) None of these are correct.

Accepted Answer

Unsecured bonds, often referred to as debentures, are bonds that do not have any collateral backing them. Instead, they are backed solely by the creditworthiness and reputation of the issuing corporation.

Question 15

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.

Accepted Answer

This bond is a convertible participating bond because it offers a minimum interest rate with the potential for higher payments if corporate earnings increase, and it can be converted into stock of the corporation.

Question 16

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.

Accepted Answer

Under the Revised Act, the directors' determination of the consideration's "adequacy" is generally upheld unless there is evidence of fraud or bad faith.

Question 17

Allen owns 50 of the 500 shares outstanding of General Myopics. GM plans to issue 500 new shares. If Allen has preemptive rights, he may:
A) buy all 500 shares before anyone else.
B) buy 500 shares at the same price he paid for the other stock.
C) buy 5 shares at a discount of 10%.
D) buy 50 of the 500 new shares.

Accepted Answer

Preemptive rights allow existing shareholders to maintain their proportional ownership in a company when new shares are issued. Since Allen owns 10% of the current shares (50 out of 500), he has the right to buy 10% of the new shares being issued (50 out of 500) to maintain his percentage of ownership.

Question 18

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.

Accepted Answer

The 1980 amendments to the MBCA eliminated the concept of treasury shares.

Question 19

The Revised Act explicitly requires a corporations's charter to authorize:
A) one or more classes of shares that have limited voting rights.
B) one or more classes of shares that together are entitled to receive the net assets of the corporation upon dissolution.
C) Both are correct.
D) nothing. The Revised Act only recommends, not requires, the charter contents.

Accepted Answer

The Revised Act requires that a corporation's charter must authorize one or more classes of shares that are entitled to receive the net assets of the corporation upon dissolution.

Question 20

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.

Accepted Answer

When a corporation buys back its own shares, those shares are referred to as treasury shares. They are considered issued because they were once part of the shares sold to investors, but they are not outstanding because they are not currently held by external investors.

Quiz 34: Financial Structure of Corporations

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

Which of the following is correct with regard to "par value"?

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

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

Caverun Co. has two classes of stock. The company may:

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

The "cash flow test" for the payment of dividends and other distributions is also known as the:

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 the Revised Act, how many shares of stock could validly be sold?

The board of directors cannot declare dividends when the corporation:

If Class A preferred shares provide only for a cumulative dividend of $3 per share, what will be the consequence on liquidation?

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

As amended in 2002, the Revised Act permits the creation of classes or series of shares with terms that vary among holders of the same class or series so long as the variations are expressly set forth in the articles of incorporation.

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:

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

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:

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:

Allen owns 50 of the 500 shares outstanding of General Myopics. GM plans to issue 500 new shares. If Allen has preemptive rights, he may:

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

The Revised Act explicitly requires a corporations's charter to authorize:

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: