Question 1

Which of the following is correct regarding a two-for-one stock 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 2

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

Accepted Answer

The Revised Act, the 1980 Amendments to the MBCA, and over half of the states have eliminated the concept of par value, stated capital, and capital surplus. This means that corporations no longer have to assign a value to their shares or maintain a certain level of stated capital, and they can use their funds more flexibly.

Question 3

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

Accepted Answer

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

Question 4

Par value:

Accepted Answer

Par value is the minimum price at which the corporation may sell the stock at issuance. It is not an indication of the worth of the stock, the maximum price at which the stock may be sold, or the amount for which the stock must be traded.

Question 5

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

Accepted Answer

The board of directors is responsible for making decisions regarding the declaration of dividends and the amount to be paid out to stockholders. They take into consideration the financial performance of the corporation, any outstanding debts or obligations, and the desires of stockholders. The officers of the corporation may provide input, but ultimately the decision lies with the board of directors. The state in which the corporation was chartered may have some regulations regarding dividends, but they do not determine the timing or amount of dividend payments.

Question 6

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

Accepted Answer

A proportional distribution of additional shares of a corporation's capital stock to its shareholders is known as a stock or share dividend. A stock split involves dividing existing shares into multiple shares, while redemption involves a corporation buying back its own shares from shareholders.

Question 7

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:

Accepted Answer

The Revised Act states that the valuation of consideration for the issuance of stock is based on the directors' determination of its "adequacy." This means that the directors have the discretion to determine the value of the property, as long as they believe it is adequate for the number of shares being issued. If the valuation is later determined to be incorrect, it does not automatically subject Justin to liability for the difference, but it may be challenged in court if necessary. Additionally, there is no indication of fraud in this scenario, so choice D is not relevant.

Question 8

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:

Accepted Answer

Preemptive rights allow Allen to maintain his proportional ownership by purchasing a proportionate number of new shares. He can buy 10% of the new shares (60 shares), but none of the options correctly describe this.

Question 9

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

Accepted Answer

The "cash flow test" is also known as the equity insolvency test, which ensures that a company can pay its debts as they come due after distributing dividends.

Question 10

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

Accepted Answer

Unsecured bonds, also known as debentures, are not backed by any specific collateral and rely solely on the creditworthiness of the issuing corporation. They do not have any specific assets pledged as collateral for their repayment, making them riskier than secured bonds which have specific assets backing them. Income bonds are a type of bond that only pays interest if the issuer earns enough income, and secured bonds have specific assets pledged as collateral for repayment. Therefore, the correct answer is C, unsecured bonds or debentures.

Question 11

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?

Accepted Answer

The total value of the consideration paid is $30 + $2,000 + $3,000 = $5,030. Dividing this by the share price of $30 gives 167.67 shares. Under traditional corporate law, only whole shares can be issued, so the maximum number of shares that could validly be sold is 167.

Question 12

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

Accepted Answer

The answer of In the case of Metropolitan Life Insurance...

Question 13

The board of directors cannot declare dividends when the corporation:

Accepted Answer

When a corporation is insolvent, it means that their liabilities exceed their assets, and they are unable to pay their debts. In this situation, the board of directors cannot declare dividends because they must prioritize paying off their debts before distributing profits to shareholders.

Question 14

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:

Accepted Answer

Callable bonds are the type of bonds subject to a redemption provision that allows the issuer to redeem or pay off all or part of the issue before maturity at a specific price.

Question 15

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

Accepted Answer

The capital surplus is the amount of money that is received above the par value of the stock when it is issued. In this case, the par value of the stock is $50 per share and 100 shares were issued, which means the total par value is $5,000 (50 x 100). However, the shares were issued at $75 per share, which means the total amount received was $7,500 (75 x 100). Therefore, the capital surplus is $2,500 ($7,500 - $5,000).

Question 16

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:

Accepted Answer

When a company purchases its own shares, they become treasury shares. They are considered issued but not outstanding because they are no longer in the hands of shareholders. Therefore, the best choice is A) treasury shares.

Question 17

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

Accepted Answer

The 1980 amendments to the Model Business Corporation Act (MBCA) did indeed eliminate the concept of treasury shares. Therefore, options A, B, and D are all incorrect.

Question 18

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

Accepted Answer

A) The Revised Act has indeed eliminated the terms "preferred" and "common" and instead uses the term "voting" and "nonvoting" to describe different classes of shares. 
B) Common stock does not have any special contract rights or preferences and is generally the most basic type of ownership in a company. 
C) Common stockholders generally bear the greatest risk of loss in the event of the failure of the enterprise because they only receive their share of assets after all other classes of security holders have been paid out. Therefore, all statements are correct with regard to common stock.

Question 19

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:

Accepted Answer

This bond is convertible because the holder has the option to exchange it for stock of the corporation. It is also participating because the interest payment is tied to corporate earnings - if earnings are higher, the holder receives a higher interest payment. Thus, the correct option is B - a convertible participating bond.

Question 20

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.

Accepted Answer

The term "liquidation preference" refers to the amount that preferred stockholders receive before common stockholders in the event of liquidation or dissolution of the company. This preference is typically outlined in the company's articles of incorporation. Therefore, when the articles provide a liquidation preference, preferred stock has priority over common stock in the distribution of assets upon dissolution of the corporation.

Quiz 35: Financial Structure of Corporations