Question 1

Bonds with the callable feature sell at lower prices than bonds without such a feature.

Accepted Answer

Bonds with a callable feature give the issuer the option to redeem the bond before maturity, which decreases the value and increases the risk for the investor. Therefore, these bonds typically sell at a lower price and higher yield compared to non-callable bonds.

Question 2

How much will be recorded as a firm's additional paid-in capital if it issues 1 million shares that have a $5 par value for $15 per share? (Use dollar values)
A) $0
B) $5,000,000
C) $10,000,000
D) $15,000,000

Accepted Answer

Additional paid-in capital is the amount received above the par value of the stock. In this case, the stock was issued at $15 per share, which is $10 above the $5 par value. Therefore, for 1 million shares, the additional paid-in capital would be $10 million x 1 million shares = $10,000,000.

Question 3

Earnings this year for Plasti-tech Inc.were $200,000,of which $60,000 it decided to plow back and 10 % was depreciation.Plasti-tech's internally generated funds are:
A) $40,000.
B) $60,000.
C) $80,000.
D) $140,000.

Accepted Answer

Internally generated funds = Earnings - Dividends - Depreciation
= $200,000 - $60,000 - (10% * $200,000)
= $200,000 - $60,000 - $20,000
= $120,000
Therefore, Plasti-tech's internally generated funds are $80,000.

Question 4

When firms retain cash,they are generating funds internally by increasing shareholder investment.

Accepted Answer

The answer of When firms retain cash,they are generating funds...

Question 5

What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?
A) $17,500
B) $32,500
C) $50,000
D) $76,923

Accepted Answer

Dividends are paid out of after-tax income.

Question 6

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes did the shareholder cast for Director 'A' if four directors are to be elected and the maximum number of votes was cast for 'A'?
A) 25
B) 100
C) 200
D) 400

Accepted Answer

With cumulative voting, the shareholder can distribute their votes among the candidates as they choose, including giving more than one vote to a single candidate. To determine how many votes the shareholder cast for Director 'A' when the maximum number of votes was cast for that candidate, we need to use the formula for cumulative voting:

total number of votes = number of shares × number of directors being elected

In this case, the shareholder owns 100 shares and four directors are being elected, so the total number of votes the shareholder has to distribute is:

100 × 4 = 400

If the maximum number of votes was cast for Director 'A', that means the shareholder gave all of their 400 votes to that candidate. Therefore, the answer is 400 votes for Director 'A'.

Question 7

What tax liability is created by a Canadian corporation in the 35% tax bracket that receives $50,000 in preferred stock dividends?
A) $0
B) $5,250
C) $12,250
D) $17,500

Accepted Answer

In Canada, dividends received by a corporation from another Canadian corporation are generally eligible for a Dividend Received Deduction (DRD), which can significantly reduce or eliminate the tax liability on those dividends. This is designed to prevent double taxation of income. Since the corporation is in the 35% tax bracket and receives $50,000 in preferred stock dividends from another Canadian corporation, it can utilize the DRD to reduce its tax liability on these dividends to $0.

Question 8

Eurobonds are long-term,corporate liabilities that:
A) are issued by European firms.
B) are held outside the U.S.
C) are marketed in all countries.
D) are repaid in U.S. dollars.

Accepted Answer

Eurobonds are not limited to European firms or the U.S. dollar; they are international bonds that can be marketed in various countries, not just within Europe or the U.S.

Question 9

If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital of $800 million,the total par value of the issued shares is:
A) $200 million.
B) $600 million.
C) $800 million.
D) $1 billion.

Accepted Answer

The total par value of the issued shares is equal to the number of shares multiplied by the par value per share. Thus, 100 million shares multiplied by a par value of $2 per share equals $200 million. The additional paid in capital is not relevant to the calculation of the total par value.

Question 10

What is the net value of common equity for a firm with 3 million shares issued,1 million shares outstanding,$4 million of retained earnings,$2 million of treasury stock at cost,$1 million in additional paid-in capital,and a $1 par value per share?
A) $4 million
B) $6 million
C) $8 million
D) $10 million

Accepted Answer

The answer of What is the net value of common...

Question 11

Which of the following statements is typically correct for a going-concern firm?
A) book value of equity exceeds market value of equity
B) market value of equity exceeds book value of equity
C) book value of equity equals market value of equity
D) no typical relationship exists between book and market values of equity

Accepted Answer

In a going-concern firm, the value of the assets and future earnings potential are taken into consideration, which may result in a higher market value of equity compared to the book value of equity. This is because the market value reflects the current expectations and potential of the company's future earnings, which may not be captured by the book value.

Question 12

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:
A) $15,000.
B) $30,000.
C) $35,000.
D) $50,000.

Accepted Answer

The answer of What will be the effect on retained...

Question 13

Protective covenants are offered for the benefit of:
A) common shareholders.
B) preferred shareholders.
C) Bondholders.
D) both common and preferred shareholders.

Accepted Answer

Protective covenants are offered to protect the interests of bondholders. These covenants enable bondholders to enforce certain restrictions on the issuer of the bond and provide assurance that the issuer will fulfill the terms of the loan. Common and preferred shareholders do not typically receive protective covenants.

Question 14

What is the book value per share of equity for a firm with $1 million in net common equity,$50,000 in authorized share capital,25,000 shares issued,and 20,000 shares outstanding? (Use dollar value)
A) $38.00
B) $40.00
C) $47.50
D) $50.00

Accepted Answer

The answer of What is the book value per share...

Question 15

Which of the following statements is correct about a corporation that borrows from its bank at "Prime plus one %?" The interest rate:
A) is set at a level of the prime rate at initiation of the loan, plus one %.
B) can fluctuate up to 1 % upwards over the life of the loan.
C) can be changed upwards but not downwards over the life of the loan.
D) can be changed upwards or downwards in accordance with prime rate changes over the life of the loan.

Accepted Answer

"Prime plus one %" means that the interest rate is set as the current prime rate plus an additional one percent. As the prime rate fluctuates, the interest rate on the loan will also change accordingly, either upwards or downwards. Therefore, option D is correct.

Question 16

A firm's internally generated funds are calculated by:
A) subtracting depreciation from net income.
B) adding depreciation to net income.
C) adding dividends to net income.
D) subtracting dividends from net income plus depreciation.

Accepted Answer

The answer of A firm's internally generated funds are calculated...

Question 17

Long-term debt refers to those liabilities that:
A) have established a sinking fund for repayment.
B) are not callable at the option of the firm.
C) are secured by specific collateral.
D) have a maturity of more than one year remaining.

Accepted Answer

Long-term debt refers to any liabilities that have a maturity of more than one year remaining. This includes bonds, notes, and other borrowings that are not callable by the firm and may or may not be secured by specific collateral. The presence or absence of a sinking fund does not necessarily determine whether or not a liability is considered long-term.

Question 18

Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:
A) common shareholders.
B) preferred shareholders.
C) Bondholders.
D) both common and preferred shareholders.

Accepted Answer

Protective covenants are put in place to protect the interests of bondholders by limiting the actions of issuers that could negatively affect bondholders. Common and preferred shareholders do not benefit directly from these covenants.

Question 19

For most firms,the majority of their funding is generated internally.

Accepted Answer

Internal funding sources, such as retained earnings and cash flow from operations, are the primary sources of funding for most firms. External funding, such as debt and equity financing, may be used to supplement internal funding or for specific projects, but it is typically a smaller portion of the firm's overall funding.

Question 20

If a corporation uses cumulative voting,then ______ of a shareholder's vote's _____ be cast for one candidate.
A) some; must
B) none; can
C) all; can
D) all; must

Accepted Answer

In cumulative voting, all of a shareholder's votes can be cast for one candidate. This is because the total number of votes equal to the number of shares held by the shareholder can be allocated all towards one candidate. Therefore, option C is correct.

Quiz 14: Introduction to Corporate Financing and Governance

Bonds with the callable feature sell at lower prices than bonds without such a feature.

How much will be recorded as a firm's additional paid-in capital if it issues 1 million shares that have a $5 par value for $15 per share? (Use dollar values)

Earnings this year for Plasti-tech Inc.were $200,000,of which $60,000 it decided to plow back and 10 % was depreciation.Plasti-tech's internally generated funds are:

When firms retain cash,they are generating funds internally by increasing shareholder investment.

What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes did the shareholder cast for Director 'A' if four directors are to be elected and the maximum number of votes was cast for 'A'?

What tax liability is created by a Canadian corporation in the 35% tax bracket that receives $50,000 in preferred stock dividends?

Eurobonds are long-term,corporate liabilities that:

If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital of $800 million,the total par value of the issued shares is:

What is the net value of common equity for a firm with 3 million shares issued,1 million shares outstanding,$4 million of retained earnings,$2 million of treasury stock at cost,$1 million in additional paid-in capital,and a $1 par value per share?

Which of the following statements is typically correct for a going-concern firm?

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:

Protective covenants are offered for the benefit of:

What is the book value per share of equity for a firm with $1 million in net common equity,$50,000 in authorized share capital,25,000 shares issued,and 20,000 shares outstanding? (Use dollar value)

Which of the following statements is correct about a corporation that borrows from its bank at "Prime plus one %?" The interest rate:

A firm's internally generated funds are calculated by:

Long-term debt refers to those liabilities that:

Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:

For most firms,the majority of their funding is generated internally.

If a corporation uses cumulative voting,then __ of a shareholder's vote's _ be cast for one candidate.