Question 1

When new shares of stock are sold at a price greater than par value,the excess over par is recorded as:

Accepted Answer

The amount received over and above the par value of shares is called capital surplus. It is a part of the equity section of the balance sheet and represents the amount of money generated by the company's activities that is not related to earnings or drawing down retained earnings. Therefore, the excess over par is recorded as capital surplus.

Question 2

The system of electing a board of directors where each director is voted on separately is known as:

Accepted Answer

In majority voting, each director is voted on separately, and the candidate with the most votes wins.

Question 3

Wheat's Market just issued 17,500 new shares of common stock at a price of $20 a share.How will this transaction affect the equity accounts on the firm's balance sheet if the par value is $1 per share?

Accepted Answer

Increase in common stock account = 17,500 × $1 = $17,500Increase in paid in surplus = 17,500 × ($20 − 1) = $332,500

Question 4

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

Accepted Answer

Dividends are paid out of after-tax income.

Question 5

One way in which control of a corporation can be removed from the current board of directors is to:

Accepted Answer

Fighting a proxy contest involves soliciting shareholders to vote for a new slate of directors, effectively removing the current board of directors from control. This is a common method used by activist investors to gain control of a corporation and implement change. Taking away the directors' stock or giving voting power to management would not necessarily remove control from the current board of directors, and removing the Board's voting power is not a practical option as they are responsible for making important decisions on behalf of the corporation.

Question 6

Which statement correctly describes the company's dividend decision?

Accepted Answer

The dividend payment must be approved by the board of directors. While shareholders have the ultimate authority to approve or reject dividend payments, it is typically the responsibility of the board of directors to make recommendations about dividend policy and to oversee the management's implementation of the policy. Bondholders do not have a direct role in setting dividend policy.

Question 7

One common reason for issuing two distinct classes of common stock is to:

Accepted Answer

Issuing two classes of common stock allows the company to restrict voting privileges from some shareholders. For example, one class of stock may have full voting rights while the other class has limited voting rights, such as no ability to vote on the election of directors. This can be advantageous for the company to maintain control over certain decisions while still raising capital through the issuance of stock.

Question 8

Which one of the following statements is correct?

Accepted Answer

The statement that is correct is D, as the owner of a warrant will benefit if the firm's stock does well. A is incorrect because the convertible bondholder has the option to convert at any time, not being forced. B is incorrect because the convertible option on a bond gives the owner the right to convert the bond into a pre-specified number of common shares, not to buy them at a cash price. C is incorrect because the owner of a warrant has the option to buy common shares at a pre-specified price, not to convert them into convertible bonds.

Question 9

Corporations generally need shareholder approval to do which one of the following?

Accepted Answer

Corporations need shareholder approval to increase the number of authorized shares, as this allows the company to issue more shares of stock, which can dilute the value of existing shares. Shareholder approval is not typically needed for selecting a new CEO, purchasing treasury stock, or paying a regular dividend.

Question 10

All of the following are true of retained earnings except:

Accepted Answer

Retained earnings are not the difference between paid-in capital and total dividends paid; they are the cumulative earnings of a company minus any dividends paid out to shareholders.

Question 11

Which one of the following statements is correct?

Accepted Answer

This is the principle of cumulative preferred stock, which means that if preferred stock dividends are in arrears, they must be paid before common stock dividends can be paid. Common stock dividends are not guaranteed and can only be paid out of a company's available profits, while preferred stock dividends are usually fixed and must be paid before common stock dividends.

Question 12

The value of retained earnings on the corporate balance sheet represents the amount of earnings:

Accepted Answer

Retained earnings represent the cumulative amount of net income that a company has reinvested in the business rather than distributing to shareholders as dividends since the company's inception.

Question 13

Jay's Jams Inc.was just established with an investment of $3 million.Jay expects his company to generate free cash flow of $800,000 a year for the next 10 years.If Jay's cost of capital is 15%,find the market value and book value of his company.

Accepted Answer

To find the market value of the company, we need to calculate the present value of the expected free cash flows discounted at the cost of capital. Using the formula for the present value of an annuity, we get:

PV = C x ((1 - (1 + r)^-n)/r)
Where:

C = annual cash flow = $800,000
r = discount rate = 15%
n = number of years = 10

Plugging in the values, we get:

PV = $800,000 x ((1 - (1 + 0.15)^-10)/0.15)
PV = $4,901,373.11

Therefore, the market value of the company is $4.9 million.

The book value of the company is simply the initial investment of $3 million.

Thus, the best choice is C as it matches the above calculations.

Question 14

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

Accepted Answer

In a going-concern firm, the market value of equity is typically higher than the book value of equity because the market value reflects the expectations of future earnings and growth potential, which are not necessarily reflected in the book value.

Question 15

An investor might prefer floating-rate debt if she thought that:

Accepted Answer

Floating-rate debt typically pays interest that is tied to a benchmark rate such as LIBOR or the Prime Rate. As interest rates rise, the interest payments on the debt increase, providing protection against inflation. Therefore, an investor may prefer floating-rate debt if she believed that interest rates were going to rise.

Question 16

A firm just issued 15,000 new shares of stock with a market price of $14 per share and par value of $2 per share.Which one of these correctly states the resulting change in the equity accounts?

Accepted Answer

Increase in common stock = 15,000 × $2 = $30,000Increase in capital surplus = 15,000 × ($14 − 2) = $180,000

Question 17

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

Accepted Answer

Maximum votes with cumulative voting = 4 × 100 = 400

Question 18

A company's board of directors is primarily an agent of the company's:

Accepted Answer

The board of directors is primarily responsible for representing the interests of the shareholders. This means making decisions that are in the best interest of the shareholders and maximizing shareholder value. While the board of directors may also consider the interests of management and employees, ultimately their main priority is to represent the interests of the shareholders who own the company.

Question 19

What is the most commonly bundled type of loan in the asset-backed bond category?

Accepted Answer

Mortgages are the most commonly bundled type of loan in the asset-backed bond category. This is because they are large and stable assets that can generate regular cash flows, making them attractive to investors. The bundle of mortgages is then securitized and sold as bonds to investors.

Question 20

If net equity issues have been negative,

Accepted Answer

Negative net equity issues mean that the company has repurchased more shares than newly issued, resulting in a decrease in equity.

Quiz 14: Introduction to Corporate Financing and Governance

When new shares of stock are sold at a price greater than par value,the excess over par is recorded as:

The system of electing a board of directors where each director is voted on separately is known as:

Wheat's Market just issued 17,500 new shares of common stock at a price of $20 a share.How will this transaction affect the equity accounts on the firm's balance sheet if the par value is $1 per share?

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

One way in which control of a corporation can be removed from the current board of directors is to:

Which statement correctly describes the company's dividend decision?

One common reason for issuing two distinct classes of common stock is to:

Which one of the following statements is correct?

Corporations generally need shareholder approval to do which one of the following?

All of the following are true of retained earnings except:

Which one of the following statements is correct?

The value of retained earnings on the corporate balance sheet represents the amount of earnings:

Jay's Jams Inc.was just established with an investment of $3 million.Jay expects his company to generate free cash flow of $800,000 a year for the next 10 years.If Jay's cost of capital is 15%,find the market value and book value of his company.

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

An investor might prefer floating-rate debt if she thought that:

A firm just issued 15,000 new shares of stock with a market price of $14 per share and par value of $2 per share.Which one of these correctly states the resulting change in the equity accounts?

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

A company's board of directors is primarily an agent of the company's:

What is the most commonly bundled type of loan in the asset-backed bond category?

If net equity issues have been negative,