Question 1

Dilution of ownership occurs when a new stock issue results in each present stockholder having a larger number of shares and, thus, a claim to a larger part of the firm's earnings than previously.

Accepted Answer

Dilution of ownership occurs when a new stock issue results in each present stockholder having a smaller percentage of ownership and a smaller claim to the firm's earnings than previously.

Question 2

Another term sometimes applied to a common shareholder is a

Accepted Answer

As a common shareholder, one has the right to claim the residual assets of a company in case of liquidation. Therefore, a common shareholder is also referred to as a residual owner of the firm. A, C, and D do not accurately describe the ownership characteristics of a common shareholder.

Question 3

An underwritten issue of common stock is one in which the firm purchases insurance to cover unexpected losses suffered by shareholders.

Accepted Answer

An underwritten issue of common stock is when a third-party underwriter agrees to purchase any shares that are not bought by investors during an initial public offering (IPO). It is not related to the purchase of insurance to cover unexpected losses suffered by shareholders.

Question 4

________ is hired by a firm to find prospective buyers for its new stock or bond issue.

Accepted Answer

An investment banker is typically hired by a firm to underwrite and sell new securities such as stocks or bonds. As part of this process, the investment banker will help the firm find prospective buyers for the new issue. This may involve marketing the securities to institutional investors, private equity firms, or other potential buyers.

Question 5

Regarding the tax treatment of payments to securities holders, it is true that ________, while ________.

Accepted Answer

Interest payments are tax-deductible for the company, while dividends on both common and preferred stock are not tax-deductible.

Question 6

A common stockholder has no guarantee of receiving any cash inflows, but receives what is left after all other claims on the firm's income and assets have been satisfied.

Accepted Answer

This is true, as common stockholders are considered residual owners of the company and have the lowest priority of claims on the firm's income and assets.

Question 7

Preemptive rights allow existing shareholders to maintain voting control and protect against the dilution of their ownership.

Accepted Answer

Preemptive rights give shareholders the right to purchase new shares before they are offered to the public, thereby allowing them to maintain their ownership percentage and voting power. This helps protect their investment from dilution.

Question 8

A prospectus is another term for a firm's annual report showing the firm's prospects for the coming year.

Accepted Answer

A prospectus is a legal document that provides details about an investment opportunity, such as a new stock or bond issue. It contains information about the company's financial status, management team, and history, as well as its plans for the future. It is typically used to solicit investments from potential investors. While it may include projections for the future, it is not the same as a firm's annual report.

Question 9

Treasury stock is generally reclassified as class B common stock and has voting rights.

Accepted Answer

Treasury stock does not have voting rights and is not considered as part of the outstanding shares. It is held by the company and can be sold back to the market or retired.

Question 10

Treasury stock generally does not have voting rights, does not earn dividends, and does not have a claim on assets in liquidation.

Accepted Answer

This is a general rule for treasury stock, but there may be exceptions depending on the specific circumstances and company policies.

Question 11

Angel capitalists or angels are wealthy individual investors who do not operate as a business but invest in early-stage companies in exchange for a portion of equity.

Accepted Answer

Angel investors are indeed individual investors who provide funding to early-stage companies in exchange for equity, but they do not operate as a formal business entity.

Question 12

Common stockholders expect to earn a return by receiving

Accepted Answer

Common stockholders typically expect to earn a return on their investment through receiving dividends, which are periodic payments that are not fixed or guaranteed. Semiannual interest and annual interest are typically associated with debt investments, while fixed periodic dividends are more commonly associated with preferred stock investments rather than common stock.

Question 13

A prospectus is a portion of the security registration statement that describes the key aspects of the issue, the issuer, and its management and financial position.

Accepted Answer

This statement is true. The prospectus provides important information for investors to make informed decisions about the security being offered.

Question 14

American Depositary Receipts (ADRs) are claims issued by U.S. banks representing ownership of shares of a foreign company's stock held on deposit by the U.S. bank in the foreign market and issued in dollars to U.S. investors.

Accepted Answer

This is the definition of American Depositary Receipts (ADRs).

Question 15

Preferred stock that provides for dividend payments based on certain formulas allowing preferred stockholders to participate with common stockholders in the receipt of dividends beyond a specified amount is called cumulative preferred stock.

Accepted Answer

Cumulative preferred stock refers to the accumulation of unpaid dividends, not participation in additional dividends. The correct term for preferred stock that allows participation with common stockholders is "participating preferred stock."

Question 16

Shares of stock currently owned by the firm's shareholders are called

Accepted Answer

Shares of stock that are currently owned by the firm's shareholders are called outstanding shares. Authorized shares refer to the maximum number of shares that a company is allowed to issue, while issued shares refer to the number of shares that have been issued by the company. Treasury shares are shares that have been bought back by the company and are held in its treasury.

Question 17

The free cash flow valuation model can be used to determines the value of an entire company as the present value of its expected free cash flows discounted at the firm's weighted average cost of capital.

Accepted Answer

This is the correct definition of the free cash flow valuation model.

Question 18

Firms occasionally repurchase stock in order to alter capital structure or to increase the returns to the owners.

Accepted Answer

This statement is true, as firms may repurchase stock for various reasons including altering the capital structure, increasing the return to shareholders, and improving other financial metrics such as earnings per share.

Question 19

If a firm has class A and class B common stock outstanding, it means that

Accepted Answer

If a firm has class A and class B common stock outstanding, it typically means that one of the classes (usually class A) has voting rights while the other (usually class B) does not. This allows owners of the non-voting stock to receive dividends and benefit from the success of the company without having a say in the company's decisions. However, it is possible for both classes to receive the same dividend and have the same par value, so choices A and B are not necessarily true. Additionally, the tax deductibility of dividends does not depend on the different classes of stock, so choice C is also incorrect.

Question 20

All of the following are examples of marketable securities EXCEPT

Accepted Answer

Common stock is not considered a marketable security in the context of short-term, liquid investments, whereas Treasury bills, commercial paper, and negotiable certificates of deposit are.

Quiz 7: Stock Valuation