Question 1

The use of preferred shares to increase return to common shareholders is an example of financial leverage.

Accepted Answer

Preferred shares allow a company to raise additional capital without diluting the ownership of existing common shareholders, which can lead to increased returns for those shareholders. This use of preferred shares represents a form of financial leverage.

Question 2

Preferred shares are seen by some investors as being less risky and having a greater dividend rate than common shares.

Accepted Answer

Preferred shares are designed to have a fixed dividend rate, which can make them more attractive to investors seeking income. Additionally, in the event of a company's bankruptcy, preferred shareholders have priority over common shareholders in receiving any remaining assets. Therefore, some investors see preferred shares as less risky than common shares.

Question 3

If a corporation is authorized to issue 1,000 preferred shares,which have a current market value of $80 per share,it has $80,000 worth of shares outstanding.

Accepted Answer

The corporation only has $80,000 worth of shares outstanding if it has actually issued all 1,000 preferred shares. Being authorized to issue shares is not the same as having issued them.

Question 4

When issuing common shares,the initial investment is credited to Common Shares.

Accepted Answer

When issuing common shares, the initial investment is credited to the Common Shares account on the company's balance sheet.

Question 5

A corporation can issue two general types of shares: common and preferred.

Accepted Answer

A corporation can issue common shares and preferred shares.

Question 6

The liability for preferred dividends declared is recorded on the date of record.

Accepted Answer

The liability for preferred dividends declared is recorded on the date of declaration, not the date of record. The date of record is simply the date used to determine which shareholders are eligible to receive the dividend.

Question 7

The declaration of cash dividends reduces retained earnings.

Accepted Answer

Cash dividends are payments to shareholders that come out of a company's retained earnings, which is the portion of a company's profits that is kept for future use. Therefore, when cash dividends are declared, the retained earnings balance is reduced.

Question 8

Whenever the dividend rate on preferred shares is higher than the rate the corporation earns on its assets,the effect of issuing preferred shares is to increase the dividend rate earned by common shareholders.

Accepted Answer

Issuing preferred shares with a dividend rate higher than the corporation's earnings rate on its assets dilutes the earnings available for common shareholders, as preferred dividends are paid out before any dividends are distributed to common shareholders. This typically reduces the amount available for common shareholders, not increases it.

Question 9

When issuing shares,the initial investment is credited to Retained Earnings.

Accepted Answer

When issuing shares, the initial investment is credited to the Share Capital account, not the Retained Earnings account. Retained Earnings are only credited in subsequent periods when the company earns profits and decides to retain a portion of those profits instead of distributing them as dividends.

Question 10

One of the preference rights for preferred shares is the right to vote.

Accepted Answer

Generally, preferred shares do not have voting rights. Instead, they often receive priority over common shares in terms of receiving dividends and in the event of liquidation. However, some types of preferred shares may have voting rights attached to them.

Question 11

If shares are issued for non-cash assets,the assets are always recorded at the current market value of the shares.

Accepted Answer

The assets are recorded at the fair market value of the non-cash assets or the fair market value of the shares issued, whichever is more clearly determinable.

Question 12

Cumulative preferred shares carry the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.

Accepted Answer

Cumulative preferred shares have the right to receive both current and any past unpaid dividends before any dividends are paid to common shareholders. This means that if a company misses a dividend payment to its preferred shareholders, it must make up for it in the future before it can pay any dividends to its common shareholders.

Question 13

The date of record is the date the directors vote to pay a dividend to shareholders.

Accepted Answer

The date of record is the date on which a shareholder must own shares to be eligible to receive the declared dividend. The date when the directors vote to pay a dividend is called the date of declaration.

Question 14

Corporations issue preferred shares in order to raise capital without sacrificing control of the corporation and to increase the return earned by common shareholders.

Accepted Answer

Preferred shares do not typically carry voting rights, so the issuance of preferred shares allows corporations to raise capital without giving up control to new shareholders. Additionally, preferred shares often pay a higher dividend than common shares, which benefits common shareholders by increasing the overall return earned on their investment.

Question 15

Shares are most commonly issued for cash.

Accepted Answer

This statement is true, as shares are commonly issued to raise capital for a company.

Question 16

Special rights for preferred shares may include a preference in receiving dividends and in the distribution of assets if the corporation is liquidated.

Accepted Answer

This is true. Preferred shares often have a preference in receiving dividends and a preference in the distribution of assets in the event of liquidation.

Question 17

When preferred shares are issued,this will always cause an increase in the future return to common shareholders.

Accepted Answer

The issuance of preferred shares does not necessarily result in an increase in future return to common shareholders. The dividends and other rights associated with preferred shares may dilute the future earnings and returns available to common shareholders. However, in some cases, preferred shares may lead to an increase in overall company value and, consequently, benefit all shareholders.

Question 18

Common shares usually carry a preference for dividends.

Accepted Answer

Common shares do not have a preference for dividends. Dividends are paid out at the discretion of the company and are not guaranteed. Preference shares, on the other hand, may have a predetermined dividend rate and are usually paid out before common shareholders.

Question 19

Organization costs may be paid for by giving shares to promoters of a corporation in exchange for their services in organizing the corporation.

Accepted Answer

Organization costs can include a variety of expenses related to the formation of a corporation, and it is permissible for a corporation to issue shares to its promoters as compensation for their services in organizing the corporation, including covering such costs.

Question 20

Unpaid preferred dividends are called dividends in arrears.

Accepted Answer

Unpaid preferred dividends are known as dividends in arrears as they have not been paid to the shareholders on the due date.

Quiz 13: Organization and Operation of Corporations