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Ch14

By Brittany Anderson,2014-04-30 23:12
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RossCorp8e SelfStudy Ch14

Questions in [New Questions] 1) Which one of the following is a right given to the holders of common stock? [ ] right to firm assets prior to the payment of the firm's debts [ ] right to elect the president of the firm [ ] right to vote on the amount of salary to be paid to a new employee ? [ ] right to retain his or her proportional ownership should new shares be issued [ ] right to decide if dividends should be paid in a particular quarter 2) Unpaid preferred dividends: [ ] are a liability of the firm. [ ] are a primary reason for corporate bankruptcies. ? [ ] must be paid before common dividends if the preferred stock is cumulative. [ ] are taxable income to individual shareholders. [ ] increase the liquidation value of the preferred stock if the dividends are non-cumulative. 3) Which of the following will increase the book value per share? I. sale of newly issued shares at a market price which exceeds the book value of the previously issued shares II. additional net income which is not being currently distributed to shareholders III. a dividend payment IV. a sale of newly issued shares at a time when the market value per share equals the book value per share [ ] I and III only [ ] II and IV only ? [ ] I and II only [ ] II and III only [ ] I, II, and III only 4) What percentage of preferred stock dividend income is exempt from federal income taxes when received by a corporation? [ ] 0 percent [ ] 25 percent [ ] 40 percent ? [ ] 70 percent [ ] 75 percent 5) Mildred owns 5,000 shares of High Town common stock. She would like to attend the annual shareholder meeting so that she can vote in favor of a proposed merger. However, Mildred recently fell and broke her foot so will not be able to travel to the meeting. Mildred can still vote her shares by having management cast her votes by use of a: [ ] stock classification. [ ] legal binder. [ ] straight voting agreement. ? [ ] proxy. [ ] declaration of intent. 6) Which one of the following forms of debt is most apt to be repaid first in a bankruptcy proceeding? [ ] short-term, unsecured debt [ ] a debenture ? [ ] a secured, senior note [ ] secured, subordinated note [ ] a consol 7) The preemptive right is the right granted to a shareholder to: [ ] elect the members of the board of directors. [ ] have final say over the selection of the firm's chief financial officer. [ ] vote on important corporate matters. [ ] vote on the amount of dividend to be paid each year. ? [ ] share proportionally in any new stock sold. 8) In a bankruptcy proceeding, subordinated debt will be paid: [ ] before other debt or equity claims. [ ] only after all other debt and equity claims. ? [ ] after senior debt and prior to equity claims. [ ] only from the specific assets that were originally pledged as collateral. [ ] as if it were an equity claim. 9) Net new equity decreases when: [ ] shares of preferred stock are issued. [ ] shares of common stock are issued. [ ] new debt is incurred.

[ ] debt is repaid. ? [ ] shares of stock are repurchased. 10) For the period of 1995-2004, the debt-equity ratio of U.S. nonfarm, nonfinancial firms: [ ] dramatically increased on both a book and a market value basis. [ ] increased on a book value basis and remained constant on a market value basis. [ ] increased annually on a market value basis and dramatically declined on a book value basis. [ ] remained constant on both a book and a market value basis. ? [ ] fluctuated on a market value basis while declining slightly on a book value basis. 11) If a firm is exceedingly successful, the bulk of the benefit of that success will be enjoyed by the firm's: [ ] creditors. ? [ ] common shareholders. [ ] preferred shareholders. [ ] creditors and shareholders proportionally. [ ] common and preferred shareholders proportionally. 12) Kellie owns 650 shares of Altmeyer Company. Each share of stock is granted one vote under the firm's system of straight voting. How many additional votes must Kellie acquire if she wants to be elected to one of the three open seats on the board of directors if the firm has 1,800 shares outstanding? [ ] 0 votes ? [ ] 251 votes [ ] 901 votes [ ] 1,151 votes [ ] 2,051 votes 13) Which one of the following is the most effective means by which shareholders can control a corporation? Assume the shareholders are neither directors nor employees of the firm. [ ] ability to declare dividends [ ] ability to resell shares ? [ ] right to elect directors [ ] right to dividend distributions [ ] preemptive right 14) The number of authorized shares is established in the: [ ] corporate by-laws. [ ] initial minutes of the board of directors' meeting. ? [ ] articles of incorporation. [ ] financial statements of the firm. [ ] statutes of the state of incorporation. 15) The current tax laws in the U.S. tend to favor financing a firm's operations with: ? [ ] debt. [ ] common stock. [ ] preferred stock. [ ] half debt and half equity. [ ] half common and half preferred stock. 16) Which one of the following is most apt to be a restrictive covenant in an indenture agreement? [ ] preliminary approval for acquiring additional debt at an interest rate to be determined later [ ] requirement to increase the annual dividend payments ? [ ] minimum level of working capital which must be maintained [ ] restriction on obtaining additional equity capital [ ] a clause allowing a firm to forego paying interest on the debt in order to pay a dividend to shareholders 17) In which one of the following situations would the preferred shareholders of a firm be most apt to receive voting rights? [ ] merger of the firm with a competitor ? [ ] lack of preferred dividend payments for an extended period of time [ ] common stock dividend paid in conjunction with a preferred dividend [ ] take-over attempt by a disgruntled board member [ ] major proposed corporate expansion 18) A corporation's individual creditors: ? [ ] can partially control a firm thru stipulations in their loan agreements. [ ] control a firm via their voting rights. [ ] cannot force a firm into bankruptcy if the debt is unpaid. [ ] receive tax exempt interest payments. [ ] receive dividends which are taxed as personal income.

19) Bledsloe Industries has 150,000 shares of stock authorized of which 100,000 are issued. The board of directors has voted to sell as many additional shares as they can without seeking shareholder approval. What is the maximum number of additional shares than can be sold given this restriction? [ ] 0 ? [ ] 50,000 [ ] 100,000 [ ] 150,000 [ ] unlimited 20) Southern Foods has 6 percent, cumulative preferred stock outstanding with a stated value of $100. Dividends are normally paid on a quarterly basis. Southern Foods has not paid a preferred dividend for the last two quarters but wants to pay a dividend to its common shareholders this quarter. How much must Southern Foods first pay to its preferred shareholders before paying the common stock dividend? [ ] $1.50 [ ] $3.00 ? [ ] $4.50 [ ] $6.00 [ ] $18.00 21) Delphi Corporation owns 10,000 shares of Taylor-Smith, Inc. Taylor-Smith just paid a dividend of $0.34 a share. How much taxable income did this dividend payment create for the Delphi Corporation? [ ] $0 ? [ ] $1,020 [ ] $1,700 [ ] $2,380 [ ] $3,400 22) Which one of the following definitions is correct? [ ] The stated value of a share of stock, as it would be shown on a stock certificate, is called the book value. [ ] Both a shareholder and a stockholder are terms that apply to only non-employee owners of common stock. [ ] The maximum number of shares that a firm can issue as of today is referred to as the number of shares outstanding. ? [ ] The dedicated capital of a firm is the number of shares of stock issued multiplied by the par value per share. [ ] The number of shares of common stock that are owned by investors are referred to as the number of authorized shares. 23) Extinguished debt is debt which: [ ] is perpetual. [ ] is classified as short-term. [ ] is long-term and has a sinking fund requirement. [ ] has been called by the issuer. ? [ ] has been fully repaid. 24) Which one of the following statements is correct concerning dividends? [ ] Dividends reduce the taxable income of a firm. [ ] Dividends paid to individuals are non-taxable income to those individuals. [ ] The non-payment of an undeclared quarterly dividend can cause a firm to become bankrupt. [ ] Dividends are paid out of pre-tax profits. ? [ ] Dividends paid to corporations are partially tax-exempt to those corporations. 25) What is the primary reason preferred stock tends to have a low yield? [ ] priority over bondholders in a bankruptcy [ ] tax deductibility of dividend payments [ ] residual ownership of the firm ? [ ] seventy percent tax exemption for corporate shareholders [ ] tax exemption on all dividend distributions 26) The key reason that firms issue multiple classes of stock is to: [ ] increase the market value of the firm without increasing the dividend payments. [ ] allow some dividends to be classified as interest expense. ? [ ] allow management to maintain corporate control while raising equity capital. [ ] stagger the payment of dividends. [ ] realize a tax benefit. 27) Which one of the following statements is correct? [ ] Net new equity as a percentage of total financing by U.S. nonfinancial corporations rose significantly between 2000 and 2004. [ ] U.S. firms rely more on external financing than they do on internal financing.

[ ] U.S. firms rely more on financing from external equity than do foreign firms. ? [ ] U.S. firms generate more financing from internally generated cash than do foreign firms. [ ] The entire financial deficit of a firm must be covered by net new equity. 28) Over the last year, Trenton Industries earned a net income of $38,000. The firm sold 5,200 shares of $1 par value stock for $11 a share. The firm paid out $17,000 in dividends. For the year, the firm: [ ] increased its common stock account by $57,200. [ ] increased the capital surplus by $40,200. [ ] decreased its retained earnings by $17,000. [ ] decreased its common stock by $5,200. ? [ ] increased its retained earnings by $21,000. 29) Which one of the following statements is correct concerning preferred dividends? [ ] Individuals only pay federal income taxes on 30 percent of the dividend income they receive. [ ] Thirty percent of the preferred dividends distributed reduce the taxable income of the paying corporation. [ ] Seventy percent of the preferred dividends distributed reduce the taxable income of the paying corporation. ? [ ] Preferred dividends paid to individuals are subject to double taxation. [ ] Preferred dividends are only taxable at the corporate level. 30) The Bridge Tire Company has a common stock account value of $45,000, capital surplus of $179,000, and retained earnings of $211,000. The par value of the stock is $1 and the market value of $22 per share. Which one of the following statements is correct given this information? [ ] The firm has a total market value of $435,000. [ ] The firm has 179,000 shares of stock outstanding. [ ] If the firm sells one more share of stock at the current market value, the common stock account will increase by $22. [ ] The book value of equity is $224,000. ? [ ] The firm has earned a total of $211,000 from its inception until today that it has not yet distributed to its shareholders. 31) Which one of the following terms best fits the definition of unsecured debt that must be repaid in three years? ? [ ] note [ ] indenture [ ] debenture [ ] consol [ ] senior security 32) The Broken Straw Company has $428,000 in assets and $452,000 in liabilities. The equity shareholders can: [ ] default on the interest payments to avoid bankruptcy. ? [ ] benefit by defaulting on the debt. [ ] distribute the firm's assets amongst themselves and then default on the debt. [ ] subordinate the existing debt and thereby erase the liability. [ ] avoid bankruptcy by subordinating the debt to the equity. 33) Treasury stock is defined as: [ ] authorized shares which have not been issued to date. ? [ ] shares currently owned by the issuer that previously were owned by investors. [ ] the number of shares outstanding which are being paid a dividend. [ ] the number of outstanding shares in excess of the initially authorized amount. [ ] the number of outstanding shares in excess of the initial issue. 34) The call price of a bond is: [ ] determined at the time of the call. [ ] set equal to the par value of the debt. [ ] set equal to the market price of the debt at the time of the call. ? [ ] a premium over par as set forth when the debt is issued. [ ] a discount under par as set forth when the debt is issued. 35) Equity investors benefit from the option to default on debt: [ ] when new borrowing occurs. [ ] because interest payments are tax deductible. [ ] when debt is repaid. [ ] when debt is not repaid timely and the value of the firm's assets exceeds the amount of the debt. ? [ ] when debt is not repaid timely and the value of the firm's assets is less than the amount of the debt. 36) Currently, you own 1,400 shares of AB Simon common stock which is currently valued at $23 a share. Your goal is to elect yourself to the board of directors under the assumption that no one else will vote for you. The firm uses cumulative voting. There will be 3 seats on the board open during the next election cycle. How much money do you need to invest today to guarantee your election if the firm has a total of 35,000 shares outstanding?

? [ ] $169,073 [ ] $189,023 [ ] $201,273 [ ] $368,023 [ ] $402,523 37) Which of the following are presented as justification for the continued existence of preferred stock? I. lack of taxable income for some firms II. taxability of dividends paid to individuals III. ability of utility companies to pass on the tax disadvantage of preferred dividends IV. unpaid dividends cannot create a bankruptcy situation [ ] I and II only [ ] III and IV only [ ] I, II, and III only ? [ ] I, III, and IV only [ ] I, II, III, and IV 38) Creditors generally: [ ] provide financing that has little, if any, tax benefits for the borrower. [ ] receive voting rights if the debt financing they provide is for a period in excess of ten years. [ ] have no legal claim to the assets of the debtor. [ ] increase the risk of a financial failure for the debtor in the same manner as equity investors do. ? [ ] protect themselves via the indenture. 39) Which one of the following represents the order in which U.S. firms tend to fund their projects? The first item listed should be the first source of funds. I. new equity II. new debt III. net income plus depreciation minus dividends IV. dividends [ ] I, IV, II, III [ ] III, IV, II, I [ ] I, II, III, IV [ ] II, III, I only ? [ ] III, II, I only 40) Jeb is an unhappy shareholder of ABC Companies stock. He believes that the current management team is leading ABC Companies in the wrong direction and is also misusing corporate funds. Given this, Jeb also believes that ABC Companies has tremendous potential, both as a business and as an investment opportunity. Therefore, Jeb has decided to gather the votes needed to replace the board of directors and in turn, replace the current managers. Current management on the other hand, is working to gather the votes they need to re-elect the current directors so that the management can remain intact. This situation is frequently referred to as a: [ ] dividend block. ? [ ] proxy fight. [ ] share takeover. [ ] proportional play. [ ] shareholder preemptive play. 41) The maximum number of shares of common stock that can be authorized is: [ ] limited to the number of shares that are initially issued. [ ] limited to five times the number of shares that are initially issued. [ ] limited to ten times the number of shares that are initially issued. [ ] limited by the state statute in the state of incorporation. ? [ ] unlimited. 42) The River Café just issued 5,000 additional shares of $1 par value stock at a sales price of $11.60 per share. What is the total addition to capital surplus? [ ] $1 [ ] $10.60 [ ] $5,000 ? [ ] $53,000 [ ] $58,000 43) Staggering the terms of the corporate directors: I. makes it more difficult for minority shareholders to gain control over the election of a director. II. at least partially offsets the benefits that cumulative voting provides the minority shareholders. III. increases the number of seats on the board of directors that minority shareholders can control. IV. increases the difficulty of successfully executing a takeover attempt. [ ] I and IV only [ ] II and III only

? [ ] I, II, and IV only [ ] II, III, and IV only [ ] III and IV only 44) Which one of the following is defined as unsecured debt? [ ] callable bond [ ] mortgage ? [ ] debenture [ ] extinguished bond [ ] indentured bond 45) Which one of the following statements is correct? [ ] Debt represents ownership interest in a firm. [ ] The number of shares of stock authorized is the number of shares owned by the public. [ ] Capital surplus is the total amount of cash a firm has received from selling shares of stock. ? [ ] Some stocks issued have no par value. [ ] The value of the retained earnings of a firm will be less than the value of the capital surplus. 46) Preferred shareholders: [ ] receive preference for their dividend payments over any interest due on a firm's debts. [ ] automatically receive voting rights since they are equity holders. [ ] would generally receive $5 a year in dividends when the dividend yield is 2.5 percent. [ ] prefer noncumulative shares over cumulative shares. ? [ ] may not receive the dividends on their shares in a timely manner. 47) A firm has $1 par value common stock outstanding. The balance sheet shows a capital surplus amount of $74,000, a common stock balance of $61,000, and retained earnings of $58,000. What is the book value per share? [ ] $2.61 ? [ ] $3.16 [ ] $5.77 [ ] $16.69 [ ] $19.30 48) Sarah owns 650 shares of The Burger Hut. The firm grants one vote per share per open seat. What is the maximum number of votes that Sarah can cast for any one candidate if there are four open seats on the board and the firm uses straight voting? [ ] 0 [ ] 162 [ ] 400 ? [ ] 650 [ ] 2,600 49) Common shareholders generally have control over the firm via their: [ ] priority status. [ ] tax deductible dividends. [ ] cumulative dividends. ? [ ] voting rights. [ ] loan agreement with the firm. 50) Marc Anthony owns 500 shares of ABC Corporation. The firm is in a voting period in which there are 3 open seats on the board of directors. Each share has been granted one vote per open seat. Under cumulative voting, what is the maximum number of shares Marc can cast for any one candidate? [ ] 0 [ ] 166 [ ] 167 [ ] 500 ? [ ] 1,500 51) The internal cash flow of a firm is equal to: [ ] net income plus depreciation for the period. ? [ ] retained earnings plus depreciation for the period. [ ] net income for the period. [ ] retained earnings for the period. [ ] net income minus interest payments plus taxes for the period. 52) Long-term debt is selling at a premium when the par value: [ ] exceeds the face value. [ ] is less than the face value. [ ] exceeds the market value.

? [ ] is less than the market value. [ ] is less than the book value. 53) Assume that you own 1,000 shares of 9% noncumulative preferred stock in Lisbon Technology. The stock has a par value of $100 and an expected perpetual life. No dividends have been paid on the preferred stock for the past 18 months. Given this, you know that you: [ ] have a $9,000 claim against the firm. [ ] have a $13,500 claim against the firm. [ ] will receive $18,000 in dividends next year. [ ] will receive $13,500 in extra dividends sometime in the future. ? [ ] may never receive the unpaid dividends even if the firm is profitable going forward. 54) A consol is: [ ] a loan that does not entail any interest payments. [ ] debt that matures in less than one year. [ ] debt with an original maturity of five years or less that can automatically be renewed for a maximum of another five years. [ ] debt that is treated as if it represents an ownership interest in the issuer. ? [ ] perpetual debt. 55) A bond pays semiannual interest payments of $42.50. What is the bond's coupon rate if the par value of the bond is $1,000 and the market value is $998.50? [ ] 4.25 percent [ ] 4.26 percent [ ] 4.28 percent ? [ ] 8.50 percent [ ] 8.51 percent 56) Frederico is a very controlling individual. He recently purchased 3,500 shares of Indigo Paints. Indigo Paints is a corporation that has 12,000 shares of stock outstanding with one vote granted per share. The firm uses cumulative voting. The firm has a total of five directors, three of which are elected one year with the other two elected the following year. Each director is elected for a 2-year term. How many additional shares of Indigo Paints must Frederico purchase if he wants to control who sits in every seat on the board of directors? [ ] 501 votes [ ] 2,500 votes ? [ ] 2,501 votes [ ] 8,500 votes [ ] 8,501 votes 57) Which of the following features tend to benefit minority shareholders in a corporation? I. voting by proxy II. cumulative voting III. straight voting IV. staggered terms for the board of directors [ ] I and III only [ ] II and IV only ? [ ] I and II only [ ] III and IV only [ ] I, II, and IV only 58) In general, U.S. firms today tend to use: [ ] equal amounts of debt and equity financing. ? [ ] more equity than debt financing. [ ] more debt than equity financing. [ ] all equity financing. [ ] all debt financing. 59) For the period 1993 to 2004, U.S. firms in general have: [ ] experienced an average financial deficit in excess of 30 percent per year. [ ] reduced their net working capital on an annual basis. [ ] financed all their business spending with internally generated funds. [ ] invested more in net working capital than in capital assets. ? [ ] tended to have negative new equity on an annual basis. 60) Which one of the following will increase the book value per share? ? [ ] earning more net income than the firm distributes in dividends [ ] repurchasing shares of stock at a price that exceeds the book value per share [ ] selling new shares of stock when the market price equals the book value per share [ ] paying a dividend of $1 per share on earnings per share of $1 [ ] selling shares for less than the book value per share

61) Baker Industries has two forms of debt outstanding. The first is $175,000 of debt secured by a mortgage on the firm's equipment. The second debt is a $120,000 debenture. Assume that the firm declares bankruptcy and is liquidated. The equipment is sold for $181,000 cash and the remaining assets are converted into $86,000 of cash. Which one of the following statements is true given this information? Ignore all bankruptcy costs and other claims. [ ] The holders of the mortgaged debt will receive $175,000 / ($175,000 + $120,000) of the total $267,000 of cash. ? [ ] The holders of the mortgaged debt will receive $175,000. [ ] The holders of the mortgage debt will receive $181,000. [ ] The holders of the debenture will receive $86,000. [ ] The holders of the debenture will receive $120,000. 62) Black Rock, Inc., has 125,000 authorized shares of $1 par value stock. The common stock account has a value of $87,500 and the capital surplus account has a value of $452,000. How many shares of stock are outstanding? [ ] 37,500 shares [ ] 62,500 shares ? [ ] 87,500 shares [ ] 125,000 shares [ ] 452,000 shares 63) The book value of a firm includes which of the following accounts? I. long-term debt II. retained earnings III. capital surplus IV. common stock [ ] I and IV only [ ] I, III, and IV only [ ] II and III only ? [ ] II, III, and IV only [ ] I, II, III, and IV 64) A dividend becomes a liability of a firm when: [ ] the dividend is anticipated by the shareholders. ? [ ] it is declared. [ ] the date of record occurs. [ ] the stock goes ex-dividend. [ ] it is paid. 65) Which of the following is a cross between a debt security and an equity security? [ ] common stock [ ] mortgage bond [ ] subordinated bond ? [ ] preferred stock [ ] debenture 66) Paulson Enterprises has two forms of debt outstanding. The first is $250,000 of debt secured by a mortgage on the firm's equipment. The second debt is a $150,000 debenture. Assume that Paulson Enterprises declares bankruptcy and the firm is liquidated. The equipment is sold for $158,000 cash and the remaining assets are converted into $112,000 of cash. Which one of the following statements is true given this information? Ignore all bankruptcy costs and other claims. [ ] The holders of the mortgaged debt will receive $250,000 / ($250,000 + $150,000) of the total $270,000 of cash. [ ] The holders of the mortgaged debt will receive exactly $250,000. ? [ ] The holders of the mortgage debt will receive $158,000 plus have a claim of $92,000 on the remaining $112,000 of cash. [ ] The holders of the debenture will receive $112,000. [ ] The holders of the debenture will receive $158,000. 67) Which one of the following terms best fits the definition of long-term, unsecured debt that must be repaid in 15 years? [ ] note [ ] indenture ? [ ] debenture [ ] consol [ ] senior security 68) Which of the following would generally be true for a corporation which has more than one class of stock outstanding?

I. the shares of each class have different market prices II. the classes have unequal voting rights III. at least one class of stock may not be publicly traded IV. the shares held by the key owners or managers tend to have the most voting rights per share [ ] I and IV only [ ] II and III only [ ] I, II, and III only [ ] II, III, and IV only ? [ ] I, II, III, and IV 69) Which one of the following is a correct statement concerning preferred stock? [ ] Dividends are tax deductible to the issuing firm. [ ] Dividend payments are guaranteed. [ ] Preferred stock generally has a stated liquidating value of $50. [ ] Preferred stock must be repaid. ? [ ] Preferred stock generally has a low dividend yield. 70) Which of the following are concerns which tend to limit the number of authorized shares? I. limited par value II. state taxes III. limited dedicated capital IV. investor concerns [ ] I only [ ] II only [ ] I and III only ? [ ] II and IV only [ ] III and IV only 71) Which one of the following describes the party or parties which generally determine if a firm should merge with another firm? [ ] creditors only [ ] common and preferred shareholders jointly [ ] creditors, common shareholders, and preferred shareholders proportionally [ ] preferred shareholders only ? [ ] common shareholders only 72) Which one of these statements is correct? [ ] The federal government subsidizes a firm's dividends but not its interest. [ ] Shareholders can force a firm into bankruptcy if the firm does not pay regular dividend payments. [ ] Dividends are tax deductible but interest is not. ? [ ] Dividends are a return of contributed capital and are paid on an aftertax basis. [ ] Issuing shares of stock increases the probability that the issuer will be a financial failure. 73) Who determines if, when, and how much should be paid as a dividend? [ ] company president [ ] company CFO [ ] common shareholders ? [ ] board of directors [ ] company treasurer 74) The Timken Company has debt outstanding that has a 7 percent coupon rate, a call feature, and a maturity date 11 years from today. Given this, The Timken Company has the: [ ] obligation to repay the debt early. ? [ ] option to repay the debt early. [ ] obligation to change the coupon rate as market rates change. [ ] option of changing the coupon rate as market rates change. [ ] option of deferring all interest payments until the debt matures. 75) What is the amount of a coupon if a bond has a par value of $1,000, a coupon rate of 6.75 percent, and semiannual interest payments? [ ] $0 [ ] $3.38 [ ] $6.75 ? [ ] $33.75 [ ] $67.50

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