Question 1

Hewlett-Packard's capital stock has largely recovered from the loss of confidence brought about by the failure to find a successful CEO and the multimillion-dollar severance packages the ousted executives received.

Accepted Answer

A) True 
 B)False

Question 2

The effect of a rights offering on a stockholder is

Accepted Answer

A)   the right to sell stocks, in which the stockholder's wealth only increases if the stock is sold.
B)   the right to own more stocks, in which the stockholder's wealth increases only if the new stock is purchased.
C)   the right to own more shares at a cheaper price, while the wealth of the stockholder's original shares goes up.
D)   the right to own more shares at a cheaper price, but the wealth of the stockholder's original shares goes down.

Question 3

The Nash Corp. is considering four investments. Which provides the highest after-tax return for Nash Corp. if it is in the 40% federal tax bracket? Assume the tax rate on dividends is 15%.

Accepted Answer

A)   Treasury bonds at 4%
B)   Corporate bonds at 7.5%
C)   Municipal bonds at 7.25%
D)   Preferred stock at 7.5%

Question 4

Participating preferred stock is advantageous to common stockholders because it receives more dividends.

Accepted Answer

A) True 
 B)False

Question 5

Which would NOT be considered an American Depository Receipts (ADR)  stock in the U.S.?

Accepted Answer

A)   Heineken
B)   Nestle
C)   Sony
D)   Intel

Question 6

A stock is said to sell "ex-rights"

Accepted Answer

A)   when the period in which the subscription privilege is to be exercised has expired.
B)   when the stockholder no longer has the ability to transfer stock ownership.
C)   after the rights have all been exercised and the new issue is completely sold.
D)   after the terms of the subscription have been made public.

Question 7

Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to elect three of nine directors to the board.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following is NOT an advantage that American Depository Receipts (ADRs)  have over investing in actual shares of a foreign stock?

Accepted Answer

A)   ADRs are an effective barrier to foreign currency risk.
B)   Unlike direct foreign stock, ADRs have financial statements presented in a GAAP format.
C)   Dividends are paid in dollars and are easier to collect than actual shares of foreign stock.
D)   ADRs are more liquid and less expensive than buying foreign stock directly.

Question 9

A rights offering may be of limited value to shareholders.

Accepted Answer

A) True 
 B)False

Question 10

After a rights offering, the common stock price will sell at the subscription price.

Accepted Answer

A) True 
 B)False

Question 11

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is the correct order of corporate issues based on risk and return? (From most risk-return to least risk-return.)

Accepted Answer

A)   Common stock, subordinated debentures, secured debt, Treasury bills
B)   Preferred stock, common stock, subordinated debentures, secured debt
C)   Common stock, long-term government bonds, secured debt, subordinated debt
D)   Common stock, secured debt, subordinated debentures, preferred stock

Question 13

Which of the following is NOT true about preferred stock?

Accepted Answer

A)   70% of dividends are non taxable to other corporations that hold preferred stock.
B)   The after-tax cost is higher than debt with the same yield.
C)   Dividends are legal obligations of the firm.
D)   Preferred stocks are typically cumulative with respect to dividends.

Question 14

Seven rights are necessary to purchase one share of Fogel stock at $34. The ex-rights value of Fogel stock is $48. The right sells for $______.

Accepted Answer

A)   $14
B)   $11
C)   $48
D)   $2

Question 15

A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 30%, would receive an after-tax preferred yield of approximately _____. Assume the tax rate on dividends is 15%.

Accepted Answer

A)   10.2%
B)   7.7%
C)   8.1%
D)   9.3%

Question 16

Which of the following is not a true statement?

Accepted Answer

A)   Common stockholders have a residual claim to income.
B)   Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C)   Common stockholders are legally entitled to some dividend.
D)   A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.

Question 17

Preferred stock dividends are a tax-deductible expense for a corporation.

Accepted Answer

A) True 
 B)False

Question 18

Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income.

Accepted Answer

A) True 
 B)False

Question 19

When comparing common stock of the same company, it is fair to say that

Accepted Answer

A)   all shares, no matter how many classes, are all created with the same equal rights.
B)   companies sometimes have two different classes of shares with unequal rights to dividends and votes.
C)   the Securities and Exchange Commission allows only one class of common stock.
D)   investors are indifferent between class A and class B shares.

Question 20

Which of the following actions will provide the shareholders with the most total wealth when a company conducts a rights offering?

Accepted Answer

A)   Exercise the right to buy new shares to increase wealth.
B)   Sell the rights themselves and hold existing shares and cash.
C)   Exercise the rights and sell the shares to increase wealth.
D)   None of these options are true.

Exam 17: Common and Preferred Stock Financing

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N, where N is the number of rights needed to purchase a new share of stock.

Correct AnswerverifiedShow Answer

Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to elect three of nine directors to the board.

Correct AnswerverifiedShow Answer

A stock is said to sell "ex-rights"

Correct AnswerverifiedShow Answer

Seven rights are necessary to purchase one share of Fogel stock at $34. The ex-rights value of Fogel stock is $48. The right sells for $______.

Correct AnswerverifiedShow Answer

The effect of a rights offering on a stockholder is

Correct AnswerverifiedShow Answer

Preferred stock dividends are a tax-deductible expense for a corporation.

Correct AnswerverifiedShow Answer

The Nash Corp. is considering four investments. Which provides the highest after-tax return for Nash Corp. if it is in the 40% federal tax bracket? Assume the tax rate on dividends is 15%.

Correct AnswerverifiedShow Answer

Which of the following actions will provide the shareholders with the most total wealth when a company conducts a rights offering?

Correct AnswerverifiedShow Answer

Which one of the following is NOT an advantage that American Depository Receipts (ADRs) have over investing in actual shares of a foreign stock?

Correct AnswerverifiedShow Answer

Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income.

Correct AnswerverifiedShow Answer

Which of the following is the correct order of corporate issues based on risk and return? (From most risk-return to least risk-return.)

Correct AnswerverifiedShow Answer

A rights offering may be of limited value to shareholders.

Correct AnswerverifiedShow Answer

After a rights offering, the common stock price will sell at the subscription price.

Correct AnswerverifiedShow Answer

Which of the following is NOT true about preferred stock?

Correct AnswerverifiedShow Answer

When comparing common stock of the same company, it is fair to say that

Correct AnswerverifiedShow Answer

Which of the following is not a true statement?

Correct AnswerverifiedShow Answer

Hewlett-Packard's capital stock has largely recovered from the loss of confidence brought about by the failure to find a successful CEO and the multimillion-dollar severance packages the ousted executives received.

Correct AnswerverifiedShow Answer

A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 30%, would receive an after-tax preferred yield of approximately _____. Assume the tax rate on dividends is 15%.

Correct AnswerverifiedShow Answer

Participating preferred stock is advantageous to common stockholders because it receives more dividends.

Correct AnswerverifiedShow Answer

Which would NOT be considered an American Depository Receipts (ADR) stock in the U.S.?

Correct AnswerverifiedShow Answer

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