Deck 17: Common and Preferred Stock Financing

Question 1

Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund expansions.

Answer 1

True

Question 2

Stock classes may differ in both voting rights and dividend rights.

Answer 2

True

Question 3

Stock classes are similar to bond ratings in that they are used to rank the performance of different corporation's stock.

Answer 3

False

Question 4

Common stockholders may assign a proxy, or the power to cast their ballot, only when majority voting is in place.

Question 5

Common stockholders have a legal claim to dividend income.

Question 6

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

Question 7

A rights offering may be of limited value to shareholders.

Question 8

A common stockholder cannot force a company into bankruptcy for eliminating the dividend.

Question 9

Stockholders always have preemptive rights when new issues of stock are offered.

Question 10

The ex-rights date usually takes place after the end of the subscription period.

Question 11

Under majority voting, it is easier for minority stockholders to elect some directors to the board.

Question 12

When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to receive a right.

Question 13

Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to elect 3 of 9 directors to the board.

Question 14

The difference between the rights-on and ex-rights common stock price is equal to the value of a right.

Question 15

Common stockholders have a residual claim to income, in other words they are last in line.

Question 16

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

Question 17

The increasing sophistication of individual investors has decreased the role of institutional investors in the stock market.

Question 18

The type of shareholder voting has become less important with the influence of takeovers, leveraged buy-outs, and other challenges to management control.

Question 19

The difference between the rights-on and ex-rights price is equal to the subscription price divided by N.

Question 20

Bondholders never have any control over the actions of a firm.

Question 21

Preferred stock dividends are a deductible expense for a corporation.

Question 22

Convertible exchangeable preferreds give the holder the sole right to exchange their preferred stock for common stock.

Question 23

To the individual recipient, preferred stock dividends offer no advantage over common stock dividends.

Question 24

Some preferred stocks are participating preferreds and this may allow for an increase in the preferred stock dividend when the common stock dividend equals the preferred stock dividend.

Question 25

The after-tax cost of debt is cheaper than preferred stock to the issuing corporation.

Question 26

Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend based on the firm's success.

Question 27

The floating rate feature on preferred stock causes more volatility in its price.

Question 28

If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the year.

Question 29

To the security holder, preferred stock offers the highest risk and the lowest return.

Question 30

The current market value of Markowitz Corp stock is $61. If ten rights are required to buy one additional share of Markowitz, at the subscription price of $50, then the rights are worth $1.00.

Question 31

American Depository Receipts (ADRs) are certificates that give foreign stockholders a legal claim on U.S. companies' foreign stock.

Question 32

Stock purchased through a rights offering may carry lower margin requirements.

Question 33

Because of tax considerations, corporations often are able to issue preferred stock at a slightly lower yield than debt.

Question 34

Participating preferred stock is advantageous to common stockholders.

Question 35

Generally the receipt of corporate bond interest is more valuable than preferred dividends to corporate investors.

Question 36

Participating preferred stock may receive an extra dividend in a particularly good year when earnings are above a stated level.

Question 37

Preferred stock generally carries a higher interest rate than debt.

Question 38

A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids.

Question 39

The market price of floating rate preferred stock is less volatile than that of regular preferred stock.

Question 40

Although ADRs are traded in the U.S in dollars, foreign currency risk for the investor remains.

Question 41

A proxy is

A) a device for circumventing regular voting procedures.
B) a coupon attached to each share of stock and used by the shareholder in casting his vote on current issues.
C) an authorization of a registered stockholder to another person to act in his place at the meeting.
D) a warrant allowing a stockholder to purchase a specified number of additional shares at a given price.

Question 42

The effect of a rights offering on a stockholder is

A) to increase his/her wealth.
B) to increase his/her wealth only if the new stock is purchased.
C) to decrease his/her wealth unless the stock is purchased.
D) to decrease his/her wealth if nothing is done.

Question 43

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

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 44

There are a number of possible advantages to a rights offering:

A) current shareholders are protected against dilution.
B) the firm has a built-in market of knowledgeable investors.
C) distribution costs are lower than a public offering.
D) all of these.

Question 45

If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes more attractive relative to a debt issuance.

Question 46

A rights offering is generally financially advantageous to the investor because it provides them with additional shares of stock.

Question 47

Which of the following is not a true statement?

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 48

A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm to acquire the company is called

A) a preemptive right.
B) a poison pill.
C) ex-rights.
D) rights-on.

Question 49

Given that there are 4,000,000 shares outstanding in Miller Corp., how many shares will be required for a minority group of stockholders to elect 2 of the 9 members on the board of directors? (Assume cumulative voting required)

A) 800,001
B) 1,000,001
C) 1,090,910
D) 1,000,000

Question 50

Under normal operating conditions, the board of directors is elected by

A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the above.

Question 51

An increasing proportion of shares in the U.S. are owned by:

A) individual investors.
B) corporations (Treasury Stock).
C) institutions.
D) governments.

Question 52

Investors are usually in favor of poison pills because it prevents takeovers.

Question 53

Participating preferred stock gives its owners voting rights.

Question 54

Which of the following statements is true with respect to cumulative voting?

A) Cumulative voting permits multiple votes for a single director.
B) Cumulative voting gives minority shareholders a better chance of being represented on the board of directors.
C) If 6 directors are to be elected and you own 100 shares, you may vote all 600 votes for one director and none for the others.
D) All of these are true.

Question 55

Dutch Auction preferred stocks, unlike standard preferred stocks, are typically short-term instruments.

Question 56

ADRs are subject to foreign exchange risk unlike direct methods of investing on the foreign exchange.

Question 57

The purpose of cumulative voting is

A) to maintain majority control of the board of directors.
B) to allow minority stockholders the possibility of a voice on the board of directors.
C) to obstruct unfriendly mergers and takeover efforts.
D) to prevent the dilution of common stock through pre-emptive rights offerings.

Question 58

Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to its lower risk.

Question 59

Sharpe Products has 1 million outstanding shares and 7 directors to be elected. Cumulonimbus Holdings owns 200,000 shares of Sharpe. How many directors can Cumulonimbus elect with cumulative voting?

A) 0
B) 1
C) 2
D) 3

Question 60

Coase Corp. has 10,000,000 outstanding shares. There are 11 directors on the firm's board. The Becker family owns 2,300,000 shares of Coase Corp. How many directors can the Becker family be assured of electing by themselves if Coase Corp. uses majority voting?

A) 0
B) 1
C) 2
D) 3

Question 61

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $3.00 per share and has not been paid for 3 years. If Kuhns earned $1 million this year, what could be the maximum payment to the preferred stockholders on a per share basis?

A) $9.50 per share
B) $15.00 per share
C) $6.00 per share
D) $5.00 per share

Question 62

The subscription rate is generally _______ than the rights-on price and _______ than the ex-rights price.

A) higher, higher
B) higher, lower
C) lower, higher
D) lower, lower

Question 63

Which of the following is not true about rights trading on organized exchanges?

A) Rights trade at low prices
B) Continuous trading of a right for long periods of time (similar to stocks)
C) Rights trading tends to surge during bull markets
D) All are true

Question 64

If a corporate charter includes a provision for preemptive rights, the stockholders

A) must sell their stock to the company.
B) get first option to buy additional issues of common stock.
C) may purchase existing treasury stock.
D) cannot utilize cumulative voting procedures.

Question 65

"Preemptive rights" means that

A) existing shareholders can prevent management from issuing additional common stock.
B) common shareholders can "preempt" preferred shareholders for dividends.
C) existing shareholders are guaranteed an opportunity to retain their proportional share of ownership of the firm.
D) management can preempt the right of shareholders to receive dividends if earnings are down.

Question 66

Advantages that the American Depository Receipts (ADRs) have over investing in actual shares of a foreign stock include all but the following

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 easier to collect than actual shares of foreign stock.
D) ADRs are more liquid and less expensive than buying foreign stock directly.

Question 67

American Depository Receipts (ADRs) are.

A) receipts sent to foreign stockholders who own American companies.
B) proof of ownership for Eurodollar deposits held by Americans.
C) certificates that have a legal claim on an ownership interest in a foreign company's common stock.
D) certificates in U.S. companies that allow foreign investors to buy shares of American companies.

Question 68

A stock is said to sell "ex-rights"

A) when the period in which the subscription privilege is to be exercised has expired.
B) when transfer of stock ownership no longer carries with it the privilege of subscription.
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 69

American Depository Receipts

A) have annual reports and financial statement presented in English.
B) pay dividends in dollars.
C) are more liquid and less expensive to buy than foreign stock.
D) all of these are true.

Question 70

Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for a $4. The ex-rights value of Fogel stock is

A) $70
B) $46
C) $74
D) none of these

Question 71

Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is the price of Tricki expected to be when it begins trading ex-rights?

A) $47.23
B) $44.00
C) $44.09
D) $45.00

Question 72

A rights offering

A) gives a firm a built-in market for new securities.
B) will likely lead to considerably higher distribution costs.
C) will increase the shareholder's total valuation.
D) is the least expensive way to raise capital.

Question 73

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

A) Exercise the rights for new shares.
B) Sell the rights themselves and hold existing shares and cash.
C) Exercise the rights and sell the shares.
D) None of these.

Question 74

All of the following statements are true except

A) Poison pills discourage hostile takeovers.
B) Poison pills discourage potential high takeover bids.
C) Stockholders have to approve the acceptance of poison pill strategies before a corporation can use them.
D) Many institutional investors are opposed to the poison pill.

Question 75

Preferred stock may be good for a company because it

A) expands the capital base of the firm without diluting the common stock ownership.
B) does not require interest payment in times of financial trouble, but are tax-deductible when dividends are paid.
C) is not as costly as common stock or bonds.
D) has no future negative ramifications when dividend payments are missed.

Question 76

Which of the following are benefits of a rights offering?

A) Rights offerings increase return on equity.
B) Rights offerings substantiate higher debt to equity ratios.
C) Rights offerings have lower margin requirements.
D) None of these.

Question 77

Which would not be considered an ADR stock in the U.S.?

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

Question 78

The following are primary purchasers of preferred stock except

A) corporate investors.
B) insurance companies.
C) pension funds.
D) individual investors.

Question 79

The most important feature of the preemptive right is that the rights

A) may be sold for profit.
B) afford stockholders protection against dilution.
C) may be cumulatively voted.
D) are nontransferable.

Question 80

North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are required to purchase one share. The value of a right is

A) $0.11
B) $1.11
C) $1.00
D) $1.50