Deck 13: Equity and Hybrid Instruments

Question 1

A certificate of ownership representing a proportionate share of the common equity interest in a corporation is best described as:

A) debt.
B) warrant.
C) hybrid security.
D) common share.
E) preferred share.

Answer 1

common share.

Question 2

Which of the following is not considered an ownership interest in a corporation?

A) A bond
B) Common stock
C) Preferred stock

Answer 2

A bond

Question 3

Which of the following is considered an ownership interest in a corporation?

A) A bond
B) Preferred stock
C) Commercial paper

Answer 3

Preferred stock

Question 4

Dividends on common stock are:

A) an obligation of the corporation.
B) paid at the discretion of the board of directors.
C) deductible as an ordinary and necessary expense for the corporation.

Question 5

Treasury stock is:

A) stock that is authorized, yet not issued as yet.
B) funds saved to be used to buy back stock in the market.
C) stock that is bought back by the corporation, so it is no longer outstanding.

Question 6

Equity which is senior with respect to claims on income and assets is best described as:

A) debt.
B) warrant.
C) hybrid security.
D) common share.
E) preferred share.

Question 7

Which of the following is not part of shareholders' equity?

A) Treasury stock
B) Accumulated earnings less dividends
C) Accumulated comprehensive income or loss
D) Capital that owners paid in to buy the initial shares of stock

Question 8

Consider the following from Company A's Statement of Shareholders' Equity:
The preferred equity for Company A is closest to:

A) $25 million
B) $100 million
C) $125 million
D) $750 million

Question 9

Consider the following from the Company A's Statement of Shareholders' Equity:
The total shareholders' equity for Company A is closest to:

A) $125 million
B) $250 million
C) $500 million
D) $750 million

Question 10

Consider the following from Company B's Statement of Shareholders' Equity:
The preferred equity for Company B is closest to:

A) $100 million
B) $250 million
C) $750 million
D) $1,150 million
E) $1,250 million

Question 11

For individuals, dividends are taxed at a lower rate than other income if they are considered:

A) qualified dividends.
B) unqualified dividends.
C) common stock dividends.
D) preferred stock dividends.

Question 12

Which of the following is correct?

A) Common equity = Common stock + retained earnings + treasury stock.
B) Common equity = Common stock - retained earnings - treasury stock.
C) Common equity = Common stock + retained earnings - treasury stock.
D) Common equity = Common stock - retained earnings + treasury stock.

Question 13

Consider the following from the Company A's Statement of Shareholders' Equity:
The common equity for Company A is closest to:

A) $500 million
B) $650 million
C) $750 million
D) $1,750 million

Question 14

Consider the following from the Company B's Statement of Shareholder Equity:
The common equity for Company B is closest to:

A) $100 million
B) $250 million
C) $750 million
D) $1,150 million
E) $1,250 million

Question 15

Consider the following from the Company B's Statement of Shareholder Equity:
The total shareholders' equity for Company B is closest to:

A) $100 million
B) $250 million
C) $750 million
D) $1,150 million
E) $1,250 million

Question 16

Which of the following would not change a company's book value of equity?

A) Earnings
B) Stock split
C) Dividends paid
D) Shares repurchased
E) Other comprehensive income or loss

Question 17

Consider a company that has the following financial information:
The dividend yield on this company's stock is closest to:

A) 7.5%
B) 12.5%
C) 60%
D) $3
E) $5

Question 18

Consider a company that has the following financial information:
The dividend yield on this company's stock is closest to:

A) $1
B) $2
C) 2.5%
D) 5.5%
E) 50%

Question 19

The pre-emptive right is the right to:

A) vote before preferred shareholders vote.
B) sell the stock back to the issuing company.
C) convert dividends into new shares of stock.
D) maintain proportional ownership when new shares are issued.

Question 20

Common shareholders have the right to:

A) a claim on assets before creditors.
B) vote for members of the board of directors.
C) a claim on income before preferred shareholders.
D) buy any preferred shares when issued before the public offering of these shares.

Question 21

TransgenRX is issuing new stock to raise capital. Shareholders of TransgenRX have the right as a shareholder to maintain proportional ownership in the company when new shares are issued. This right is best described as the

A) 50/50 rule.
B) pre-emptive right.
C) fairness in equity rule.
D) proportional ownership rule.

Question 22

Which of the following is not a right of common equity interests?

A) Receive any dividend declared by the corporation
B) Vote at any meeting of shareholders of the corporation
C) Receive the remaining property of the corporation on dissolution
D) Receive dividends or liquidated value before preferred shareholders and creditors

Question 23

Which of the following rights most likely reflects equity owners' rights as residual owners?

A) The right to vote and the pre-emptive right
B) The right to receive any dividend declared by the corporation and the right to limited liability
C) The right to vote and the right to receive any remaining property on dissolution of the corporation
D) The right to receive a dividend and the right to receive any remaining property on dissolution of the corporation.

Question 24

Which of the following statements is incorrect?

A) Nonvoting shares always trade for less than voting shares.
B) Nonvoting shares are common shares that have no voting rights.
C) In the 1980s, companies issued shares with superior voting rights as takeover defenses.
D) Nonvoting shares normally have a slight premium in terms of the right to a dividend to offset the lost value of control.

Question 25

Preferred shares that have no maturity date and pay a fixed dividend at regular intervals are best described as:

A) straight preferred share.
B) retractable preferred stock.
C) soft-retractable preferred stock.
D) mandatory redeemable preferred stock

Question 26

With which kind of preferred shares does the investor not have the option to sell the shares back?

A) Straight preferred share
B) Retractable preferred stock
C) Soft retractable preferred stock
D) Mandatory redeemable preferred stock

Question 27

Preferred shares that permit early retirement, with the typical retirement date set at 5 years, are best described as:

A) straight preferred share.
B) retractable preferred stock.
C) soft retractable preferred stock.
D) mandatory redeemable preferred stock.

Question 28

Issuers of ______________________ have the right to pay cash or in shares of the issuers common stock at redemption.

A) Straight preferred share
B) Retractable preferred stock
C) Soft retractable preferred stock
D) Mandatory redeemable preferred stock

Question 29

Which of the following dividend types carries a rate based on periodic auctions?

A) Fixed
B) Floating
C) Cumulative
D) Participating
E) Adjustable rate

Question 30

Which of the following dividend types carries a rate based on a specified benchmark?

A) Fixed
B) Floating
C) Cumulative
D) Participating
E) Adjustable rate

Question 31

Which of the following is considered debt for financial reporting purposes?

A) Preferred shares
B) Common shares
C) Callable convertible preferred stock
D) Mandatory convertible preferred stock

Question 32

Which of the following is not considered a perpetual security?

A) Common shares
B) Perpetual bond
C) Straight preferred shares
D) Mandatory convertible preferred stock

Question 33

Which of the following statements is incorrect?

A) Mandatory redeemable preferred stock should be valued as a perpetual security.
B) The trigger on the repurchase of mandatory redeemable preferred stock by the issuer is sometimes a specific date.
C) The trigger on the repurchase of mandatory redeemable preferred stock by the issuer is sometimes an event like a merger.
D) Financial institutions have increasingly used mandatory redeemable preferred stock because it is considered equity capital for regulatory purposes.

Question 34

Which type of preferred stock trades close to its par value?

A) Straight preferred stock
B) Participating preferred stock
C) Adjustable rate preferred stock (ARPS)
D) Mandatory redeemable preferred stock
E) Preferred stock with a cumulative provision

Question 35

Which of the following dividend types on preferred stock is a fixed rate plus a share of income?

A) Fixed
B) Floating
C) Cumulative
D) Participating
E) Adjustable rate

Question 36

If the floor rate is 2.5 percent and dividends in the adjustable rate preferred rate stock are LIBOR plus 50bp, the dividend rate when the LIBOR is 3 percent is closest to:

A) 2.5 percent.
B) 3.0 percent.
C) 3.5 percent.
D) 6.5 percent.
E) 8.0 percent.

Question 37

If the floor rate is 2.5 percent and dividends in the adjustable rate preferred rate stock are LIBOR plus 50bp, the dividend rate when the LIBOR is 1.75 percent is closest to:

A) 2.5 percent.
B) 3.0 percent.
C) 3.5 percent.
D) 6.5 percent.
E) 8.0 percent.

Question 38

Suppose a preferred stock convertible into 5 shares of common stock is currently trading at $100 a share. If the common stock is trading at $18 per share, the conversion premium is closest to:

A) $0
B) $10
C) $18
D) $20

Question 39

Suppose a preferred stock convertible into 6 shares of common stock is currently trading at $120 a share. If the common stock is trading at $20 per share, the conversion premium is closest to:

A) $0
B) $10
C) $18
D) $20

Question 40

The yield that investors require on callable preferred stock is most likely:

A) less than that of similar dividend-rate non-callable preferred stock.
B) the same as similar dividend rate non-callable preferred stock.
C) greater than that of similar dividend-rate non-callable preferred stock.

Question 41

The yield that investors require on convertible preferred stock is most likely:

A) less than that of similar dividend-rate non-convertible preferred stock.
B) the same as similar dividend rate non-convertible preferred stock.
C) greater than that of similar dividend-rate non-convertible preferred stock.

Question 42

If a gas well driller wants to issue a bond whose interest or principal is tied to the price of natural gas, this would best be described as a(n):

A) income bond.
B) cash flow bond.
C) commodity bond.
D) adjustable rate convertible subordinated security.

Question 43

A security that has fixed principal and maturity, and interest that normally comprises a fixed interest rate and some function of the dividend paid in the previous six months is best described as a(n):

A) income bond.
B) cash flow bond.
C) commodity bond.
D) adjustable rate convertible subordinated security.

Question 44

A warrant that is issued but not attached to another security is best described as:

A) single.
B) naked.
C) unattached.
D) warrant-less.

Question 45

Which of the following statements is not true regarding warrants?

A) Often granted along with another security
B) Carry long maturities, which makes them valuable
C) Not as valuable when the underlying asset is more volatile
D) Issued by companies to raise capital and when they are exercised, more shares are created
E) Provides the investor with the option to convert or exchange the warrant into another security

Question 46

A warrant is most similar to a:

A) stock option.
B) Treasury stock.
C) convertible security.
D) share of common stock.

Question 47

An ownership interest in an underlying business entity is an equity security.

Question 48

Accumulated comprehensive income or loss is the same thing as accumulated earnings.

Question 49

Treasury stock is considered outstanding stock.

Question 50

Market capitalization is another name for "book value of equity".

Question 51

Some or all of the interest received by a corporation from another corporation is not taxed.

Question 52

The most common shareholders can lose is their investment, yet their upside potential is unlimited.

Question 53

Corporations can have one class of stock that is publicly traded and another class of stock that is owned by a small group.

Question 54

The rules of the governance of the corporation that are filed with the state of incorporation are the articles of incorporation.

Question 55

If a company has more than one class of stock, the "A" shares will always carry more rights than the shares designated "B" shares.

Question 56

Common shares that have no voting rights are referred to as Class C shares.

Question 57

Straight preferred shares are valued as a perpetuity because they never mature.

Question 58

When a financial institution issues debt through a trust preferred security it counts for regulatory purposes as equity capital.

Question 59

A basic difference between common stock and preferred stock is that common stock has a fixed dividend attached.

Question 60

Floating rate dividends tied to prime, Libor, or some other base rate are generally used in shorter term preferred shares.

Question 61

A cumulative provision added to preferred stock protects preferred shareholders, who do not carry the right to vote.

Question 62

Participating preferred stock is used in some venture capital financing of start-ups.

Question 63

Preferred stock that can be exchanged for a specified number of units of another security is best described as exchangeable preferred stock.

Question 64

The difference between the value of a convertible security and the market value of the security into which it is convertible is called the conversion ratio.

Question 65

Preferred stock that must be converted to common shares at or before a specified date is best described as mandatory convertible preferred stock.

Question 66

Some preferred stock is considered a liability for accounting purposes, whereas other preferred stock is considered equity.

Question 67

Warrants that are issued without being attached to another security issue of the issuer are best described as naked warrants.

Question 68

XYZ Company issues warrants that are not attached to another security issue. These warrants of XYZ Company would best be described as detachable warrants.

Question 69

Income stock is a debt obligation issued after a reorganization with the interest tied to some cash flow level for the company and with quite long maturity dates.

Question 70

Cash flow bonds and income bonds are mainly used following reorganization.

Question 71

Preferred stock can best be described as a hybrid security.

Question 72

Consider the following from the Company XYZs Statement of Equity:
What is the preferred equity for Company A?

Question 73

Consider the following from the Company XYZs Statement of Equity:
What is the common equity for Company XYZ?

Question 74

Consider the following from the Company XYZs Statement of Equity:
What is the amount of total shareholders' equity for Company XYZ?

Question 75

Generic Company has issued $100 par callable convertible preferred shares in which each share can be converted into 4 shares of Generic Company common stock. The price of Generic Company's common stock is $20 per share. The price of Generic Company's preferred stock is $95. Generic Company's preferred stock is callable at $110 per share. What is the conversion ratio of Generic Company's preferred stock?

Question 76

Generic Company has issued $100 par callable convertible preferred shares in which each share can be converted into 4 shares of Generic Company common stock. The price of Generic Company's common stock is $20 per share. The price of Generic Company's preferred stock is $95. Generic Company's preferred stock is callable at $110 per share. If Generic Company is intending to call the preferred stock, should the investor accept the call price or should the investor convert the preferred shares into common shares?

Question 77

Generic Company has issued $100 par callable convertible preferred shares in which each share can be converted into 4 shares of Generic Company common stock. The price of Generic Company's common stock is $20 per share. The price of Generic Company's preferred stock is $95. Generic Company's preferred stock is callable at $110 per share. What is the conversion premium on Generic Company's preferred stock?

Question 78

Seagull Company has issued $100 par callable convertible preferred shares in which each share can be converted into 5 shares of Seagull Company common stock. The price of Seagull Company's common stock is $25 per share. The price of Seagull Company's preferred stock is $135. Seagull Company's preferred stock is callable at $110 per share. What is the conversion ratio of Seagull Company's preferred stock?

Question 79

Seagull Company has issued $100 par callable convertible preferred shares in which each share can be converted into 5 shares of Seagull Company common stock. The price of Seagull Company's common stock is $25 per share. The price of Seagull Company's preferred stock is $135. Seagull Company's preferred stock is callable at $110 per share. If Seagull Company is intending to call the preferred stock, should the investor accept the call price or should the investor convert the preferred shares into common shares?

Question 80

Seagull Company has issued $100 par callable convertible preferred shares in which each share can be converted into 5 shares of Seagull Company common stock. The price of Seagull Company's common stock is $25 per share. The price of Seagull Company's preferred stock is $135. Seagull Company's preferred stock is callable at $110 per share. What is the conversion premium on Seagull Company's preferred stock?