Deck 14: Long-Term Financing: An Introduction

Question 1

Different classes of shares usually are issued to:

A)maintain ownership control by holding the class of equity with greater voting rights.
B)pay less in dividends between the classes of equity.
C)fool investors into thinking that equity is equity and there is no difference in control or value features.
D)extract perquisites without the other class of shareholders knowing.
E)None of the above.

Answer 1

maintain ownership control by holding the class of equity with greater voting rights.

Question 2

If a long-term debt instrument is perpetual,it is called a(n):

A)secured debt issue.
B)subordinated debt issue.
C)consol.
D)capital debt issue.
E)indenture.

Answer 2

consol.

Question 3

If cumulative voting is permitted:

A)the total number of votes a shareholder has is equal to the number of shares owned.
B)the total number of votes a shareholder has is equal to the number of shares owned times the average number of years the shareholder has owned the shares.
C)the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.
D)the total number of votes a shareholder has is equal to the number of shares times the number of board meetings the shareholder has attended.
E)None of the above.

Answer 3

the total number of votes a shareholder has can be calculated as the number of shares owned times the number of directors to be elected.

Question 4

The book value of the shareholders' ownership is represented by:

A)the sum of the par value of common stock,the capital surplus and the accumulated retained earnings.
B)the total assets minus the net worth.
C)the sum of the preference shares,debt and the capital surplus.
D)the sum of the total assets minus the current liabilities.
E)None of the above.

Question 5

If a group other than management solicits the authority to vote shares to replace management,a _____ is said to occur.

A)proxy fight
B)shareholder derivative action
C)tender offer
D)vote of confidence
E)None of the above.

Question 6

Shares of equity that have been repurchased by the corporation are called:

A)treasury stock.
B)undistributed capital stock.
C)retained equity.
D)capital surplus shares.
E)None of the above.

Question 7

Retained earnings are:

A)the amount of cash that the firm has saved up.
B)the difference between the net income earned and the dividends paid.
C)the difference between the market price of the equity and the book value.
D)the amount of shares repurchased.
E)None of the above.

Question 8

A grant of authority allowing someone else to vote shares of equity that you own is called:

A)a power-of-share authorization.
B)a proxy.
C)a share authority grant (SAG).
D)a restricted conveyance.
E)None of the above.

Question 9

The written agreement between a corporation and its bondholders is called:

A)the collateral agreement.
B)the deed.
C)the indenture.
D)the deed of conveyance.
E)None of the above.

Question 10

The dedicated capital of a corporation is determined by:

A)the sum of the capital in excess of par and the retained earnings.
B)the par value of preference shares.
C)the sum of the treasury stock and the preference shares.
D)the number of shares issued multiplied by the par value of each share.
E)the market price of company's debt.

Question 11

Shareholders usually have which of the following right(s)?

A)To elect board members,the authorizing of new shares and other matters of great importance to shareholders such as being acquired.
B)To share proportionally in regular and liquidating dividends.
C)To share proportionally in any new equity sold.
D)All of the above.
E)None of the above.

Question 12

Which of the following statements is false?

A)Creditors do not have voting power.
B)Payment on interest on debt in considered an expense,while payment of dividends is a return on capital.
C)Unpaid debt is a liability of the firm,and if not paid,can result in liquidation of the firm.Unpaid ordinary equity dividends cannot force liquidation.
D)One of the costs of issuing equity is the possibility of financial distress,while no financial distress is associated with debt.
E)None of the above.

Question 13

The market-to-book value ratio and the Tobin's Q ratio are both indicators of the success of a firm when:

A)their values are both greater than 0.
B)their values are both no less than 10.
C)their values are both less than 0.
D)their values are both less than 1.
E)their values are both greater than 1.

Question 14

There are 3 directors seats up for election.If you own 1,000 shares and you can cast 3,000 votes for a particular director,this is illustrative of:

A)cumulative voting.
B)absolute priority voting.
C)sequential voting.
D)straight voting.
E)None of the above.

Question 15

Debt that may be extinguished before maturity is referred to as:

A)sinking-fund debt.
B)debentures.
C)callable debt.
D)indenture debt.
E)None of the above.

Question 16

Paying off long-term debt by making installment payments is called:

A)foreclosing on the debt.
B)amortizing the debt.
C)funding the debt.
D)calling the debt.
E)None of the above.

Question 17

Capital surplus usually refers to:

A)the equity's par value.
B)last year's retained earnings.
C)book value per share.
D)the amount of directly contributed equity capital in excess of par value.
E)treasury stock.

Question 18

If you own 1,000 shares and you can cast only 1,000 votes for a particular director,then the equity features:

A)cumulative voting.
B)absolute priority voting.
C)sequential voting.
D)straight voting.
E)None of the above.

Question 19

A share certificate often has a stated value on it.This amount is the:

A)book value.
B)stated book value.
C)subordinated liquidation value.
D)par value.
E)None of the above.

Question 20

The amount of loan a person or firm borrows from a lender is the:

A)creditor.
B)indenture.
C)debenture.
D)principal.
E)amortization.

Question 21

If a debenture is subordinated,it:

A)has a higher priority status than specified creditors.
B)is secondary to equity.
C)must give preference to the specified creditor in the event of default.
D)has been issued because the company is in default.
E)None of the above

Question 22

Holden Bicycles has 1,000 shares outstanding each with a par value of £0.10 each.If they are sold to shareholders at £10 each,what would the additional paid in capital be?

A)£100
B)£900
C)£9,900
D)£10,000
E)£11,000

Question 23

The Lory Bookstore used internal financing as a source of long-term financing for 80% of its total needs in 2009.The company borrowed an additional 27% of its total needs in the long-term debt markets in 2009.What was Lory's net new share issues in that year?

A)-20%
B)-7%
C)7%
D)20%
E)27%

Question 24

Rockwell plc had net income of £150,000 for the year ending 2009.The company decided to payout 40% of earnings per share as a dividend.Rockwell has 120,000 shares issued and outstanding.What are the retained earnings for the 2009?

A)£ 40,000
B)£ 60,000
C)£ 90,000
D)£150,000
E)None of the above.

Question 25

Based on historical experience,which of the following best describes the "pecking order" of long-term financing strategy in Europe?

A)Long-term debt first,new ordinary equity,internal financing last.
B)Long-term debt first,internal financing,new ordinary equity last.
C)Internal financing first,new ordinary equity,long-term borrowing last.
D)Internal financing first,long-term borrowing,new ordinary equity last.
E)None of the above.

Question 26

The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings.This prohibition is an example of a(n):

A)maintenance of security provision.
B)collateral restriction.
C)affirmative indenture.
D)restrictive covenant.
E)None of the above.

Question 27

Information on shareholder's equity as currently shown on the books of the Eaton plc is given as:

Question 28

If a firm retires or extinguish a debt issue before maturity the specific amount they pay is:

A)the amortization amount.
B)the call price.
C)the sinking fund amount.
D)the spread premium.
E)None of the above.

Question 29

Financial deficits are created when:

A)profits and retained earnings are greater than the capital-spending requirement.
B)profits and retained earnings are less than the capital-spending requirement.
C)profits and retained earnings are equal to the capital-spending requirement.
D)All of the above.
E)None of the above.

Question 30

There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s.Some of this was due to the repurchasing of shares.The market value ratio of debt to debt and equity exhibited no upward trend.This can be explained by:

A)the change in the accounting rules of the period.
B)the difference between tax accounting and accounting for financial accounting purposes.
C)a large increase in the market value of equity that was greater than the increase in debt.
D)All of the above.
E)None of the above.

Question 31

Information on shareholder's equity as currently shown on the books of the Eaton plc is given as:

Question 32

Nelson Company had equity accounts in 2009 as follows: $\begin{array}{|l|l|}\hline\text { Ordinary Equity ( } £ 1 \text { Par Value }) & £ 120,000 \\\hline \text { Retained Earnings } & £ 32,000 \\\hline \text { Total Shareholder } s \text { Equity } & £ 152,000\\\hline\end{array}$ Projected income is £150,000 and the dividend per share to be paid immediately is 40%.What will the ending retained earnings account be?

A)£ 90,000
B)£ 92,000
C)£122,000
D)£210,000
E)£242,000

Question 33

Technically speaking,a long-term corporate debt offering that features a specific attachment to corporate property is generally called:

A)a debenture.
B)a bond.
C)a long-term liability.
D)a preferred liability.
E)None of the above.

Question 34

If a debt issue is callable,the call price is ____ par.

A)greater than
B)less than
C)equal to
D)unrelated to
E)It varies widely based on the risk of the firm.

Question 35

Corporate financial officers prefer to use book values when measuring debt ratios because:

A)book values are more stable than market values.
B)debt covenant restriction are usually expressed in book value terms.
C)rating agencies measure debt ratios in book values terms.
D)All of the above.
E)None of the above.