Question 1

The cost of a firm borrowing money is called the
A) interest rate.
B) dividend payment.
C) prime charge.
D) opportunity charge.

Accepted Answer

The cost of borrowing money is typically in the form of interest paid to lenders. Therefore, the correct choice is A) interest rate. The other choices (B) dividend payment, (C) prime charge, and (D) opportunity charge are not directly related to the cost of borrowing money.

Question 2

Iron Age Metalworks, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent
A) a part of the firm's profit distributed to stockholders.
B) the increase in market share the company has earned.
C) current value of the firm's stock holdings.
D) income that is sheltered from taxes.

Accepted Answer

A dividend is a part of the firm's profits that is distributed to shareholders.

Question 3

The corporate certificate issued to an investor that has loaned money to the corporation or government is called a
A) common stock.
B) preferred stock.
C) bond.
D) debt document.

Accepted Answer

A corporate certificate issued to an investor that has loaned money to the corporation or government is called a bond. Common stock represents ownership in the company, while preferred stock represents a hybrid of debt and equity. "Debt document" is not a commonly used term in finance.

Question 4

Greg purchased 2,000 shares of common stock of the Rite Track Corporation last year. He learned several months later that the stock does not pay a dividend. Greg should proceed to
A) hire an attorney and file a lawsuit.
B) hire an attorney and go after the registered representative that brokered the trade.
C) do the proper research before he invests.
D) immediately proceed to sell the shares.

Accepted Answer

The investor bought several shares of what is probably a growth stock. Prior to investing, it is important to research and determine a historical view of the stock of interest. Many stocks are only purchased for growth, while others are purchased for growth and income.

Question 5

Issuing ________ increases a firm's debt and may adversely affect the financial community's perception of the firm.
A) common stock
B) bonds
C) preferred stock
D) retained earnings

Accepted Answer

Issuing bonds increases a firm's debt because bonds are a form of long-term debt financing. This increase in debt may cause the financial community to view the firm as riskier since the firm will have to make interest payments on the bonds and eventually repay the principal. Common stock and retained earnings do not increase a firm's debt, and preferred stock is a type of equity financing that does not increase debt but may still affect the perception of the financial community depending on the terms of the preferred stock issuance.

Question 6

After many years as a privately held corporation, Greeley Industries decided to offer stock to the general public. Greeley may discover that stockholders
A) expect to be repaid at a future date.
B) can legally demand dividend payments if the corporation maintains profitability.
C) adversely affect the company's debt level.
D) can exercise a significant impact on company management and policies.

Accepted Answer

As owners, stockholders vote for the board of directors. Changes in the makeup of the board of directors can result in changes in top management and corporate direction.

Question 7

A share of preferred stock for Marshall Manufacturing currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal
A) $800
B) $8.00
C) $2,000
D) $4,000

Accepted Answer

Par value is the basis for the dividend the firm is willing to pay to preferred stockholders. In this case, 8% of $100 is an $8 dividend. The shareholder owns 500 shares. Her total annual dividend = $4,000.

Question 8

Hallie owns 20% of the common stock of the Bean Brothers Coffee Company. The company announced plans to offer an additional 10,000 shares of common stock for sale. If Hallie exercises her preemptive rights, Bean Brothers must offer her the opportunity to purchase
A) 8,000 shares.
B) 2,000 shares.
C) as many of the new shares as the investor is willing and able to buy.
D) 20% of the outstanding preferred stock.

Accepted Answer

Preemptive rights give existing stockholders the opportunity to maintain their proportional share of ownership in the company. If the investor currently owns 20%, she must be offered the opportunity to buy 20% of the new issue (10,000 shares x 20% = 2,000 shares).

Question 9

The disadvantages of issuing stock to obtain long-term financing include
A) the legal obligation to pay dividends if the company is profitable.
B) the funds contributed by stockholders must be repaid from after-tax profits.
C) a reduction in the market value of the firm's products.
D) a possible change in management and policies in the company.

Accepted Answer

As owners, stockholders vote for the board of directors. Changes in the makeup of the board of directors can result in changes in top management and corporate direction.

Question 10

When Ira purchased 500 shares of preferred stock in the Fairlawn Corporation, his certificate indicated the stock had a par value of $50 per share. This means that Ira
A) will never get less than $50 per share when selling his stock.
B) has shares that are currently worth $50 per share.
C) may receive dividends based on this value per share.
D) must receive a $5 dividend each and every year.

Accepted Answer

Par value is an arbitrary value used for calculating preferred stock dividends.

Question 11

Juanita owns stock in Elite Technologies. Her stock provides a priority claim on dividend payments and on the firm's assets in the event of liquidation. However, her ________ stock ownership does not offer her voting rights.
A) common
B) preferred
C) superior
D) callable

Accepted Answer

Preferred stock gives its owners preference in the payment of dividends and an earlier claim on assets if the company is liquidated. However, preferred stock normally does not include voting rights in the firm.

Question 12

Another name for the fixed rate of interest attached to a bond is the
A) yield to maturity.
B) dividend.
C) coupon rate.
D) security rate.

Accepted Answer

The fixed rate of interest attached to a bond is known as the coupon rate.

Question 13

Dividends on preferred stock are
A) paid after common stockholders receive their dividends.
B) guaranteed, except in the event of bankruptcy.
C) normally fixed, if and when dividends are paid.
D) always greater than dividends on common stock.

Accepted Answer

Preferred stockholders generally receive a fixed dividend, often expressed as a percentage of the stock's par value.

Question 14

Maggie owns 10% or 50,000 common shares of a small biotech company. Although she has enjoyed a lot of control, Maggie realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Unless she and others exercise preemptive rights,
A) the company will surely begin to pay dividends.
B) the new issue will dilute her ownership.
C) the new issue will decrease the market price of the stock.
D) The new issue will be traded on the secondary market.

Accepted Answer

When company boards of directors vote to issue additional stock for public sale, the disadvantage is that there is dilution of ownership. Owners usually have one vote per share of ownership.

Question 15

Which of the following accurately describes an advantage of selling bonds to raise long-term capital?
A) Interest is a legal obligation.
B) Face value must be repaid.
C) Bondholders have voting rights.
D) Interest is a tax-deductible expense.

Accepted Answer

One advantage of selling bonds to raise long-term capital is that interest on the bonds is a tax-deductible expense, meaning it can lower a company's tax burden.

Question 16

Jacob impresses his friends by stating that he just cast four votes in the election of the board of directors of Epic Electronics, indicating that Jacob owns ________ stock in Epic Electronics.
A) preferred
B) cumulative preferred
C) registered
D) common

Accepted Answer

Common stock represents ownership privileges that include the right to vote to elect the board of directors.

Question 17

A bond's face value is the same as its
A) risk rating.
B) principal.
C) coupon value.
D) yield.

Accepted Answer

Face value refers to the principal amount that the bond issuer will pay at maturity, so it is the same as the bond's principal. It is not related to the bond's risk rating, coupon value, or yield.

Question 18

Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders?
A) call provision
B) cumulative preferred
C) participating preferred
D) convertible preferred

Accepted Answer

Cumulative preferred stock guarantees an investor that if one or more dividend payments are not paid, the missed dividends will be accumulated. All the dividends, including past dividends, must be paid in full before any common stock dividends can be distributed.

Question 19

Government bonds can vary in denomination, but most corporate bonds are issued in
A) discounted denominations.
B) $1,000 denominations.
C) $100 denominations.
D) $5,000 denominations.

Accepted Answer

Most corporate bonds are issued in $1,000 denominations. This is the standard size for trading in the secondary market and makes it easier for investors to buy and sell bonds.

Question 20

Issuing bonds to obtain long-term funds legally compels a firm to pay regular ________ payments and repay the ________ at the maturity date.
A) dividend; par value
B) interest; bond premium
C) dividend; maturity value
D) interest; principal

Accepted Answer

When a firm issues bonds, it is legally required to make regular interest payments to bondholders and repay the principal (or face value) of the bonds at the maturity date. Therefore, the best choice is D - interest payments and principal repayment. Choices A and C are incorrect because they mention "dividend" payments, which are not applicable to bonds. Choice B is incorrect because bond premium refers to a situation where the market price of the bond is higher than its face value, and it is not a mandatory payment that a firm has to make.

Quiz 19: Using Securities Markets for Financing and Investing Opportunities

The cost of a firm borrowing money is called the

Iron Age Metalworks, known for its very generous dividend policy, easily attracts investors. These dividend payments basically represent

The corporate certificate issued to an investor that has loaned money to the corporation or government is called a

Greg purchased 2,000 shares of common stock of the Rite Track Corporation last year. He learned several months later that the stock does not pay a dividend. Greg should proceed to

Issuing ________ increases a firm's debt and may adversely affect the financial community's perception of the firm.

After many years as a privately held corporation, Greeley Industries decided to offer stock to the general public. Greeley may discover that stockholders

A share of preferred stock for Marshall Manufacturing currently sells for $120. It offers the investor a dividend rate of 8%, on a par value of $100. If the investor owns 500 shares, her total annual dividend will equal

Hallie owns 20% of the common stock of the Bean Brothers Coffee Company. The company announced plans to offer an additional 10,000 shares of common stock for sale. If Hallie exercises her preemptive rights, Bean Brothers must offer her the opportunity to purchase

The disadvantages of issuing stock to obtain long-term financing include

When Ira purchased 500 shares of preferred stock in the Fairlawn Corporation, his certificate indicated the stock had a par value of $50 per share. This means that Ira

Juanita owns stock in Elite Technologies. Her stock provides a priority claim on dividend payments and on the firm's assets in the event of liquidation. However, her ________ stock ownership does not offer her voting rights.

Another name for the fixed rate of interest attached to a bond is the

Dividends on preferred stock are

Maggie owns 10% or 50,000 common shares of a small biotech company. Although she has enjoyed a lot of control, Maggie realizes that in order for the firm to acquire the funds to grow in a recessionary economy, it will need to issue more stock. Unless she and others exercise preemptive rights,

Which of the following accurately describes an advantage of selling bonds to raise long-term capital?

Jacob impresses his friends by stating that he just cast four votes in the election of the board of directors of Epic Electronics, indicating that Jacob owns ________ stock in Epic Electronics.

A bond's face value is the same as its

Which of the following securities guarantees preferred stockholders payment of missed dividends before any dividends are paid to common stockholders?

Government bonds can vary in denomination, but most corporate bonds are issued in

Issuing bonds to obtain long-term funds legally compels a firm to pay regular payments and repay the at the maturity date.