Question 1

Which of the following is NOT a primary investor in preferred stock?

Accepted Answer

Commercial banks are not typically primary investors in preferred stock, as they focus more on loans and other types of investments.

Question 2

A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 21%, would receive an after-tax preferred yield of approximately ________. Assume the tax rate on dividends is 15%.

Accepted Answer

After-tax preferred yield = Before-tax preferred stock yield × [1 − (Tax rate) (Taxable amount of dividends) = 0.085 × [1 − (0.15) (0.30)] = 8.12%

Question 3

Common stockholders rights include all of the following EXCEPT:

Accepted Answer

Common stockholders do not have a fixed dividend yield. They may receive dividends, but the amount is not predetermined and can fluctuate based on the company's performance. Therefore, choice A is the correct answer. The other options are all common rights given to stockholders - voting rights, first option to purchase new shares, and residual claim to income.

Question 4

An individual investing in preferred stock receiving a before-tax preferred yield of 6.75% and having a tax rate of 25% would receive an after-tax preferred yield of ________. Assume the tax rate on dividends is 15%.

Accepted Answer

After-tax preferred yield = Before-tax preferred stock yield × (1 − Tax rate) = 0.0675 × (1 − 0.15) = 5.7%

Question 5

Which of the following statements is false with respect to the use of rights in financing?

Accepted Answer

Shares in rights offerings are typically priced at a discount to the current market price to encourage existing shareholders to buy more shares, not at a premium.

Quiz 17: Common and Preferred Stock Financing

Which of the following is NOT a primary investor in preferred stock?

A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and having a corporate tax rate of 21%, would receive an after-tax preferred yield of approximately ________. Assume the tax rate on dividends is 15%.

Common stockholders rights include all of the following EXCEPT:

An individual investing in preferred stock receiving a before-tax preferred yield of 6.75% and having a tax rate of 25% would receive an after-tax preferred yield of ________. Assume the tax rate on dividends is 15%.

Which of the following statements is false with respect to the use of rights in financing?