Chapter 11 Part 1

Question 1

private (closed) corporations

Answer 1

a limited group of people often owns all the stock, as well as serving as tbe corporation’s directors and managers. no public market for the company’s stock

Question 2

Shareholders are responsible for

Answer 2

electing a board of directors whose duty is to oversee the operations of the company. The board, in turn, appoints the company’s senior managers who manage the company

Question 3

inside directors

Answer 3

senior executives, such as the president, also serve on the board of directors

Question 4

Outside directors

Answer 4

directors who are not otherwise affiliated with the corporation

Question 5

There are two basic methods used by corporations to raise money

Answer 5

debt financing (loans) and equity financing (stock ownership)

Question 6

A company that issues stock is using

Answer 6

equity financing to raise capital

Question 7

The total amount of stock that a corporation may issue is

Answer 7

authorized in its corporate charter, which is its governing docurnent. the company may not issue more stock than is authorized without the approval of the majority of the stockholders

Question 8

The rights of shareholders are specified in the corporation’s

Answer 8

charter and bylaws

Question 9

The shareholder has the right to receive

Answer 9

“one or more certificates as proof of
ownership. the certificate states the name or the corporation, the owner’s name, and the number of shares the stockholder owns. It also shows the names of the transfer agent and registrar and must he signed by an authorized corporate officer”

Question 10

The transfer agent keeps

Answer 10

a list of all registered stockholders and is also responsible for canceling old stock certificates and issuing new ones when the shares arc transferred

Question 11

The registrar

Answer 11

makes certain that the company does not issue more shares than its charter authorizes

Question 12

The majority of clients choose to have their securities held in

Answer 12

street name at their brokerage firm. In a modern trading environment, these positions are adjusted electronically through the Depository Trust & Clearing Corporation (DTCC)

Question 13

Stockholders have the right to

Answer 13

transfer shares freely. They may sell them, give them away, or bequeath the shares to heirs. This right may be limited in the case of stockholders who are also employees of the company and acquired stock directly from the company as part of their compensation

Question 14

Stockholders have the right to

Answer 14

inspect certain books and records of the company, including the stockholders’ list and the minutes of stockholders’ meetings

Question 15

basic unit of corporate ownership

Answer 15

Common stock. lt is the most widely issued and the first type of stock that a corporation issues. For bookkeeping purposes, common stock is usually issued with a par value that is a nominal amount used for the company’s financial statement. There is no relationship between the par value of an equity security and its market value

Question 16

Only common stockholders have

Answer 16

voting rights

Question 17

In statutory voting, shareholders determine the number of votes they have by

Answer 17

multiplying the number of shares they own by the number of directors being elected. However, the maximum number of votes they may cast for each director is limited to the number of actual shares they own.

Question 18

In cumulative voting, shareholders determine the number of votes in the same way as statutory and may cast

Answer 18

all the votes any way they want. They may cast all their votes for one individual director or divide them among various directors

Question 19

Common shareholders may also have

Answer 19

preemptive rights. This means that if the corporation issues additional stock, the current shareholders have the right to additional shares before they are offered to the public. This way, the present shareholders can maintain their proportionate ownership interest in the company

Question 20

rights offering

Answer 20

The process of offering preemptive rights lo common stockholders is called a rights offering. Each common stockholder receives one right for each share owned. The number of rights needed to buy one share of the new stock, the purchase price, and the period for exercising the rights vary. Usually the offer is good for a limited period (less than two months) and the purchase price (subscription price) is below the current market value of the stock