Chapter 7 TB Flashcards
Unlike creditors, equity-holders are owners of the firm.
T or F?
TRUE
Unlike equity-holders, creditors are owners of the firm.
T or F?
FALSE
Unlike creditors, equity-holders are owners of the firm.
Holders of equity have claims on both income and assets that are secondary to the claims of creditors.
T or F?
TRUE
The tax deductibility of interest lowers the cost of debt financing.
T or F?
TRUE
Interest paid to bondholders is tax deductible.
T or F?
TRUE
Dividends paid to stockholders are tax deductible.
T or F?
FALSE
Which of the following is an advantage for a firm to issue common stock over long-term debt?
A) the cost of equity financing being less than the cost of debt financing
B) the primary claim of equityholders on income and assets in the event of liquidation
C) no maturity date on which the par value of the issue must be repaid
D) the tax deductibility of dividends which lowers the cost of equity financing
C
Which of the following is a difference between common stock and bonds?
A) Bondholders have a voice in management; common stockholders do not.
B) Bondholders have a senior claim on assets and income relative to stockholders.
C) Stocks have a stated maturity but bonds do not.
D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.
B
Holders of equity capital ________.
A) own the firm
B) receive interest payments
C) receive guaranteed income
D) have loaned money to the firm
A
Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________.
A) fixed dividend payments
B) greater returns from their investment than the return that bondholders expect
C) all profits to be paid out in dividends
D) warrants to be attached to the stock issue
B
If bankruptcy were to occur, ________ would have the first claim on assets.
A) preferred stockholders
B) unsecured creditors
C) equity stockholders
D) secured creditors
D
The market value of common stock is related to its par value because both are sensitive to the reactions of investors to new information.
T or F?
FALSE
Common stockholders are often referred to as residual claimants.
T or F?
TRUE
Common stock can be either privately owned by private investors or publicly owned by public investors.
T or F?
TRUE
The market value of common stock is completely unrelated to its par value.
T or F?
TRUE
The par value on a common stock is used as a basis for determining its fixed dividend.
T or F?
FALSE
The number of authorized shares of common stock is always greater than or equal to the number of outstanding shares of common stock.
T or F?
TRUE
The number of outstanding shares of common stock is always greater than or equal to the number of authorized shares of common stock.
T or F?
FALSE
Super-voting shares of common stock provide shareholders with more votes per share compared with ordinary shares of common stock.
T or F?
TRUE
Most investors pay taxes on dividends at the same rate at which their ordinary income is taxed.
T or F?
FALSE
Treasury stocks held within the corporation do not have voting rights but have a claim on assets in liquidation.
T or F?
FALSE
Regarding the tax treatment of payments to securities holders, it is true that ________.
A) interest and preferred stock dividends are not tax-deductible ,while common stock dividends are tax deductible
B) interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductible
C) common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductible
D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is usually tax-deductible
D
Which of the following is true of outstanding shares?
A) A firm cannot sell more shares than the outstanding shares mentioned in the charter.
B) Authorized shares become outstanding shares when they are issued or sold to investors.
C) Outstanding shares are indicated in a firm’s corporate charter.
D) Outstanding shares are the shares repurchased by the firm.
B
Shares of stock currently owned by a firm’s shareholders are called ________.
A) authorized shares
B) issued shares
C) outstanding shares
D) treasury shares
C
If a firm has class A and class B common stock outstanding, it usually means that ________.
A) each class receives a different dividend
B) the par value of each class is different
C) the dividend paid to one of the classes is tax deductible by the corporation
D) the classes have different voting rights
D
Common stockholders expect to earn a return by receiving ________.
A) semiannual interest
B) fixed periodic payments
C) dividends
D) annual interest
C
The purpose of nonvoting common stock is to ________.
A) limit the voting power of the management
B) allow the minority interest to elect one director
C) raise capital without giving up any voting control
D) give preference on distribution of earnings to those shareholders who own the stock
C
A proxy statement gives shareholders the right ________.
A) of one vote for each share owned
B) to give up their vote to another party
C) to maintain their proportionate ownership in the corporation when new common stock is issued
D) to sell their share of stock at a premium
B
A proxy battle is the attempt by ________.
A) the creditors of a bankrupt corporation to seize assets of the corporation
B) the management to dismiss the board of directors for their incapability to manage the operations
C) a nonmanagement group to unseat the existing management and gain control of the firm
D) the employees to form trade unions to influence decisions on behalf of members
C
The attempt by a nonmanagement group to gain control of the management of a firm by soliciting a sufficient number of proxy votes is called a ________.
A) hostile takeover
B) bankruptcy proceeding
C) proxy battle
D) management buyout
C
In a ________, new shares are sold to the existing shareholders.
A) private placement
B) public offering
C) rights offering
D) direct placement
C
Treasury stock refers to the ________.
A) sale of stock at a price greater than the par value
B) stock issued by the US government
C) repurchase of outstanding stock
D) authorization of additional shares of stock by the board of directors
C
Which of the following is true of the issuance of nonvoting common stock?
A) It is issued in the event of a hostile takeover to preserve the interests of existing owners.
B) It helps the corporation to raise capital through the sale of common stock, without giving up its voting control.
C) It helps the existing stockholders to automatically transfer their voting rights to new stockholders without any legal proceeding.
D) It tends to result in the dilution of voting rights of current stockholders.
B
Which of the following is true of par value of a common stock?
A) It is determined on the basis of the stock’s market value.
B) It is an arbitrary value established for legal purposes in a firm’s corporate charter.
C) It indicates the market value at which the stock was originally sold.
D) It allows stockholders to purchase additional shares at a price below the market price.
B
________ allows stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.
A) A rights offering
B) Treasury stock
C) Preemptive rights
D) Proxy statements
A
Which of the following is true of a common stock?
A) It gives voting rights which permit determination of the amount of dividend receivable.
B) It gives claims on income and assets which are superior to the claims of creditors of the firm.
C) Dividends on common stock are fully tax-deductible.
D) There is no fixed dividend payment obligation for the company.
D
Stock rights provide the stockholder with ________.
A) the right to purchase additional shares in direct proportion to their number of owned shares
B) the right to elect the board of directors
C) cumulative voting privileges over the preference stockholders
D) the opportunity to receive extraordinary earnings
A
The preemptive right gives shareholders the right ________.
A) to caste one vote for each share owned at the annual meeting of the company
B) to give up their vote to another party if they do not attend the annual meeting
C) to maintain their proportionate ownership in the corporation when new common stock is issued
D) to sell their share of stock at a premium in the event of liquidation
C
Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to payment of any interest to outstanding bonds.
T or F?
FALSE
In the case of liquidation, bondholders are paid before preferred stockholders, who in turn are paid before common stockholders.
T or F?
TRUE
In the case of liquidation, common stockholders are paid before preferred stockholders, who in turn are paid before bondholders.
T or F?
FALSE
Preferred stock has characteristics of debt since it provides a fixed periodic cash payment.
T or F?
TRUE
The amount of the claim of preferred stockholders in liquidation is normally equal to the market value of the preferred stock.
T or F?
FALSE
Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must be paid along with the current dividend prior to the payment of dividends to common stockholders.
T or F?
TRUE
Because preferred stock is a form of ownership and has no maturity date, its claims on income and assets are secondary to those of the firm’s creditors.
T or F?
TRUE
No-par preferred stock has no stated face value, but its annual dividend is stated as a percentage of the market value.
T or F?
FALSE
The market value of a preferred stock is not used to calculate dividend payments, but rather represents the value of the stock in the marketplace.
A preferred stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left—the residual—after all other claims on the firm’s income and assets have been satisfied.
T or F?
FALSE
An ordinary stockholder is sometimes referred to as a residual owner, since in essence he or she receives what is left—the residual—after all other claims on the firm’s income and assets have been satisfied.
A call feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.
T or F?
FALSE
A conversion feature is a feature that allows preferred stockholders to change each share into a stated number of shares of common stock.
Although preferred stock provides added financial leverage in much the same way as bonds, it differs from bonds in that the issuer can pass a dividend payment without suffering the consequences that result when an interest payment is missed on a bond.
T or F?
TRUE
Preferred stockholders are often referred to as residual claimants.
T or F?
FALSE
Common stockholders are often referred to as residual claimants.