Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19–81
268. Stock certificates represent evidence of ownership in an organization. A stock
certificate contains which of the following?
A. Current market value of the stock
B. The total number of shares issued by the company
C. The type of stock the investor is buying
D. The stock symbol and trading exchange of the company
Feedback: A stock certificate will identify the name of the company, the number of
shares it represents, and the type of stock it is.
269. Dividends are paid out of a corporation’s:
A. Profit, before taxes.
B. Profit, after taxes.
C. Sales revenue.
D. Capital contributed by bondholders.
Feedback: Dividends are paid out of profit after taxes and are not tax deductible.
270.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19–82
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.
Feedback: Preferred stockholders generally receive a fixed dividend, often expressed as
a percent of the stock’s par value.
271. 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
Feedback: 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.
272.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
19–83
Mark impresses his friends by stating that he just cast four votes in the election of
the board of directors of Microsoft, indicating that Mark owns __________ stock in
Microsoft.
A. preferred
B. cumulative preferred
C. registered
D. common
Feedback: Common stock represents ownership privileges that include the right to vote
to elect the board of directors.
273. After many years as a privately held corporation, Connecticut Industries decided
to offer stock to the general public. Connecticut 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.
Feedback: 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.
274.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
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The disadvantages of selling 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.
Feedback: 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.
275. When Tong Su purchased 500 shares of preferred stock in the Vibrates
Corporation, his certificate indicated the stock had a par value of $50 per share.
This means that Tong Su:
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.
Feedback: Par value is an arbitrary value used for calculating preferred stock dividends.
276.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Georgia Corporation, 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.
Feedback: A dividend is a part of the firm’s profits that is distributed to shareholders.
277. Ellie owns stock in Rotary 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
Feedback: 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.
19–89
285. The cost of a firm borrowing money is called the:
A. interest rate.
B. dividend payment.
C. prime charge.
D. opportunity charge.
286. 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
287. A Bond’s face value is the same as its:
A. risk rating.
B. principal.
C. coupon value.
D. yield.
288.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Government bonds can vary in denomination, but most corporate bonds are issued
in ____________.
A. Discounted denominations
B. $1000 denominations
C. $100 denominations
D. $5,000 denominations
289. 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.
290. 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
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300. Which of these represents a special feature included with some bond issues?
A. No repayment of par value
B. No obligation to pay dividends
C. No increase in the firm’s debt level
D. Convertibility of a debt security (bond) into an equity security (stock)
Feedback: Convertible bondholders can choose to exchange their bonds for shares of
stock in the same company.
301. A convertible bond allows the bondholder to exchange the bond for:
A. preferred stock.
B. common stock.
C. collateral.
D. debt holder privileges.
Feedback: Convertible bonds allow the bondholder to convert the bond into shares of
common stock in the issuing company.
302.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Seattle Music, Inc. recently offered bonds for sale to the public. The unsecured
corporate bond paid interest of 9% to investors for the twenty-year life of the
bonds. Seattle Music is obligated to:
A. Represent each bondholder as an owner in the company.
B. Pay interest semi-annually.
C. Pay stockholders their dividends, before paying bondholders their interest.
D. Pay each owner their principal if and when they want to cash-in their
investment.
Feedback: Selling bonds to raise long-term capital obligates the organization to pay
interest payments throughout the life of the bond usually semi-annually.
303. As your elderly Uncle Bill approaches retirement, he asks for your advice for a
safe place to invest several thousand dollars. He wants to receive some kind of
payment each year for investing his money without a great deal of risk. You
explain:
A. Yankee bonds are certain not to default.
B. common stock always pays quarterly dividends.
C. junk bonds do not pay annual interest.
D. treasury and top-grade corporate bonds pay interest two times each year.
Feedback: The interest on most bonds is quoted as an annual rate, but it is usually issued
in two increments each year.
19–96
304. The ABC Corporation issues a $1,000 bond, with an interest rate of 10%, and a
maturity date of 2015. This creates a liability for the ABC Corporation to pay the
bondholder:
A. $100 interest per year and $1,000 in the year 2015.
B. 10% of the selling price of the bond.
C. an interest payment equal to the dividend payment distributed to the common
stockholders.
D. $1,100 annually until the year 2015.
Feedback: The bondholder will receive 10% of $1,000 per year. The bondholder will also
receive the face value of $1,000 on the maturity date in 2015.
305. Moody’s Investor Service currently rates the Sasha Deal Corporation bonds as a C
grade. This indicates that these bonds are:
A. of the highest quality with lowest default risk.
B. moderately speculative.
C. corporate bonds with variable interest rates.
D. the lowest quality and the highest risk.
Feedback: Figure 19.3 shows that Moody’s Investor Service rates bonds on a scale from
AAA (highest quality and lowest default risk) to C (lowest grade).
306.
Chapter 19 – Using Securities Markets for Financing and Investing Opportunities
Ebony Enterprises decides to pay off its bonds several years before the maturity
date. Apparently, the bonds ______________.
A. contain an early dismissal clause
B. have an early retirement option
C. are callable
D. have discount authorization
Feedback: When a bond is “callable”, it contains a special call provision that permits the
bond issuer to pay off the bond prior to its maturity date.
307. Wyoming Mining Corporation makes regular monetary deposits that will
accumulate and provide for an orderly retirement of their bonds when they come
due in 2015. Wyoming Mining appears to be utilizing a:
A. call provision.
B. sinking fund.
C. compensating balance system.
D. retirement escrow account.
Feedback: A sinking fund requires the issuer of a bond to regularly set aside funds in a
reserve account to provide for accumulated funds necessary to repay the principal of the
bond.
