Corporate Finance, 12e (Ross)
1) Which group has the ultimate control over a corporation?
A) Bondholders
B) Classified board
C) Shareholders
D) Directors
E) Chief executive officer
2) A classified board is one which has:
A) representation from various classes of stock.
B) terms that expire at different times.
C) both employee and non-employee directors.
D) directors elected solely by one class of shareholders.
E) directors that have been assigned differing numbers of votes per seat.
3) Preferred stock dividends:
A) become a debt of the firm if unpaid.
B) can be deferred indefinitely.
C) are only paid if common stock dividends are also paid.
D) have priority over debt interest payments but not common stock dividends.
E) are a tax-deductible business expense.
4) Firms may prefer to issue cumulative preferred stock rather than debt for which reason?
A) If there is no current taxable income, preferred stock dividends are automatically voided.
B) Preferred stock has no voting rights but debt does.
C) Preferred dividends provide a tax shield but debt does not.
D) Corporate investors can receive a tax break on dividends.
E) Dividend payments are tax deductible, interest on debt is not.
5) Which one of the following statements about preferred stock is true?
A) Unlike dividends paid on common stock, dividends paid on preferred stock are a tax-
deductible expense.
B) Dividends on preferred stock payable during the next twelve months are considered to be a
corporate liability.
C) If preferred dividends are non-cumulative, then preferred dividends not paid in a particular
year will be carried forward to the next year.
D) There is no significant difference in the voting rights granted to preferred and common
shareholders.
E) Preferred stock usually has a stated liquidating value of $100 per share.
6) A grant of authority allowing someone else to vote shares of stock that you own is called a:
A) power-of-share authorization.
B) proxy.
C) share authority grant (SAG).
D) restricted conveyance.
E) general right of execution.
7) Not paying dividends on a cumulative preferred issue may result in:
A) preferred dividend arrearages that can be eliminated only after all common dividends are
paid.
B) increased taxes based on the amount of the dividend arrearage.
C) the permanent forfeiture of all unpaid past dividends but the resumption of future dividends.
D) the issuer being forced into repaying all preferred shareholders the stated value of their
shares.
E) voting rights being granted to preferred shareholders.
8) ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive from this
situation?
A) ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income.
B) ABC benefits because it is able to treat any XYZ dividends it receives as interest income.
C) Fifty percent of the dividends paid by XYZ to ABC is exempt from income taxes.
D) ABC can exclude 30 percent of any XYZ dividends received from its taxable income.
E) All dividend income ABC receives from XYZ is tax-exempt.
9) There are three directors’ seats up for election. If you own 1,000 shares of stock and have been
granted a total of 3,000 votes to cast in a single election, then the firm uses the voting procedure
referred to as:
A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
E) market share voting.
10) There are three directors’ seats up for election. If you own 1,000 shares of stock and you can
cast 1,000 votes in each of the three elections, then the firm uses the voting procedure referred to
as:
A) cumulative voting.
B) absolute priority voting.
C) sequential voting.
D) straight voting.
E) market share voting.
11) If a group other than current management solicits the authority to vote shares as part of their
effort to replace the current management team, a ________ is said to occur.
A) proxy fight
B) stockholder derivative action
C) tender offer
D) vote of confidence
E) seniority turnover
12) When shareholders are granted preemptive rights, they obtain the right:
A) to elect members to the board of directors.
B) to share proportionally in regular and liquidating dividends.
C) of first refusal for their proportionate percentage of new shares offered.
D) to receive dividends prior to any preferred shareholders.
E) to resell their shares to the issuer at any time at a predetermined price.
13) Different classes of stock usually are issued to:
A) allow a certain group to maintain ownership control while reducing that group’s equity
position.
B) reduce the firm’s dividend obligation.
C) fool investors.
D) extract perquisites from one class of shareholders without the other class of shareholders
knowing.
E) distinguish the time periods in which the various shares were issued.
14) Assuming control of a corporation would be hardest to obtain if the firm uses which type of
voting?
A) Cumulative voting with annual elections for each seat
B) Cumulative voting with an annual board
C) Straight voting with a staggered board
D) Cumulative voting with a staggered board
E) Straight voting with annual elections for each seat
15) Which one of these is not a right generally granted to shareholders?
A) Right to elect individuals to the board of directors
B) Right to purchase shares of any new stock issue
C) Right to receive proportional dividends
D) Right to vote to approve or reject a merger offer
E) First right to liquidation proceeds
16) Which one of the following statements is true?
A) Bondholders are generally granted voting rights equal to those of common shareholders.
B) Payments of both interest and dividends are tax-deductible as business expenses.
C) Unpaid common stock dividends can force a firm into liquidation.
D) Debt increases the possibility of financial distress.
E) Debt holders have a residual claim on a firm’s assets.
17) Unsecured corporate debt is commonly referred to as:
A) an indenture.
B) a debenture.
C) deferred debt.
D) protected debt.
E) collateralized debt.
18) Bonds that grant the issuer the right to extinguish the debt prior to maturity are referred to as
which type of bond?
A) Put bond
B) Debenture
C) Callable bond
D) Subordinated bond
E) Covenant bond
19) The written agreement between a corporation and its bondholders is called the:
A) collateral agreement.
B) note.
C) indenture.
D) conveyance.
E) legal understanding.
20) Ideally, corporations try to create securities that have the tax benefits:
A) of equity but the bankruptcy benefits of debt.
B) and bankruptcy benefits of debt.
C) and bankruptcy benefits of equity.
D) of debt and the equity benefits of dividends.
E) of debt but the bankruptcy benefits of equity.
21) If an issuer retires a debt issue before maturity, the specific amount paid to do so is called
the:
A) amortized payoff.
B) call price.
C) sinking fund amount.
D) the discount.
E) par or face amount.
22) If a debt is subordinated, it:
A) has a higher priority status than secured creditors.
B) is secondary to equity.
C) must give preference to the secured creditors in the event of default.
D) has been issued because the company is in default.
E) is treated as an equity security.
23) The written agreement between a corporation and its bondholders might contain a
prohibition against paying dividends in excess of current earnings. This prohibition is an
example of a(n):
A) maintenance of security provision.
B) collateral restriction.
C) affirmative indenture.
D) negative covenant.
E) put provision.
24) Which one of these is not included in the indenture?
A) Bond seniority
B) Registered owner
C) Protective covenant
D) Call provision
E) Repayment arrangements
25) If a bond issue is callable, the call price generally is:
A) less than par value.
B) variable based on the market rate of interest.
C) equal to par value.
D) constant over the life of the debt.
E) set so it decreases as the bond approaches maturity.
26) Historically in the U.S., corporate bonds have generally been issued with a par value of:
A) $100.
B) $5,000.
C) $500.
D) $10,000.
E) $1,000.
27) A blanket mortgage is securitized by:
A) the sinking fund.
B) the borrower’s inventory.
C) all the borrower’s real property.
D) the good faith and credit of the borrower.
E) the borrower’s inventories and accounts receivables.
28) Sinking fund arrangements are least apt to contain which one of these requirements?
A) A deferred provision for the first few years
B) A one-time repayment of the entire principal and interest at maturity
C) A balloon payment
D) Equal payments of principal over the life of the bond
E) Sufficient payments over the bonds’ life to retire the entire bond issue
29) If a bond has a make-whole call provision, the:
A) call premium can be either positive or negative.
B) bond’s market price will always equal its face value.
C) bondholder will receive the face value amount plus interest if the bond is called.
D) bondholder will receive the face value amount minus any interest paid to date if the bond is
called.
E) call price will increase as interest rates decrease.
30) Which one of these is a positive covenant?
A) The firm must maintain a current ratio of 1.2 or better.
B) The firm will not issue any debt with higher seniority.
C) The firm cannot be acquired in a friendly takeover.
D) No dividend increases will be allowed.
E) The market debt-equity ratio cannot exceed .60.
31) Which one of these applies to floating-rate bonds?
A) Bondholders can generally redeem their bonds at par at any time.
B) Coupon payments are variable while the par value is fixed.
C) Interest adjustments are accrued and paid on the maturity date.
D) Coupon payments are fixed but the par value is variable.
E) Bondholders frequently are granted a put provision at the current market price.