Chapter 34. Financial Structure
1. Warrick makes a $10,000 investment in a debenture issued by F & M Company. Warrick is now a secured creditor
of F & M Company.
a. True
b. False
2. Dunbar Corp. is a debtor in relation to Martina, who is the holder of an income bond issued by Dunbar.
a. True
b. False
3. Once the amount of shares that a corporation is authorized to issue has been specified in the charter, it cannot be
changed, so the charter commonly specifies more shares than are to be issued initially.
a. True
b. False
4. Debentures are the same as indentures.
a. True
b. False
5. If no exemption is available, a corporation offering shares of stock for sale is subject to court injunction and civil
liability in damages to persons to whom securities are sold in violation of the regulatory statute, but there is no
potential criminal liability.
a. True
b. False
6. A bondholder generally takes less of a risk than a shareholder of a corporation.
a. True
b. False
7. A shareholder of one–third of all the stock in a corporation would be entitled to one-third of all corporate assets of an
ongoing company.
a. True
b. False
8. A company may not initially issue all the shares authorized by the corporate charter. It can hold back shares.
a. True
b. False
9. “Blue sky laws” are state laws that regulate corporate stock issuance and sale.
a. True
b. False
10. The federal government leaves corporate stock regulation to the states, since corporations are state-created entities.
a. True
b. False
11. If shares are issued with no par value, the entire price must be allocated to stated capital.
a. True
b. False
12. Treasury shares are shares that have been authorized but have not yet been issued.
a. True
b. False
13. Two principal sources for corporate financing are debt and equity investment securities.
a. True
b. False
14. An investor has the right to transfer investment securities by sale, but not by gift or pledge.
a. True
b. False
15. The difference between common and preferred stock is that the latter is a debt instrument, whereas the former
represents an equity interest in the company.
a. True
b. False
16. A secured bond is enforceable by a lien upon specific property rather than against the general assets of the
corporation.
a. True
b. False
17. If a “liquidation preference” is provided, preferred stock usually has priority over common stock.
a. True
b. False
18. Article 8 of the UCC contains rules applicable to transfers of investment securities.
a. True
b. False
19. Under the majority rule, an unsuspecting shareholder who receives an illegal dividend from a solvent corporation
cannot be compelled to refund the dividend.
a. True
b. False
20. Dividends paid in stock of the corporation have virtually the same legal significance as cash or property dividends.
a. True
b. False
21. The Revised Act does not consider a stock dividend issued by ZYX Corporation to its stockholders a distribution.
a. True
b. False
22. A stock split results in a larger proportion of corporate ownership by the shareholder.
a. True
b. False
23. Redemption of shares generally results in an increase of treasury stock.
a. True
b. False
24. Earned surplus would include undistributed net profits, income, gains and losses from the date of incorporation.
a. True
b. False
25. “Capital surplus” would be credited with the excess received over par value for par value shares issued by the
corporation.
a. True
b. False
26. The RMBCA has adopted a net assets test for the issuance of dividends.
a. True
b. False
27. The board of directors of Z & X Corporation declared cash dividends of $5 per share. If these dividends are not
paid, a shareholder can bring suit to require payment.
a. True
b. False
28. A director who is a member of the board that declares an illegal dividend is not personally liable to the company for
the amount that is illegal.
a. True
b. False
29. A corporate bond creates a debtor-creditor relationship between the corporation and the holder of the security.
a. True
b. False
30. Income bonds bear a fixed interest rate.
a. True
b. False
31. Preemptive rights are shareholders’ rights to purchase a proportionate part of a new issue of stock.
a. True
b. False
32. The board of directors may issue bonds without the authorization or consent of the shareholders.
a. True
b. False
33. The most restrictive test for the issuance of dividends by a corporation is the net assets test.
a. True
b. False
34. The earned surplus test does not permit capital surplus to be used for the payment of dividends.
a. True
b. False
35. Even if it has been lawfully and properly declared, a stock dividend may be revoked unless it has been actually
distributed.
a. True
b. False
36. The shareholders normally determine the price for which shares will be issued unless the charter permits the board
of directors to set the price.
a. True
b. False
37. In the majority of states, even non-voting shares may vote on fundamental changes that affect that class of shares as
a class.
a. True
b. False
38. The MBCA, RMBCA, and statutes of many states permit corporations to redeem both preferred and common
stock.
a. True
b. False
39. With respect to liability for improper dividends, a non-breaching director and an innocent shareholder are both
protected from liability due to their good faith.
a. True
b. False
40. Shareholders have residual authority over increases in the amount of authorized capital stock.
a. True
b. False
41. The Ajax Corporation issues bonds that pay a minimum of 6% interest but that can pay more if corporate earnings
reach certain specified levels. In lieu of payment under this bond, a holder may exchange it for stock of the
corporation. This bond would be a:
a. callable income bond.
b. convertible participating bond.
c. convertible unsecured bond.
d. convertible secured bond.
42. Which of the following is correct regarding a two-for–one stock split?
a. The purpose of the split may be to increase the number of potential stockholders.
b. The purpose of the split is to make a distribution to the stockholders.
c. After the split, each stockholder will have greater ownership interest in the corporation.
d. The value of each share of stock will increase as a result of the split.