121. The type of corporate ownership that has first claim on profits and assets is called a
a. bondholder.
b. preferred stockholder.
c. creditor.
d. common stockholder.
e. board of directors.
122. What right do most common stockholders have that most preferred stockholders do not have?
a. First claim to company distributions
b. Voting rights
c. Ability to sell stock in the open market
d. Dividend guarantees
e. Authority over daily business decisions
123. A written order for a bank to pay a third party a stated amount of money on a specific date is referred to as a
a. letter of credit.
b. banker’s acceptance.
c. check.
d. line of credit.
e. dividend.
124. It is not unusual for companies to issue type(s) of common stock and type(s) of preferred stock.
a. one; one
b. two; one
c. one; many
d. many; one
e. zero; several
125. When would a company be likely to call its preferred stock?
a. If it decides it would rather have corporate bonds
b. When it needs additional long-term financing
c. As the preferred stock matures and must be redeemed
d. When the call premium becomes high enough to justify the call
e. When it can issue new common stock to replace the preferred stock
126. Retained earnings are
a. all the earnings of the corporation.
b. profits before taxes.
c. profits after taxes.
d. undistributed profits.
e. total owners’ equity.
127. Retained earnings are
a. the same as net profit.
b. interest earned on bond investments.
c. nontaxable income.
d. a form of equity financing.
e. the portion of the profit paid to stockholders.
128. Shawn starts a business called ValueCentral.com, the concept takes off, and the company has an IPO and goes
public. The company is growing very rapidly and trying to keep up with customer demand. What type of dividend is
this company likely to pay its stockholders?
a. A large dividend due to high earnings
b. An average size dividend
c. Very small or no dividend
d. All profits to be paid as dividends
e. As no stock is involved, dividends irrelevant
129. Most mature corporations distribute of their after-tax profits as dividends to stockholders.
a. none
b. 10 to 25 percent
c. 40 to 60 percent
d. 70 to 80 percent
e. all
130. Venture capital firms invest in
a. banks and financial firms.
b. large, successful firms.
c. small firms that have the potential to be very successful.
d. neighborhood convenience stores.
e. chain retail establishments.
131. Which of the following firms is most likely to receive venture capital?
a. Virtual reality Internet company
b. Laundromat
c. Local fast-food restaurant
d. Book retailer
e. Convenience store
132. A venture capital firm
a. provides financing to only large businesses.
b. looks for business that will provide a steady, average return.
c. receives corporate bonds from firms it finances.
d. consists of a pool of investors or a family partnership.
e. is a large, diversified corporation looking for investment opportunities.
133. Burberry Mills sold stock to an insurance company to raise needed financing for expansion and new product
development. This type of transaction is referred to as a(n)
a. equity deal.
b. private placement.
c. ownership transfer.
d. debt placement.
e. small business assistance package.
134. When compared with selling stocks to the public, a private placement has
a. more government regulations.
b. higher costs.
c. guaranteed repayment provisions that can be enforced.
d. lower costs.
e. more legal requirements.
135. The use of borrowed funds to increase the return on owners‘ equity is called
a. financial planning.
b. investment management.
c. management leverage.
d. financial leverage.
e. return on leverage.
136. Although Hargrove Co. makes enough money to pay for everything it needs, it still chooses to have some debt and
pay a larger portion of retained earnings back to the stockholders. What is likely the best explanation for this
decision?
a. Reduced interest rate
b. Financial leverage
c. Return multiplier
d. Equity leverage
e. Debt multiplier
137. The managers at Bally Manufacturing decided to borrow money to finance a new production facility. The loan
agreement they signed required that they pay 10 percent interest on the loan. Based on this information, which of
the following statements is true?
a. Bally doesn’t have to pay the 10 percent if the firm isn’t profitable.
b. Bally can pay the 10 percent whenever its managers vote to pay it.
c. The company will make more money if the firm earns less than a 10 percent return on its investment in the
new plant.
d. Bally is using financial leverage to increase profits as long as the firm earns more than the 10 percent it pays
to borrow the money required to finance the new plant.
e. Even if the new plant is extremely profitable, Bally should have found another way to finance the new plant.
138. Baxter Equipment earned $300,000 last year. Its owners’ equity totaled $2,500,000. Based on these amounts, what
is the firm’s return on owners’ equity?
a. 1.2 percent
b. 8.33 percent
c. 12 percent
d. 122 percent
e. It is impossible to calculate the return on owners’ equity with this information.
139. Which of the following statements is true?
a. Financial leverage should not be considered when a firm borrows money.
b. Under the right circumstances, the use of borrowed money can improve a firm‘s return on owners’ equity.
c. There is no good reason for a firm to borrow money when it has cash to finance expansion.
d. The use of borrowed money always reduces a firm’s return on owners’ equity.
e. Return on owners’ equity is not an important financial calculation.
140. A term-loan agreement requires a borrower to repay the loan
a. in monthly, quarterly, semiannual, or annual installments.
b. at the end of the second year.
c. at the end of the third year.
d. at the end of the fourth year.
e. at the end of the fifth to seventh year.
141. A promissory note that requires a borrower to repay funds in installments is called a(n)
a. term-loan agreement.
b. installment plan.
c. lease.
d. mortgage.
e. annuity loan agreement.
142. The usual repayment period for long-term business loans is
a. before the end of the first year.
b. at the end of the first year.
c. in two to three years.
d. in three to seven years.
e. at the end of ten years.
143. All of the following would be considered appropriate collateral for a long-term loan except
a. land.
b. equipment.
c. buildings.
d. inventory.
e. machinery.
144. When a small-business owner applies for a loan, the bank officer will
a. turn the loan down unless the firm doesn’t need the money.
b. check to see if the firm has issued corporate stocks or bonds.
c. reject the loan if the firm has any outstanding debts.
d. ask the business owner to fill out a loan application.
e. approve the loan if the firm has never borrowed money from a competing bank.
145. What is the typical denomination for most corporate bonds?
a. $100
b. $10,000
c. $500
d. $1,000
e. Ten times the par value of its stock
146. The date on the face of a bond telling when the face value is to be repaid is called the
a. date of issuance.
b. maturity date.
c. dividend declaration date.
d. discount rate.
e. date of record.
147. Reagan purchases a corporate bond from Mattel. On the bond it states that Reagan will receive her money back on
February 15, 2022. This is the bond’s date.
a. declaration
b. maturity
c. conversion
d. redemption
e. expiration
148. A feature of corporate bonds is that they
a. pay interest until maturity.
b. carry voting rights.
c. represent ownership in a firm.
d. pay dividends.
e. have residual claims to assets after common stock.
149. Debbie Brooks purchased a $1,000 corporate bond that pays 9 percent interest. The face value of her bond is
$1,000. What is the amount of interest that she will receive each year?
a. $100
b. $90
c. $50
d. $46.25
e. $10
150. Interest paid on outstanding bonds is usually paid
a. once every two years.
b. once a year.
c. semiannually, or every six months.
d. quarterly, or every three months.
e. on a monthly basis.
151. Sally Jackson was told that when she sold her corporate bonds she must endorse her bonds before transferring
ownership to the new owner. This means that Sally sold
a. bond indentures.
b. registered bonds.
c. trust agreements.
d. corporate savings bonds.
e. convertible bonds.
152. Bonds that are backed only by the reputation of the issuing corporation are known as
a. mortgage bonds.
b. registered bonds.
c. debenture bonds.
d. bond indentures.
e. serial bonds.
153. Downing, Inc., issues bonds to purchase new machinery for its factories. These bonds are secured by the
machinery purchased with the proceeds of the bond issue. These are bonds.
a. debenture
b. mortgage
c. convertible
d. indenture
e. sinking fund
154. Debbie purchases a corporate bond from Safeway. She has the option of redeeming her bond for 55 shares of
Safeway common stock at any time. This is a bond.
a. callable
b. subordinated
c. debenture
d. mortgage
e. convertible
155. In the , Kia Corporation describes the basics of the bond issue, who the trustee is, when the bonds mature,
and how the bonds will be paid off.
a. bond indenture
b. trustee agreement
c. bond prospectus
d. term-loan agreement
e. bond contract
156. When bonds issued at the same time mature on different dates, they are referred to as bonds.
a. callable
b. serial
c. mortgage
d. debenture
e. convertible
157. Marietta Hotels used a twenty-five-year, $50 million bond issue to finance its expansion. In its plan to ensure that
funds would be available to redeem the bonds at maturity, it arranged that none of the bonds would mature during
the first fifteen years. Therefore, 10 percent of the bonds mature each year until all the bonds are retired at the end
of the twenty-fifth year. This is an example of the method of repayment.
a. sinking fund
b. selling new bonds
c. registered bond
d. selling old bonds
e. serial bond
158. If money is reserved each year to guarantee that a bond will be paid off at maturity, the money will be held in a
fund.
a. capitalization
b. sinking
c. compounding
d. retirement
e. redemption
159. When a firm makes annual deposits to repay bondholders at maturity, it is using a
a. serial bond issue.
b. sinking fund.
c. trustee plan.
d. savings plan.
e. debenture bond issue.
160. The representative for bond owners is called a(n)
a. broker.
b. attorney.
c. member of the board of directors.
d. trustee.
e. bond counselor.