Chapter 17 Test Bank – Static Key
1. Common stockholders have a residual claim to income; in other words they are last in line during an
elimination of the company.
2. Common stockholders have a legal claim to dividend income.
3. A common stockholder cannot force a company into bankruptcy for eliminating the dividend.
4. Stock classes are similar to bond ratings in that they are used to rank the performance of different
corporations’ stock.
5. Stock classes may differ in voting rights, dividend rights, and claims to income during company
elimination.
6. Occasionally, a company will have several classes of common stock, with each class carrying different
rights to dividends and income.
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7. Common stockholders may assign a proxy, or the power to cast their ballot, only when majority voting is
in place.
8. Each common stockholder has the ability to vote, and may assign a proxy if they desire to pass the
voting right along.
9. Under majority voting, it is easier for minority stockholders to elect directors to the board.
10. The particular type of shareholder voting used has become less important with the influence of
takeovers, leveraged buy-outs, and other challenges to management control.
11. Bondholders never have any control over the actions of a firm.
12. The increasing sophistication of individual investors has decreased the role of institutional investors in
the stock market.
13. Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to
elect three of nine directors to the board.
14. Hewlett-Packard’s capital stock has largely recovered from the loss of confidence brought about by the
failure to find a successful CEO and the multimillion-dollar severance packages the ousted executives
received.
15. Stockholders always have pre emptive rights when new issues of stock are offered.
16. A rights offering may be of limited value to shareholders.
17. After a rights offering, the common stock price will sell at the subscription price.
18. Pre-emptive rights offerings are an especially popular way in Europe to raise money and fund
expansions.
19. When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to receive a right to
purchase future stock.
20. The difference between the rights-on and ex-rights price is equal to the subscription price divided by N,
where N is the number of rights needed to purchase a new share of stock.
21. The difference between the rights-on and ex-rights common stock price is equal to the value of a right
22. The ex-rights date usually takes place after the end of the subscription period.
23. If the current market value of Markowitz Corp stock is $61 and 10 rights are required to buy one
additional share of Markowitz at the subscription price of $50, then the rights are worth $1.00.
24. Stock purchased through a rights offering may carry lower margin requirements.
25. A poison pill will raise the potential for maximizing shareholder value because it deters takeover bids.
26. American Depository Receipts (ADRs) are certificates that give foreign stockholders a legal claim on
U.S. companies’ foreign stock.
27. Although American Depository Receipts (ADRs) are traded in the U.S. in dollars, U.S. investors may
still incur foreign currency risk.
28. Preferred stock dividends are a tax-deductible expense for a corporation.
29. The after-tax cost of debt is usually cheaper than issuing preferred stock to the corporation, all things
being equal.
30. Preferred stock generally carries a higher interest rate than debt.
31. To the security holder, preferred stock offers the highest risk and the lowest return.
32. To the individual recipient, preferred stock dividends offer no advantage over common stock dividends.
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33. If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit
for the year
34. Participating preferred stock may receive an extra dividend in a particularly good year when earnings
are above a stated level.
35. Generally, the receipt of corporate bond interest is more valuable than preferred dividends to investors.
36. The “convertible exchangeable” feature of preferred shares gives companies the sole right to force
preferred stock holders to exchange for common stock.
37. Some preferred stocks are “participating pre ferreds,” allowing for an increase in the preferred stock
dividend when additional profits are available after common stock dividends have been paid.
38. Participating preferred stock is advantageous to common stockholders because it receives more
dividends.
39. The market price of “floating rate” preferred stock is less volatile than that of regular preferred stock.
40. Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend
based on the firm’s success.
41. Floating rate preferred stock would be ideal to have when the stock price fluctuates and when there are
tax benefits to owning preferred stock
42. The floating rate feature on preferred stock causes more volatility in its price.
43. Participating preferred stock gives its owners voting rights.
44. Dutch Auction preferred stocks, unlike standard preferred stocks, are typically used as short-term
instruments.
45. If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes more
attractive relative to a debt issuance.
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46. A rights offering is generally financially advantageous to the investor because it provides them with
additional shares of stock.
47. Investors are usually in favor of poison pills because they prevent takeovers.
48. American Depository Receipts (ADRs) are subject to foreign exchange risk unlike direct methods of
investing in the foreign exchange market.
49. Preferred stock would generally provide a lower before-tax yield to investors than secured debt due to
its lower risk.
50. An increasing proportion of shares in the U.S. are owned by
51. Which of the following is not a true statement?
52. When comparing common stock of the same company, it is fair to say that
53. A proxy is
54. Which of the following statements is true with respect to cumulative voting?
55. The purpose of cumulative voting is
56. Under normal operating conditions, the board of directors is elected by
57. Given that there are 4,000,000 shares outstanding in Miller Corp., how many shares will be required for
a minority group of stockholders to elect two of the nine members on the board of directors? (Assume
cumulative voting is required.)
58. Sharpe Products has one million outstanding shares and seven directors to be elected. Cumulonimbus
Holdings owns 200,000 shares of Sharpe. How many directors can Cumulonimbus elect with cumulative
voting?
59. Coase Corp. has 10,000,000 outstanding shares. There are 11 directors on the firm’s board. The
Becker family owns 2,300,000 shares of Coase Corp. How many directors can the Becker family be
assured of electing by themselves if Coase Corp. uses majority voting?
60. A rights offer made to existing shareholders with the sole purpose of making it more difficult for another
firm to acquire the company is called
61. A possible advantage to a rights offering is that
62. The effect of a rights offering on a stockholder is
63. The most important feature of the pre emptive right is that the rights
64. If a corporate charter includes a provision for pre emptive rights, the original stockholders