Chapter 17 – Common and Preferred Stock Financing
64. Which of the following actions will provide the shareholders with the most total wealth
when a company conducts a rights offering?
65. A rights offering
66. Which of the following are benefits of a rights offering?
Chapter 17 – Common and Preferred Stock Financing
67. Which of the following is not true about rights trading on organized exchanges?
68. Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The
dividend is $3.00 per share and has not been paid for 3 years. If Kuhns earned $1 million this
year, what could be the maximum payment to the preferred stockholders on a per share basis?
69. A stock is said to sell “ex-rights”
Chapter 17 – Common and Preferred Stock Financing
70. The subscription rate is generally _______ than the rights-on price and _______ than the
ex-rights price.
71. All of the following statements are true except
72. Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for a
$4. The ex-rights value of Fogel stock is
Chapter 17 – Common and Preferred Stock Financing
73. North stock sells for $65 rights-on, and the subscription price is $55. Nine rights are
required to purchase one share. The value of a right is
74. Tricki Corp stock sells for $45 rights-on, and the subscription price is $35. Ten rights are
required to purchase one share. Tomorrow the stock of Tricki will go ex-rights. What is the
price of Tricki expected to be when it begins trading ex-rights?
Chapter 17 – Common and Preferred Stock Financing
75. Advantages that the American Depository Receipts (ADRs) have over investing in actual
shares of a foreign stock include all but the following
76. American Depository Receipts (ADRs) are.
77. American Depository Receipts
Chapter 17 – Common and Preferred Stock Financing
78. Which would not be considered an ADR stock in the U.S.?
79. Preferred stock may be good for a company because it
80. The following are primary purchasers of preferred stock except
Chapter 17 – Common and Preferred Stock Financing
81. Which of the following is not true about preferred stock?
82. Preferred stock is the least used of all long-term securities because
83. Preferred stock is often sold by companies
84. The par value on a preferred stock entitles the holder:
Chapter 17 – Common and Preferred Stock Financing
85. Which of the following is not a very common feature of preferred stock?
86. The Harsanyi Corp. is considering four investments. Which provides the highest after-tax
return for Harsanyi Corp. if it is in the 34% tax bracket?
Chapter 17 – Common and Preferred Stock Financing
87. The Nash Corp. is considering four investments. Which provides the highest after-tax
return for Nash Corp. if it is in the 40% tax bracket?
88. To the corporate investor, preferred stock offers which of the following advantages?
Chapter 17 – Common and Preferred Stock Financing
89. Buggy Whip Manufacturing Company is issuing preferred stock yielding 8%. Selten
Corporation is considering buying the stock. Buggy’s tax rate is 0% due to continuing heavy
tax losses, and Selten’s tax rate is 34%. What is the after-tax preferred yield for Selten?
90. If a preferred stock is of the cumulative type
91. Which of the following statements about floating rate preferred stock is true?
Chapter 17 – Common and Preferred Stock Financing
92. The floating rate feature on preferred stock allows the shareholders
93. Dutch auction preferred stock
94. Which of the following is the correct order of corporate issues based on risk and return?
(most risk-return to least risk-return)
Chapter 17 – Common and Preferred Stock Financing
95. ADRs have the following disadvantages except:
96. Primary investors in preferred stock include all of the following except:
97. A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and
having a corporate tax rate of 30% would receive an after-tax preferred yield of:
Chapter 17 – Common and Preferred Stock Financing
98. An individual investing in preferred stock receiving a before-tax preferred yield of 6.75%
and having a tax rate of 15% would receive an after-tax preferred yield of:
99. Common stockholders’ rights include all of the following except:
100. Which of the following statements is false with respect to the use of rights in financing?
Chapter 17 – Common and Preferred Stock Financing
101. Match the following with the items below:
3
1. margin
offering
7
2. rights
A hybrid security combining features of both common
4
3. majority
Shareholders are allowed to multiply their total shares
times the number of directors being elected to determine their
voting
6
4. cumulative
The situation where the purchase of common stock
stock
Holders of this security are the owners of the company.
5
6. rights-on
2
Arises from the sale of new common stock to current
stock
8
7. preferred
The privilege accorded to current common stockholders of
maintaining their ownership percentage on new issues of
right
9
8. preemptive
A situation where purchase of common stock during a
rights offering no longer includes rights to purchase additional
9. ex-rights
1
Specifies the amount of cash or equity that must be
deposited with a brokerage firm, with the balance of funds
Chapter 17 – Common and Preferred Stock Financing
102. Match the following with the items below:
Assigning voting rights to management or another
2. residual claim to
All income that is not paid out to creditors or
preferred stockholders automatically belongs to common
3. cumulative
These allow a company to force conversion from
4. convertible
exchangeable
Type of equity security with an obligatory dividend
paid at a rate which is adjusted periodically to reflect
5. Dutch auction
Rights offering made to existing shareholders for the
sole purpose of making it more difficult for an outside
6. participating
Refers to the possibility of receiving additional
dividend payments over and above the stated amount to
Stock issued to original owners of the company
which often carry special voting privileges in excess of
Assures holders of this security that they will receive
all dividends due them before dividends are paid to other
9. floating rate
These are similar to floating rate preferred stock but
is a short-term instrument that matures every seven
Chapter 17 – Common and Preferred Stock Financing
103. Krager Foods Corp. has 650,000 shares outstanding. General Grocery, one of its
subsidiaries, is disgusted with current management practices and is trying to get some of its
own people elected to the board of directors. There are twelve directors, and General Grocery
owns 60,000 shares.
a) Under cumulative voting, how many directors can General Grocery elect?
b) How many shares will General Grocery have to acquire in order to elect seven directors?
a). Number of directors=
Chapter 17 – Common and Preferred Stock Financing
104. Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of common
stock. The cumulative preferred stock has a stated dividend of $1.75 per share. Under normal
conditions, Kreisler pays out preferred dividends and 30% of remaining earnings to common
stockholders, however, because of a severe recession, Fritz retained all earnings last year.
This year, Fritz earned net income of $5 million.
Calculate the dividend per share to be received by the common stockholders this year.