Foundations of Financial Management, 17e (Block)
Chapter 17 Common and Preferred Stock Financing
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.
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) Under majority voting, any group of stockholders owning over 50 percent of the common
stock may elect all of the directors.
15) Hewlett-Packard’s capital stock has 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.
16) Stockholders always have preemptive rights when new issues of stock are offered.
17) A rights offering may be of limited value to shareholders.
18) After a rights offering, the common stock price will sell at the subscription price.
19) Pre-emptive rights offerings are an especially popular way in Europe to raise money and
fund expansions.
20) When a stock sells ex-rights, the sale of the shares no longer entitles the purchaser to receive
a right to purchase future stock.
21) 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.
22) The difference between the rights-on and ex-rights common stock price is equal to the value
of a right to purchase future stocks, all other things being equal.
23) The ex-rights date usually takes place after the end of the subscription period.
24) 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.
25) Stock purchased through a rights offering may carry lower margin requirements.
26) The margin requirement specifies the amount of cash or equity that must be deposited with a
brokerage house or a bank, with the balance of funds eligible for borrowing.
27) A poison pill will raise the potential for maximizing shareholder value because it deters
takeover bids.
28) American Depository Receipts (ADRs) are certificates that give foreign stockholders a legal
claim on U.S. companies’ foreign stock.
29) Although American Depository Receipts (ADRs) are traded in the U.S. in dollars, U.S.
investors may still incur foreign currency risk.
30) Preferred stock dividends are a tax-deductible expense for a corporation.
31) The after-tax cost of debt is usually cheaper than issuing preferred stock to the corporation,
all things being equal.
32) Preferred stock generally has a lower after-tax cost than debt to the corporation.
33) To the security holder, preferred stock usually offers higher risk and lower after-tax return
compared to bonds.
34) To the individual recipient, preferred stock dividends offer no tax advantage over bonds.
35) If a company has preferred stock, it must pay the dividends on the preferred even if it shows
no profit for the year.
36) Participating preferred stock may receive an extra dividend in a particularly good year when
earnings are above a stated level.
37) Generally, the receipt of corporate bond interest is more valuable than preferred dividends to
corporate investors.
38) The “convertible exchangeable” feature of preferred shares gives companies the sole right to
force preferred stock holders to exchange for common stock.
39) Some preferred stocks are “participating preferreds,” allowing for an increase in the preferred
stock dividend when additional profits are available after common stock dividends have been
paid.
40) Participating preferred stock is advantageous to common stockholders because it receives
more dividends.
41) The market price of “floating rate” preferred stock is less volatile than that of regular
preferred stock.
42) Floating rate preferred stock allows shareholders to receive more or less than the quoted
dividend based on the firm’s success.
43) Floating rate preferred stock would be ideal to have when the stock price fluctuates and when
there are tax benefits to owning preferred stock.
44) The floating rate feature on preferred stock causes more volatility in its price.
45) Participating preferred stock gives its owners voting rights.
46) Dutch Auction preferred stocks, unlike standard preferred stocks, are typically used as short-
term instruments.
47) If a corporation pays no taxes because it is losing money, a preferred stock issuance becomes
more attractive than normal, relative to a debt issuance.
48) A rights offering is generally financially advantageous to the investor because it provides
them with additional shares of stock.
49) Investors are usually in favor of poison pills because they prevent takeovers.
50) American Depository Receipts (ADRs) are subject to foreign exchange risk unlike direct
methods of investing in the foreign exchange market.
51) Preferred stock would generally provide a lower before-tax yield to investors than secured
debt due to its lower risk.
52) Due to the 2017 Tax Cuts and Jobs Act, for companies owning between 20 and 80 percent of
another company, any dividends received from that company are taxed at 35 percent, however
most companies don’t fall into this category.
53) Due to the 2017 Tax Cuts and Jobs Act, for companies owning less than 20 percent of
another company, the tax exclusion was reduced from 70 to 50 percent.
54) An increasing proportion of shares in the U.S. are owned by
A) individual investors.
B) corporations (Treasury stock).
C) institutions.
D) governments.
55) Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders may force a corporation into bankruptcy for failure to make interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of Directors under cumulative voting
even though someone else owns 51% of the stock.
56) When comparing common stock of the same company, it is fair to say that
A) all shares, no matter how many classes, are all created with the same equal rights.
B) companies sometimes have two different classes of shares with unequal rights to dividends
and votes.
C) the Securities and Exchange Commission allows only one class of common stock.
D) investors are indifferent between class A and class B shares.
57) A proxy is
A) a device for circumventing regular voting procedures.
B) a coupon attached to each share of stock and used by the shareholder in casting their vote on
current issues.
C) an authorization of a registered stockholder to another person to act in their place at the
meeting.
D) a warrant allowing a stockholder to purchase a specified number of additional shares at a
given price.
58) Which of the following statements is true with respect to cumulative voting?
A) Cumulative voting permits multiple votes for a single director.
B) Cumulative voting gives minority shareholders a better chance of being represented on the
board of directors.
C) If six directors are to be elected and you own 100 shares, you may vote all 600 votes for one
director and none for the others.
D) All of these options are true.
59) The purpose of cumulative voting is
A) to maintain majority control of the board of directors.
B) to allow minority stockholders the possibility of a voice on the board of directors.
C) to obstruct unfriendly mergers and takeover efforts.
D) to prevent the dilution of common stock through preemptive rights offerings.
60) Under normal operating conditions, the board of directors is elected by
A) the common stockholders.
B) the preferred stockholders.
C) the bondholders.
D) two of the options are true.