61) 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.)
A) 800,001
B) 1,000,001
C) 1,090,910
D) 888,889
62) 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?
A) 0
B) 1
C) 2
D) 3
63) 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?
A) Zero
B) One
C) Two
D) Three
64) 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
A) a preemptive right.
B) a poison pill.
C) ex-rights.
D) rights-on.
65) A possible advantage to a rights offering is that
A) current shareholders are protected against dilution.
B) the firm has a built-in market of knowledgeable investors.
C) distribution costs are lower than a public offering.
D) All of these options are true.
66) The effect of a rights offering on a stockholder is
A) the right to sell stocks, in which the stockholder’s wealth only increases if the stock is sold.
B) the right to own more stocks, in which the stockholder’s wealth increases only if the new
stock is purchased.
C) the right to own more shares at a cheaper price, while the wealth of the stockholder’s original
shares goes up.
D) the right to own more shares at a cheaper price, but the wealth of the stockholder’s original
shares goes down.
67) The most important feature of the preemptive right is that the rights
A) may be sold for profit.
B) possibly protect the stockholders’ shares against dilution.
C) may accumulate more votes.
D) are nontransferable.
68) If a corporate charter includes a provision for preemptive rights, the original stockholders
A) must sell their stock to the company.
B) get first option to buy additional issues of common stock.
C) may purchase existing treasury stock.
D) cannot utilize cumulative voting procedures.
69) “Preemptive rights” means that
A) existing shareholders can prevent management from issuing additional common stock.
B) common shareholders can “preempt” preferred shareholders for dividends.
C) existing shareholders are guaranteed an opportunity to retain their proportional share of
ownership.
D) management can preempt the right of shareholders to receive dividends if earnings are down.
70) Which of the following actions will provide the greatest increase in wealth to shareholders
when a company conducts a rights offering?
A) Exercise the right to buy new shares to increase wealth.
B) Sell the rights themselves and hold existing shares and cash.
C) Exercise the rights and sell the shares to increase wealth.
D) None of these options are true.
71) A rights offering
A) gives the firm a built-in market for new securities.
B) will likely lead to considerably higher distribution costs.
C) will increase the shareholder’s total valuation.
D) is the most expensive way to raise capital.
72) Which of the following best represents a benefit of a rights offering?
A) Rights offerings increase return on equity.
B) Rights offerings substantiate higher debt-to-equity ratios.
C) Rights offerings have lower margin requirements.
D) None of these options are true.
73) Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative and
100,000 common stock outstanding. The preferred dividend is $3.00 per share and has not been
paid for three years. If Kuhns earned $1 million this year, what could be the maximum payment
to the preferred stockholders on a per share basis?
A) $9.00 per share
B) $15.00 per share
C) $6.00 per share
D) $5.00 per share
74) A stock is said to sell “ex-rights”
A) when the period in which the subscription privilege is to be exercised has expired.
B) when the stockholder buys the stock, they no longer get a right toward the future purchase of
stock.
C) after the rights have all been exercised and the new issue is completely sold.
D) after the terms of the subscription have been made public.
75) The subscription rate of a new offering is generally ________ than the rights-on price and
________ than the ex-rights price.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
76) Which one of the following statements is false?
A) Poison pills encourage current owners to purchase more stock in the company.
B) Poison pills discourage potential high takeover bids.
C) Stockholders have to approve the acceptance of poison pill strategies before a corporation can
use them.
D) Many institutional investors are opposed to the poison pill.
77) Five rights are necessary to purchase one share of Fogel stock at $50. A right sells for $4.
The ex-rights value of Fogel stock is ________.
A) $70
B) $46
C) $74
D) $50
78) Seven rights are necessary to purchase one share of Fogel stock at $34. The ex-rights value
of Fogel stock is $48. The right sells for $________.
A) $14
B) $11
C) $48
D) $2
79) 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 ________.
A) $0.11
B) $1.11
C) $1.00
D) $1.50
80) 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 Tricki’s
expected price when it begins trading ex-rights?
A) $47.23
B) $44.00
C) $44.09
D) $45.00
81) Which one of the following is NOT an advantage that American Depository Receipts
(ADRs) have over investing in actual shares of a foreign stock?
A) ADRs are an effective barrier to foreign currency risk.
B) Unlike direct foreign stock, ADRs have financial statements presented in a GAAP format.
C) Dividends are paid in dollars and are easier to collect than actual shares of foreign stock.
D) ADRs are more liquid and less expensive than buying foreign stock directly.
82) American Depository Receipts (ADRs) are
A) receipts sent to foreign stockholders who own American companies.
B) proof of ownership for Eurodollar deposits held by Americans.
C) certificates that have a legal claim on an ownership interest in a foreign company’s common
stock.
D) certificates in U.S. companies that allow foreign investors to buy shares of American
companies.
83) American Depository Receipts
A) have annual reports and financial statements presented in English.
B) pay dividends in dollars.
C) are more liquid and less expensive to buy than foreign stock.
D) all of these answers are true.
84) Which would NOT be considered an American Depository Receipts (ADR) stock in the
U.S.?
A) Heineken
B) Nestle
C) Sony
D) Intel
85) Preferred stock may be good for a company because it
A) expands the capital base of the firm without diluting the common stock ownership.
B) does not require interest payment in times of financial trouble, but are tax-deductible when
dividends are paid.
C) is not as costly as common stock or bonds.
D) has no future negative ramifications when dividend payments are missed.
86) The following are primary purchasers of preferred stock except
A) corporate investors.
B) insurance companies.
C) pension funds.
D) individual investors.
87) Which of the following is NOT true about preferred stock?
A) 70% of dividends are nontaxable to other corporations that hold preferred stock.
B) The after-tax cost is higher than debt with the same yield.
C) Dividends are legal obligations of the firm.
D) Preferred stocks are typically cumulative with respect to dividends.
88) Preferred stock is often sold by companies
A) wanting to balance their capital structures.
B) that have a large amount of debt relative to equity.
C) looking for the taxable advantages of preferred dividends over common stock dividends.
D) that have a large amount of debt relative to equity and that want to balance their capital
structures.
89) The par value on a preferred stock entitles the holder to
A) priority on all cumulative dividends.
B) an established amount of money if the company is liquidated.
C) a minimum amount of convertible common stock.
D) none of these options are true.
90) Which of the following is not a very common feature of preferred stock?
A) Cumulative dividends
B) Voting rights
C) Call feature
D) The conversion feature
91) The Harsanyi Corp. is considering four investments. Which provides the highest after-tax
return for Harsanyi Corp. if it is in the 21% federal tax bracket? Assume the tax rate on
dividends is 15%.
A) Treasury bonds at 5.0%
B) Corporate bonds at 8.0%
C) Municipal bonds at 5.0%
D) Preferred stock at 6.0%
92) The Nash Corp. is considering four investments. Which provides the highest after-tax return
for Nash Corp. if it is in the 21% federal tax bracket? Assume the tax rate on dividends is 15%.
A) Treasury bonds at 4%
B) Corporate bonds at 7.5%
C) Municipal bonds at 7.25%
D) Preferred stock at 7.5%
93) To the corporate investor, preferred stock offers which of the following advantages?
A) A higher yield than debt, everything else being equal before taxes.
B) 30% of preferred dividends are tax-exempt.
C) 70% of preferred dividends are tax-exempt.
D) 70% of preferred dividends are tax-exempt and have a higher yield than debt, all else equal
before taxes.
94) Buggy Whip Manufacturing Company is issuing preferred stock yielding 8%. Selten
Corporation is considering buying the stock. Assume that Buggy’s tax rate is 0% due to
continuing heavy tax losses, and Selten’s tax rate is 21%. What is the after-tax preferred yield for
Selten? Assume the tax rate on dividends is 15%.
A) 7.22%
B) 5.33%
C) 7.64%
D) 8.00%
95) If a preferred stock is of the cumulative type,
A) dividends must be paid on an equal basis with common stock, so long as earnings permit.
B) dividends cannot be passed if they are earned.
C) dividends must be paid, and if not a liability is created.
D) unpaid dividends of one period must be carried forward and paid in subsequent periods before
anything can be paid to common stockholders.
96) Which of the following statements about floating rate preferred stock is true?
A) The dividend rate changes quarterly.
B) The price of the stock fluctuates with the market.
C) The dividend rate is tied to the inflation rate.
D) More than one of the options is true.
97) The floating rate feature on preferred stock allows the shareholders
A) to receive more dividends than the quoted yield when the firm enjoys a good year.
B) to pay lower taxes when the dividend yield increases.
C) to receive dividends that the corporation did not pay in previous years.
D) to receive a higher or lower dividend yield depending on current competitive market
conditions.
98) “Dutch auction” preferred stock
A) is issued first to the bidder willing to accept the lowest yield.
B) matures periodically, and is then re-auctioned at a subsequent bidding.
C) allows corporate investors to take advantage of preferred stock tax benefits.
D) all of these options are true.
99) Which of the following is the correct order of securities based on risk and return? (From
most risk-return to least risk-return.)
A) Common stock, subordinated debentures, secured debt, Treasury bills
B) Preferred stock, common stock, subordinated debentures, secured debt
C) Common stock, long-term government bonds, secured debt, subordinated debt
D) Common stock, secured debt, subordinated debentures, preferred stock
100) Which of the following is an advantage of American Depository Receipts (ADRs)?
A) No foreign currency exchange risk
B) Financial statements are written in English
C) Financial statements are translated quickly
D) Less frequent reporting of financial results
101) Which of the following is NOT a primary investor in preferred stock?
A) Commercial banks
B) Corporations
C) Insurance companies
D) Pension funds
102) A corporate investor of preferred stock receiving a before-tax preferred yield of 8.5%, and
having a corporate tax rate of 21%, would receive an after-tax preferred yield of approximately
________. Assume the tax rate on dividends is 15%.
A) 10.2%
B) 7.7%
C) 8.12%
D) 9.3%
103) An individual investing in preferred stock receiving a before-tax preferred yield of 6.75%
and having a tax rate of 25% would receive an after-tax preferred yield of ________. Assume the
tax rate on dividends is 15%.
A) 6.75%
B) 5.1%
C) 5.7%
D) 6.1%
104) Common stockholders rights include all of the following EXCEPT:
A) Fixed dividend yield
B) Voting rights
C) First option to purchase new shares
D) Residual claim to income
105) Which of the following statements is false with respect to the use of rights in financing?
A) Rights offerings are used by many U.S. companies.
B) Shares are usually priced at a premium.
C) Rights offerings are especially popular in Europe.
D) All of these statements are true.