The ultimate ownership of the firm resides:
a. with management
b. with common shareholders
c. with preferred shareholders
d. with bondholders
b. with common shareholders
Preferred shareholders:
a. play a primary role in the financing of the firm
b. have a subordinated claim to dividends
c. possess an ownership interest in the firm
d. normally have no vote on corporate issues
d. normally have no vote on corporate issues
All income not paid out to creditors or preferred shareholders:
a. is paid out as common stock dividends
b. is distributed as interest to bondholders
c. automatically belongs to common shareholders
d. is subject to a higher federal income tax rate
c. automatically belongs to common shareholders
As the owners of the firm, common shareholders:
a. have a primary claim on earnings
b. have the right to vote on all important corporate issues
c. have a legally enforceable right to dividends
d. play a secondary role in financing the firm
b. have the right to vote on all important corporate issues
The most important voting issue for common shareholders is:
a. election of the board of directors
b. dividend policy
c. proxy assignment
d. adoption of the annual report
a. election of the board of directors
Under a pre-emptive right provision:
a. holders of common stock must be given the first option to purchase new shares
b. common shareholders have a pre-emptive right to dividends
c. preferred shareholders have the first option on new common shares
d. dilution of existing positions is encouraged
a. holders of common stock must be given the first option to purchase new shares
When a rights offering is announced:
a. common shareholders may purchase one new share for each share owned
b. a stock will initially trade rights-on
c. the share price increases when the stock goes ex-rights
d. the shareholder increases the value of his holdings by exercising the rights
b. a stock will initially trade rights-on
All of the following are advantages of rights offerings except:
a. the position of current shareholders is protected
b. a rights offering provides the firm with a built-in securities market
c. more interest may be generated in the market
d. the dollar value of rights traded on exchanges is very high
d. the dollar value of rights traded on exchanges is very high
Preferred equity has all of the following characteristics except:
a. fixed dividends
b. the cumulative right to annual dividends
c. precedence over common stock dividends
d. residual claim to income
d. residual claim to income
Preferred stock may be justified in that it:
a. expands the capital base without diluting common equity
b. it is lower cost source of financing than debt
c. dividends are tax-deductible
d. really has no justification
a. expands the capital base without diluting common equity
To institutional investors, preferred stock may be very attractive because:
a. dividend payments are assured
b. dividends from another corporation are usually tax-exempt
c. the preferred yield is normally higher than that of debt
d. it provides balance to the issuing firm's capital structure
b. dividends from another corporation are usually tax-exempt
With cumulative dividends:
a. preferred stock may participate over and above the quoted yields
b. the preferred shareholder is assured of receiving a dividend every year
c. preferred dividends accumulate and must be paid in full
d. the firm's obligation to its shareholders is lessened
c. preferred dividends accumulate and must be paid in full
A preferred issue carrying a call provision will carry:
a. a higher yield than non-callable preferred
b. a lower yield than non-callable preferred
c. the same yield as non-callable preferred
d. the same yield as callable debt
a. a higher yield than non-callable preferred
In terms of increasing risk to the investor, the proper ranking would be:
a. common stock, preferred stock, secured debt
b. long-term government debt, subordinated debt, common stock
c. long-term government debt, secured debt, preferred stock
d. secured debt, common stock, preferred stock
b. long-term government debt, subordinated debt, common stock
In terms of decreasing return to the investor, the proper ranking would be:
a. common stock, long-term government debt, preferred stock
b. long-term government debt, common stock, preferred stock
c. preferred stock, common stock, secured debt
d. common stock, secured debt, treasury bills
d. common stock, secured debt, treasury bills
call feature:
Used for bonds and some preferred stock. A call allows the corporation to retire securities before maturity by forcing the bondholders to sell bonds back to it at a set price. The call provisions are included in the bond indenture.
common shareholder:
Holders of common shares are the owners of the company. They have a residual claim to the earnings
conversion feature:
A provision of a security that allows the swapping of that security for common shares under specified conditions.
convertible exchangeable preferred:
A form of preferred stock that allows the company to force conversion from convertible preferred stock into convertible debt. This can be used to allow the company to take advantage of falling interest rates or to allow the company to change after tax preferred dividends into tax-deductible interest payments.
cum-rights:
The situation in which the purchase of a share of common stock includes a right attached to the stock. Also rights-on.
cumulative dividends:
If dividends from one period are not paid to the preferred shareholders, they are said to be in arrears and are then added to the next period's dividends. When dividends on preferred stock are in arrears, no dividends can legally be paid to the common shareholders. The cumulative dividend feature is very beneficial to preferred shareholders since it assures them that they will receive all dividends due before common shareholders can get any dividends.
cumulative voting:
Allows shareholders more than one vote per share. They are allowed to multiply their total shares by the number of directors being elected to determine their total number of votes. This system enables minority shareholders to elect directors even though they do not have 51 percent of the vote.
dividend tax credit:
Tax credit accorded to individuals receiving corporate dividends. Its purpose is to compensate for the fact that corporate earnings are taxed in the hands of the corporation and possibly again in the hands of the shareholder.
Dutch auction preferred stock:
A preferred stock security that matures every seven weeks and is sold (reauctioned) at a subsequent bidding. The concept of Dutch auction means that the stock is issued to the bidder willing to accept the lowest yield, and then to the next lowest bidder, and so on until all of the preferred stock is sold.
ex-rights date:
The date after which common shares no longer include rights. Trading of shares, ex-rights, occurs two business days before the actual ex-rights date.
floating-rate preferred stock:
The quarterly dividend on the preferred stock changes with market rates. The market price is considerably less volatile than it is with regular preferred stock.
intrinsic value:
The true or inherent worth.
majority voting:
All directors must be elected by a vote of more than 50 percent. Minority shareholders are unable to achieve any representation on the board of directors.
nonvoting stock:
Stock that entitles the holder to an equal or greater dividend than voting stock, but not to a vote on company business. Often issued to allow one party to maintain control of the company.
par value:
Sometimes referred to as the face value or the principal value of the bond. Most bond issues have a par value of $1,000 per bond. Older issues of common and preferred stock may also have an assigned par value.
participation provision:
A small number of preferred stock issues are participating with regard to corporate earnings. For such issues, once the common stock dividend equals the preferred stock dividend, the two classes of securities may share equally (or in some ratio) in additional dividend payments.
poison pill:
A strategy that makes a firm unattractive as a potential takeover candidate. For example, when a potential unwanted buyer accumulates a given percentage of a firm's common stock, such as 25 percent, the other shareholders receive rights to purchase additional shares at very low prices. This makes the firm more difficult to acquire. Poison pills may take many different forms.
preemptive right:
The right of current common shareholders to maintain their ownership percentage on new issues of common stock.
preferred stock:
A hybrid security combining some of the characteristics of common stock and debt. The dividends paid are not tax-deductible expenses of the corporation, as is true of the interest paid on debt.
retractable feature:
A provision available with a security that entitles the holder to offer the security back to the issuer at a predetermined price at certain future dates.
rights offering:
A sale of new common stock through a preemptive rights offering. Usually, one right will be issued for every share held. A certain number of rights may be used to buy shares of common stock from the company at a set price lower than the market price.
