FIN 3104 Chapter Notes - Chapter 8: Cumulative Voting, Preferred Stock

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purpleduck94

24 Oct 2016

School

Virginia Tech

Department

Finance, Insurance, Business Law

Course

FIN 3104

Professor

Keown

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Document Summary

Preferred stock hybrid of security with characteristics of both common stock and bonds. It is like common stock in that 1) it has no fixed maturity date, 2) if the firm fails to pay dividends, nonpayment does not bring on bankruptcy, 3) dividends are not deductible for no tax purposes. Call provision entitles the corporation to repurchase its preferred stock from investors at stated prices over specified periods. Sinking-fund provision protective provision that requires the firm periodically to set aside an amount of money for the retirement of its preferred stock: preferred stock value = annual dividend / required rate of return. Proxy means of voting in which a designated party is provided with the temporary power of attorney to vote for the signee at the corporation"s annual meeting. Proxy fight a battle between rival groups for proxy votes in order to control the decisions made in a stockholders" meeting.

Related Questions

1) Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are

Select one:

a. convertible

b. cumulative

c. noncumulative

d. participating

2) Which of the following is usually a right of a preferred stockholder?

Select one:

a. Right to sue company in bankruptcy proceedings if promised preferred dividends are not paid.

b. Right to receive dividend payments before any dividends are paid to common stockholders.

c. Right to convert shares of common stock on demand.

d. Preemptive right to participate in the issuance of new common shares.

3) Another term sometimes applied to common stockholder is a

Select one:

a. residual owner of the firm.

b. reciprocal owner of the firm.

c. net owner of the firm.

d. fundamental or basic owner of the firm.

4) Because equity holders are the last to receive any distributions of assets as a result of bankruptcy proceedings, common stockholders expect

Select one:

a. warrants to be attached to the stocks as a sweetener.

b. greater compensation in the form of dividends and/or rising stock prices.

c. fixed dividends payments.

d. all profits to be paid out in dividends.

5) Preferred stock is valued as if it were a

Select one:

a. fixed-income obligation.

b. bond.

c. common stock.

d. perpetuity.

6) Economically rational buyers and sellers use their assessment of an asset

ultramarineelk44

9. Which of the following statements is NOT CORRECT?

a	a. Owners of preferred stock have greater voting rights than common shareholders.
	b. From an individual investor's perspective, preferred stock is riskier than bonds.
	c. Companies are more likely to issue preferred stock if they have a low tax bracket since preferred stock dividends are not tax deductible.
	d. If a preferred issue is cumulative this means that any unpaid dividends are held in arrears.

10. As a general rule, the optimal capital structure

Maximizes expected EPS also maximizes the price per share of common stock.
Minimizes the interest rate on debt also maximizes the expected EPS.
Minimizes the required rate on equity also maximizes the stock price.
Maximizes the price per share of common stock and minimizes the WACC.

11. Which of the following statements about warrants and convertibles is NOT CORRECT?

a. The value of both warrants and convertibles depends on the stock price.

b. One primary difference between warrants and convertibles is that warrants bring in additional funds to the firm when exercised while convertibles reduce debt when exercised.

c. The coupon rate on convertible debt is higher than the coupon rate on similar straight debt because convertibles are riskier.

d. Warrants and Convertibles are used by corporations in order to get a lower rate on their debt.

12. In the lease versus buy decision, leasing is often preferable

a. if the firm is unable to borrow funds at a low rate.

b. if the firm needs a specific piece of equipment that only has value to that firm.

c. Because lease obligations do not affect the riskiness of the firm.

d. if the lessee has a higher tax rate than the lessor

13. Which statement is False?

The WACC is the required return on the firm

cerisejackal589

QUESTION 10

Short-term bond yields are generally ______ than long-term bond yields, whereas long-term bond prices are generally ________ than short-term bond prices.

		more volatile, less volatile
		less volatile, more volatile
		less volatile, less volatile
		more volatile, more volatile

2.5 points

QUESTION 11

Common stockholders have a residual claim to income, in other words they are last in line.

True

False

2.5 points

QUESTION 12

Stock classes are similar to bond ratings in that they are used to rank the performance of different corporations' stock.

True

False

2.5 points

QUESTION 13

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.

True

False

2.5 points

QUESTION 14

Which of the following is not a true statement?

Common stockholders have a residual claim to income.

Bondholders may force a corporation into bankruptcy for failure to make interest payments.

Common stockholders are legally entitled to some dividend.

A minority interest can still elect members to the Board of Directors under cumulative voting even though someone else owns 51% of the stock.

2.5 points

QUESTION 15

The purpose of cumulative voting is

to maintain majority control of the board of directors.

to allow minority stockholders the possibility of a voice on the board of directors.

to obstruct unfriendly mergers and takeover efforts.

to prevent the dilution of common stock through preemptive rights offerings.

2.5 points

QUESTION 16

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 preemptive right.

a poison pill.

ex-rights.

rights-on.

2.5 points

QUESTION 17

A possible advantage to a rights offering is that

current shareholders are protected against dilution.

the firm has a built-in market of knowledgeable investors.

distribution costs are lower than a public offering.

All of these options

2.5 points

QUESTION 18

Which of the following actions will provide the shareholders with the most total wealth when a company conducts a rights offering?

Exercise the rights for new shares.

Sell the rights themselves and hold existing shares and cash.

Exercise the rights and sell the shares.

None of these options

2.5 points

QUESTION 19

The subscription rate of a new offering is generally _______ than the rights-on price and _______ than the ex-rights price.

higher; higher

higher; lower

lower; higher

lower; lower

crimsonbeaver701

FIN 3104 Chapter Notes - Chapter 8: Cumulative Voting, Preferred Stock

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