Question 1

What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?

Accepted Answer

A) $17,500 
B) $32,500 
C) $50,000 
D) $76,923 After-tax cost of preferred stock dividends:
= before-tax cost
= $50,000 
A) $17,500 
B) $32,500 
C) $50,000 
D) $76,923 After-tax cost of preferred stock dividends:
= before-tax cost
= $50,000

Question 2

A warrant has an exercise price of $40, and the current stock price is $38.An investor holding this option will purchase the stock only if:

Accepted Answer

A) The dividend yield on the stock exceeds 10 % 
B) The stock price falls below $38 
C) The stock price rises above $40 
D) The stock price falls to $20 or below 
A) The dividend yield on the stock exceeds 10 % 
B) The stock price falls below $38 
C) The stock price rises above $40 
D) The stock price falls to $20 or below

Question 3

Which of the following statements about floating-rate preferred stock is correct?

Accepted Answer

A) Its dividends increase as interest rates increase 
B) Its market price increases at a set rate annually 
C) It is the only stock issued without a par value 
D) Its dividends are deductible for tax purposes by the paying corporation 
A) Its dividends increase as interest rates increase 
B) Its market price increases at a set rate annually 
C) It is the only stock issued without a par value 
D) Its dividends are deductible for tax purposes by the paying corporation

Question 4

Outline the impact of the Sarbanes-Oxley Act.

Accepted Answer

The Sarbanes-Oxley Act tried to prevent

Question 5

An issue of bonds that is sold simultaneously in several countries is called:

Accepted Answer

A) Funded 
B) Eurobond 
C) Subordinated 
D) Sinking fund 
A) Funded 
B) Eurobond 
C) Subordinated 
D) Sinking fund

Question 6

Protective covenants are offered for the benefit of:

Accepted Answer

A) Common shareholders 
B) Preferred shareholders 
C) Bondholders 
D) Both common and preferred shareholders 
A) Common shareholders 
B) Preferred shareholders 
C) Bondholders 
D) Both common and preferred shareholders

Question 7

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:

Accepted Answer

A) $15,000 
B) $30,000 
C) $35,000 
D) $50,000 
A) $15,000 
B) $30,000 
C) $35,000 
D) $50,000

Question 8

With respect to bonds, when interest rates increase:

Accepted Answer

A) The coupon rate also increases 
B) The coupon rate remains unchanged 
C) The price of the bond rises 
D) The price of the bond remains unchanged 
A) The coupon rate also increases 
B) The coupon rate remains unchanged 
C) The price of the bond rises 
D) The price of the bond remains unchanged

Question 9

Show the capital accounts at the end of the first year of operation for a firm that, at the beginning of the year, issued 50,000 shares of $1.50 par value common stock for $15 per share, repurchased 5,000 shares during the year at $20 per share, and paid out 40 % of earnings as dividends with a 50 cent per share dividend.

Accepted Answer

The answer of Show the capital accounts at the end...

Question 10

A capital surplus is obtained when the par value of a stock is greater than the retained earnings.

Accepted Answer

A) True 
 B)False

Question 11

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes did the shareholder cast for Director 'A' if four directors are to be elected and the maximum number of votes was cast for 'A'?

Accepted Answer

A) 25 
B) 100 
C) 200 
D) 400 
A) 25 
B) 100 
C) 200 
D) 400

Question 12

Which of the following forms of debt would be likely to offer debt holders the lowest interest rate?

Accepted Answer

A) Secured debt that is not callable 
B) Secured debt with a sinking fund 
C) Subordinated debt that is callable 
D) Subordinated debt with a sinking fund 
A) Secured debt that is not callable 
B) Secured debt with a sinking fund 
C) Subordinated debt that is callable 
D) Subordinated debt with a sinking fund

Question 13

Other things being equal, discuss how the following provisions can affect the yield to maturity of bonds: Call provision Restriction on further borrowing Provision on specific collateral for the bond Option to convert the bonds into shares

Accepted Answer

A call provision gives the firm a valuab

Question 14

Which of the following balance-sheet accounts will not be affected when there is a reduction in the number of outstanding shares?

Accepted Answer

A) Retained earnings 
B) Additional paid-in capital 
C) Common shares (at par value) 
D) Treasury stock at cost 
A) Retained earnings 
B) Additional paid-in capital 
C) Common shares (at par value) 
D) Treasury stock at cost

Question 15

List four protective covenants that you might be interested in as a prospective bondholder.Briefly describe why these would be realistic bondholder concerns.Note: the text did not list four covenants, so you must be creative.

Accepted Answer

Limit either dollar value of total debt

Question 16

Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:

Accepted Answer

A) Common shareholders 
B) Preferred shareholders 
C) Bondholders 
D) Both common and preferred shareholders 
A) Common shareholders 
B) Preferred shareholders 
C) Bondholders 
D) Both common and preferred shareholders

Question 17

Which of the following statements is correct about a U.S.corporation in the 35 % tax bracket that can invest either in a bond paying 8 % interest or in the preferred stock of another corporation that pays a 6 % dividend?

Accepted Answer

A) The stock is preferred by approximately .17 % 
B) The stock is preferred by approximately .80 % 
C) The bond is preferred by approximately 1.30 % 
D) The after-tax yields are identical on each After-tax yield (bond) = 8 %(1 - tax rate)
= 8% (1 - .35)
= 8% x .65
= 5)2%
After-tax yield (stock) = 6% - (6% x taxable portion x tax rate)
= 6% - (6% x .3 x .35)
= 5)37% 
A) The stock is preferred by approximately .17 % 
B) The stock is preferred by approximately .80 % 
C) The bond is preferred by approximately 1.30 % 
D) The after-tax yields are identical on each After-tax yield (bond) = 8 %(1 - tax rate)
= 8% (1 - .35)
= 8% x .65
= 5)2%
After-tax yield (stock) = 6% - (6% x taxable portion x tax rate)
= 6% - (6% x .3 x .35)
= 5)37%

Question 18

What is the rationale for saying that the federal government provides a tax subsidy to corporate debtors?

Accepted Answer

A) Interest and principal payments are tax deductible 
B) Interest payments are tax deductible 
C) Principal payments are tax deductible 
D) 70 % of interest payments are tax deductible 
A) Interest and principal payments are tax deductible 
B) Interest payments are tax deductible 
C) Principal payments are tax deductible 
D) 70 % of interest payments are tax deductible

Question 19

Which of the following statements is correct concerning stock dividends?

Accepted Answer

A) Common stock dividends cannot be paid if preferred stock dividends are in arrears 
B) Preferred stock dividends cannot be paid if common stock dividends are in arrears 
C) Neither common nor preferred dividends can be paid if accrued interest is in arrears 
D) No stock dividends can be paid if the firm has no cash 
A) Common stock dividends cannot be paid if preferred stock dividends are in arrears 
B) Preferred stock dividends cannot be paid if common stock dividends are in arrears 
C) Neither common nor preferred dividends can be paid if accrued interest is in arrears 
D) No stock dividends can be paid if the firm has no cash

Question 20

ABC Corporation has fallen upon hard times and dividends on their non-cumulative, preferred stock have not been paid for three years.Which of the following is true?

Accepted Answer

A) Common shareholders must now receive three years' worth of dividends 
B) Preferred shareholders must now receive three years' worth of dividends 
C) The corporation must fold if preferred shareholders are not paid 
D) Common shareholders have not received dividends for three years 
A) Common shareholders must now receive three years' worth of dividends 
B) Preferred shareholders must now receive three years' worth of dividends 
C) The corporation must fold if preferred shareholders are not paid 
D) Common shareholders have not received dividends for three years

Exam 14: Introduction to Corporate Financing and Governance

What is the after-tax cost to a corporation in the 35 % tax bracket of paying $50,000 in preferred-stock dividends?

A warrant has an exercise price of $40, and the current stock price is $38.An investor holding this option will purchase the stock only if:

Which of the following statements about floating-rate preferred stock is correct?

Outline the impact of the Sarbanes-Oxley Act.

An issue of bonds that is sold simultaneously in several countries is called:

Protective covenants are offered for the benefit of:

What will be the effect on retained earnings if a firm with 5,000 shares outstanding earns $10 per share and has a 30% plowback ratio? It will increase by:

With respect to bonds, when interest rates increase:

A capital surplus is obtained when the par value of a stock is greater than the retained earnings.

A shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting.How many votes did the shareholder cast for Director 'A' if four directors are to be elected and the maximum number of votes was cast for 'A'?

Which of the following forms of debt would be likely to offer debt holders the lowest interest rate?

Other things being equal, discuss how the following provisions can affect the yield to maturity of bonds: Call provision Restriction on further borrowing Provision on specific collateral for the bond Option to convert the bonds into shares

Which of the following balance-sheet accounts will not be affected when there is a reduction in the number of outstanding shares?

List four protective covenants that you might be interested in as a prospective bondholder.Briefly describe why these would be realistic bondholder concerns.Note: the text did not list four covenants, so you must be creative.

Protective covenants prevent bond issuers from irresponsible over-borrowing behavior and are offered for the benefit of:

Which of the following statements is correct about a U.S.corporation in the 35 % tax bracket that can invest either in a bond paying 8 % interest or in the preferred stock of another corporation that pays a 6 % dividend?

What is the rationale for saying that the federal government provides a tax subsidy to corporate debtors?

Which of the following statements is correct concerning stock dividends?

ABC Corporation has fallen upon hard times and dividends on their non-cumulative, preferred stock have not been paid for three years.Which of the following is true?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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