Question 1

Which of the following statements concerning preferred stock is correct?

Accepted Answer

A)  Preferred stock generally has a higher component cost to the firm than does common stock. 
B)  By law in most states, all preferred stock issues must be cumulative, meaning that the cumulative, compounded total of all unpaid preferred dividends must be paid before dividends can be paid on the firm's common stock. 
C)  From the issuer's point of view, preferred stock is less risky than bonds. 
D)  Preferred stock, because of the current tax treatment of dividends, is bought mostly by individuals in high tax brackets. 
E)  Unlike bonds, preferred stock cannot have a convertible feature. 
A)  Preferred stock generally has a higher component cost to the firm than does common stock. 
B)  By law in most states, all preferred stock issues must be cumulative, meaning that the cumulative, compounded total of all unpaid preferred dividends must be paid before dividends can be paid on the firm's common stock. 
C)  From the issuer's point of view, preferred stock is less risky than bonds. 
D)  Preferred stock, because of the current tax treatment of dividends, is bought mostly by individuals in high tax brackets. 
E)  Unlike bonds, preferred stock cannot have a convertible feature.

Question 2

An option is a contract which gives its holder the right to buy (sell) an asset at a predetermined price within a specified period of time.

Accepted Answer

A) True 
 B)False

Question 3

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock.A proxy can be an important tool relating to control of the firm.

Accepted Answer

A) True 
 B)False

Question 4

Of the following provisions that might be found in a bond indenture, which would tend to reduce the coupon interest rate on the bond in question?

Accepted Answer

A)  A subordination clause in a debenture. 
B)  A call provision. 
C)  A convertible feature. 
D)  Having relatively few restrictive covenants. 
E)  All of the above. 
A)  A subordination clause in a debenture. 
B)  A call provision. 
C)  A convertible feature. 
D)  Having relatively few restrictive covenants. 
E)  All of the above.

Question 5

A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.

Accepted Answer

A)  convertible security 
B)  call option 
C)  warrant 
D)  put option 
E)  callable security 
A)  convertible security 
B)  call option 
C)  warrant 
D)  put option 
E)  callable security

Question 6

From a social welfare perspective, common stock is a desirable form of financing in part because it involves no fixed charge payments.Its inclusion in a firm's capital structure makes the firm less vulnerable to the consequences of unanticipated declines in sales and earnings than if only debt were available.

Accepted Answer

A) True 
 B)False

Question 7

NOPREM Inc.is a firm whose shareholders don't possess the preemptive right.The firm currently has 1,000 shares of stock outstanding, the price is $100 per share.The firm plans to issue an additional 1,000 shares at $90.00 per share.Since the shares will be offered to the public at large, what is the amount per share that old shareholders will lose if they are excluded from purchasing new shares?

Accepted Answer

A)  $90.00 
B)  $5.00 
C)  $10.00 
D)  $0 
E)  $2.50 
A)  $90.00 
B)  $5.00 
C)  $10.00 
D)  $0 
E)  $2.50

Question 8

A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?

Accepted Answer

A)  cumulative dividends 
B)  callable dividends 
C)  putable dividends 
D)  historical dividends 
E)  paid dividends 
A)  cumulative dividends 
B)  callable dividends 
C)  putable dividends 
D)  historical dividends 
E)  paid dividends

Question 9

Discounted securities are debt instruments that pay periodic interest payments and sell at par value when issued.The interest payments generate a positive return for the purchaser of discounted securities.

Accepted Answer

A) True 
 B)False

Question 10

Your Aunt Agatha purchased a call option a few months ago.Today is the expiration date, so she must decide whether to exercise the option.Which of the following statements is correct? Do not consider brokers' commissions in your answer.

Accepted Answer

A)  Aunt Agatha doesn't need to make a decision about exercising the option today; in fact, it would be better if she waited until after the option expires. 
B)  Aunt Agatha should exercise the option if the price of the stock is less than the exercise, or strike, price. 
C)  Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price. 
D)  Aunt Agatha should exercise the option, regardless of the current stock price. 
E)  None of the above. 
A)  Aunt Agatha doesn't need to make a decision about exercising the option today; in fact, it would be better if she waited until after the option expires. 
B)  Aunt Agatha should exercise the option if the price of the stock is less than the exercise, or strike, price. 
C)  Aunt Agatha should exercise the option if the price of the stock is greater than the exercise, or strike, price. 
D)  Aunt Agatha should exercise the option, regardless of the current stock price. 
E)  None of the above.

Question 11

A putable bond can be redeemed at par value at the holder's option.Usually, the put option can be exercised only if the issuer takes some specific action, such as significantly increasing debt.

Accepted Answer

A) True 
 B)False

Question 12

Assume the securities are all issued by the same firm.From the investor's standpoint, rank the following securities in order of increasing risk (the number of the least risky security is placed first, or to the left, in the answer set).

Accepted Answer

A)  1, 2, 3, 4 
B)  4, 1, 2, 3 
C)  4, 1, 3, 2 
D)  4, 2, 1, 3 
E)  4, 2, 3, 1 
A)  1, 2, 3, 4 
B)  4, 1, 2, 3 
C)  4, 1, 3, 2 
D)  4, 2, 1, 3 
E)  4, 2, 3, 1

Question 13

Companies A and B recently established a new jointly owned subsidiary, ABBA Corporation.ABBA now requires $100 million of capital.A and B will supply $40 million of common equity, $20 million each.The remaining $60 million will be raised by using some combination of debt and preferred stock.Which of the following statements is most correct?

Accepted Answer

A)  The interest rate on the debt would be higher if ABBA uses $60 million of debt and $0 preferred than it would be if ABBA uses $30 million of debt and $30 million of preferred. 
B)  Because 70 percent of preferred stock dividends received are excluded from a corporation's taxable income, (1) most preferred stock is owned by corporations, and (2) frequently a company's bond interest rate is higher than its preferred stock dividend yield. 
C)  If ABBA's preferred stock were made convertible into its common, the preferred would have a lower dividend yield than if the preferred were nonconvertible. 
D)  All of the above statements are true. 
E)  Only answers a and b above are true. 
A)  The interest rate on the debt would be higher if ABBA uses $60 million of debt and $0 preferred than it would be if ABBA uses $30 million of debt and $30 million of preferred. 
B)  Because 70 percent of preferred stock dividends received are excluded from a corporation's taxable income, (1) most preferred stock is owned by corporations, and (2) frequently a company's bond interest rate is higher than its preferred stock dividend yield. 
C)  If ABBA's preferred stock were made convertible into its common, the preferred would have a lower dividend yield than if the preferred were nonconvertible. 
D)  All of the above statements are true. 
E)  Only answers a and b above are true.

Question 14

The par value of a share of common stock represents the minimum price at which new shares can be sold.All new issues of common stock must have a par value equal to the current market price of the share.

Accepted Answer

A) True 
 B)False

Question 15

A company is planning to raise $1,000,000 to finance a new plant.Which of the following statements is correct?

Accepted Answer

A)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond. 
B)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan. 
C)  If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond on the new plant and $500,000 as debentures, the interest rate on the first mortgage bond would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. 
D)  The company would be especially anxious to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future. 
E)  All of the above statements are false. 
A)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond. 
B)  If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan. 
C)  If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond on the new plant and $500,000 as debentures, the interest rate on the first mortgage bond would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds. 
D)  The company would be especially anxious to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future. 
E)  All of the above statements are false.

Question 16

Which of the following statements is correct?

Accepted Answer

A)  Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees. 
B)  A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market, if the price of the bond exceeds the sinking fund call price. 
C)  Income bonds pay interest only when the amount of the interest is actually earned by the company.Thus, these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds. 
D)  One disadvantage of zero-coupon bonds is that issuing firms cannot realize the tax savings from issuing debt until the bonds mature. 
E)  Other things held constant, callable bonds should have a lower yield to maturity than noncallable bonds. 
A)  Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees. 
B)  A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market, if the price of the bond exceeds the sinking fund call price. 
C)  Income bonds pay interest only when the amount of the interest is actually earned by the company.Thus, these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds. 
D)  One disadvantage of zero-coupon bonds is that issuing firms cannot realize the tax savings from issuing debt until the bonds mature. 
E)  Other things held constant, callable bonds should have a lower yield to maturity than noncallable bonds.

Question 17

Retained earnings are a balance sheet account that indicates the total amount of earnings the firm has not paid out as dividends throughout its history.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is correct?

Accepted Answer

A)  If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large amount of new equity funds for expansion than would be true if the demand curve were steeper. 
B)  Flotation costs to raise a given amount of funds would, typically, be smaller under a best-efforts arrangement than with an underwritten offering, and the corporation is also more certain of getting the needed funds under a best-efforts offering.This is why best-efforts deals are most common. 
C)  Par value is not necessarily the actual price at which stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy.Thus, if a firm sold $5 par stock to investors at $30 per share, in the event of bankruptcy the firm would have to pay the stockholders no more than $5 per share. 
D)  The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any additional shares sold by the firm.This right protects current stockholders against both dilution of control and dilution of value. 
E)  One of the legal rights that often goes with common stock is the preemptive right.This is the right of present stockholders to purchase their "proportional share" of all new securities that might be issued by the firm, including common and preferred stock, and all types of debt. 
A)  If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large amount of new equity funds for expansion than would be true if the demand curve were steeper. 
B)  Flotation costs to raise a given amount of funds would, typically, be smaller under a best-efforts arrangement than with an underwritten offering, and the corporation is also more certain of getting the needed funds under a best-efforts offering.This is why best-efforts deals are most common. 
C)  Par value is not necessarily the actual price at which stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy.Thus, if a firm sold $5 par stock to investors at $30 per share, in the event of bankruptcy the firm would have to pay the stockholders no more than $5 per share. 
D)  The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any additional shares sold by the firm.This right protects current stockholders against both dilution of control and dilution of value. 
E)  One of the legal rights that often goes with common stock is the preemptive right.This is the right of present stockholders to purchase their "proportional share" of all new securities that might be issued by the firm, including common and preferred stock, and all types of debt.

Question 19

The balance sheet item common equity represents the sum of the firm's common stock, paid-in capital, and retained earnings, which equal the common stockholders' total investment in the firm stated at book value.

Accepted Answer

A) True 
 B)False

Question 20

Listed below are some provisions that are often contained in bond indentures:   Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond?

Accepted Answer

A)  1, 2, 3, 4, 5, 6 
B)  1, 2, 3, 4, 6 
C)  1, 3, 4, 5, 6 
D)  1, 3, 4, 6 
E)  1, 4, 6 
A)  1, 2, 3, 4, 5, 6 
B)  1, 2, 3, 4, 6 
C)  1, 3, 4, 5, 6 
D)  1, 3, 4, 6 
E)  1, 4, 6

Which of the following statements concerning preferred stock is correct?

An option is a contract which gives its holder the right to buy (sell) an asset at a predetermined price within a specified period of time.

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock.A proxy can be an important tool relating to control of the firm.

Of the following provisions that might be found in a bond indenture, which would tend to reduce the coupon interest rate on the bond in question?

A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.

A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?

Discounted securities are debt instruments that pay periodic interest payments and sell at par value when issued.The interest payments generate a positive return for the purchaser of discounted securities.

Your Aunt Agatha purchased a call option a few months ago.Today is the expiration date, so she must decide whether to exercise the option.Which of the following statements is correct? Do not consider brokers' commissions in your answer.

A putable bond can be redeemed at par value at the holder's option.Usually, the put option can be exercised only if the issuer takes some specific action, such as significantly increasing debt.

Assume the securities are all issued by the same firm.From the investor's standpoint, rank the following securities in order of increasing risk (the number of the least risky security is placed first, or to the left, in the answer set).

The par value of a share of common stock represents the minimum price at which new shares can be sold.All new issues of common stock must have a par value equal to the current market price of the share.

A company is planning to raise $1,000,000 to finance a new plant.Which of the following statements is correct?

Which of the following statements is correct?

Retained earnings are a balance sheet account that indicates the total amount of earnings the firm has not paid out as dividends throughout its history.

Which of the following statements is correct?

The balance sheet item common equity represents the sum of the firm's common stock, paid-in capital, and retained earnings, which equal the common stockholders' total investment in the firm stated at book value.

Listed below are some provisions that are often contained in bond indentures: Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond?

An Overview of Finance

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters

Exam 2: Financial Assets Instruments

Which of the following statements concerning preferred stock is correct?

An option is a contract which gives its holder the right to buy (sell) an asset at a predetermined price within a specified period of time.

A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock.A proxy can be an important tool relating to control of the firm.

Of the following provisions that might be found in a bond indenture, which would tend to reduce the coupon interest rate on the bond in question?

A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.

A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?

Discounted securities are debt instruments that pay periodic interest payments and sell at par value when issued.The interest payments generate a positive return for the purchaser of discounted securities.

Your Aunt Agatha purchased a call option a few months ago.Today is the expiration date, so she must decide whether to exercise the option.Which of the following statements is correct? Do not consider brokers' commissions in your answer.

A putable bond can be redeemed at par value at the holder's option.Usually, the put option can be exercised only if the issuer takes some specific action, such as significantly increasing debt.

Assume the securities are all issued by the same firm.From the investor's standpoint, rank the following securities in order of increasing risk (the number of the least risky security is placed first, or to the left, in the answer set).

The par value of a share of common stock represents the minimum price at which new shares can be sold.All new issues of common stock must have a par value equal to the current market price of the share.

A company is planning to raise $1,000,000 to finance a new plant.Which of the following statements is correct?

Which of the following statements is correct?

Retained earnings are a balance sheet account that indicates the total amount of earnings the firm has not paid out as dividends throughout its history.

Which of the following statements is correct?

The balance sheet item common equity represents the sum of the firm's common stock, paid-in capital, and retained earnings, which equal the common stockholders' total investment in the firm stated at book value.

Listed below are some provisions that are often contained in bond indentures: Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond?

An Overview of Finance

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment Concepts

Security Valuation and Selection

Filters