Chapter 15 Long-Term Financing C. retirement fund.

Multiple Choice Questions D. irrevocable trustee fund.

1. The book capital of a corporation is determined by: E. None of these
A. the sum of the capital in excess of par and the retained 8. Debt that may be extinguished before maturity is referred to
earnings. as:
B. the par value of preferred stock. A. sinking-fund debt.
C. the sum of the treasury stock and the preferred stock. B. debentures.
D. the number of shares issued multiplied by the par value of C. callable debt.
each share. D. indenture debt.
E. the market price of the company's debt. E. None of these.
2. The book value of the shareholders' ownership is 9. If a long-term debt instrument is perpetual, it is called a(n):
represented by: A. secured debt issue.
A. the sum of the par value of common stock, the capital B. subordinated debt issue.
surplus and the accumulated retained C. consol.
earnings. D. capital debt issue.
B. the total assets minus the net worth. E. indenture.
C. the sum of the preferred stock, debt and the capital surplus. 10. The amount of loan a person or firm borrows from a lender
D. the sum of the total assets minus the current liabilities. is the:
E. None of these. A. creditor.
3. Shares of stock that have been repurchased by the B. indenture.
corporation are called: C. debenture.
A. treasury stock. D. principal.
B. undistributed capital stock. E. amortization.
C. retained equity. 11. The written agreement between a corporation and its
D. capital surplus shares. bondholders is called:
E. None of these. A. the collateral agreement.
4. The market value of the ownership of the firm equals: B. the deed.
A. the market price of the stock times the number of shares C. the indenture.
outstanding. D. the deed of conveyance.
B. the sum of the market price of the bonds and the stock. E. None of these.
C. the par value of the stock times the number of shares 12. If cumulative voting is permitted:
outstanding. A. the total number of votes a shareholder has is equal to the
D. the market price of the stock minus the retained earnings. number of shares owned.
E. None of these. B. the total number of votes a shareholder has is equal to the
5. A grant of authority allowing someone else to vote shares of number of shares owned times the
stock that you own is called: average number of years the shareholder has owned the
A. a power-of-share authorization. shares.
B. a proxy. C. the total number of votes a shareholder has can be
C. a share authority grant (SAG). calculated as the number of shares owned
D. a restricted conveyance. times the number of directors to be elected.
E. None of these. D. the total number of votes a shareholder has is equal to the
6. Unsecured corporate debt is called a(n): number of shares times the number
A. indenture. of board meetings the shareholder has attended.
B. debenture. E. None of these.
C. bond. 13. The market-to-book value ratio is implies growth and
D. mortgage. success when it is:
E. None of these. A. greater than 0.
7. A standard arrangement for the orderly retirement of long- B. less than 10.
term debt calls for the corporation to C. less than 0.
make regular payments into a(n): D. less than 1.
A. custodial account. E. greater than 1.
B. sinking fund.
14. There are 3 directors' seats up for election. If you own 20. Corporations try to create hybrid securities that look like
1,000 shares of stock and you can cast equity but are called debt because:
3,000 votes for a particular director, this is illustrative of: A. debt interest expense is tax deductible.
A. cumulative voting. B. bankruptcy costs are eliminated or reduced.
B. absolute priority voting. C. these securities have lower risk than debt.
C. sequential voting. D. Both debt interest expense is tax deductible; and these
D. straight voting. securities have lower risk than debt.
E. None of these. E. Both debt interest expense is tax deductible; and bankruptcy
15. If you own 1,000 shares of stock and you can cast only costs are eliminated or reduced.
1,000 votes for a particular director, then 21. Technically speaking, a long-term corporate debt offering
the stock features: that features a specific attachment to
A. cumulative voting. corporate property is generally called:
B. absolute priority voting. A. a debenture.
C. sequential voting. B. a bond.
D. straight voting. C. a long-term liability.
E. None of these. D. a preferred liability.
16. If a group other than management solicits the authority to E. None of these.
vote shares to replace management, a _____ is said to occur. 22. If a firm retires or extinguishes a debt issue before
A. proxy fight maturity, the specific amount they pay is:
B. stockholder derivative action A. the amortization amount.
C. tender offer B. the call price.
D. vote of confidence C. the sinking fund amount.
E. None of these. D. the spread premium.
17. Shareholders usually have which of the following right(s)? E. None of these.
A. To elect board members, the authorizing of new shares and 23. If a debenture is subordinated, it:
other matters of great importance to shareholders such as A. has a higher priority status than specified creditors.
being acquired. B. is secondary to equity.
B. To share proportionally in regular and liquidating dividends. C. must give preference to the specified creditor in the event of
C. To share proportionally in any new stock sold. default.
D. All of these. D. has been issued because the company is in default.
E. None of these. E. None of these.
18. Different classes of stock usually are issued to: 24. Not paying the dividends on a cumulative preferred issue
A. maintain ownership control by holding the class of stock may result in:
with greater voting rights. A. preferred dividend arrears that can be eliminated by the
B. pay less in dividends between the classes of stock. common shareholders only after
C. fool investors into thinking that equity is equity and there is common dividends are paid.
no difference in control or value features. B. voting rights are granted to preferred stockholders if
D. extract perquisites without the other class of stockholders preferred dividends are in arrears.
knowing. C. no payment of dividends to common shareholders.
E. None of these. D. Both preferred dividend arrears that can be eliminated by
19. Which of the following statements is false? the common shareholders only after common dividends are
A. Creditors do not have voting power. paid; and voting rights are granted to preferred stockholders if
B. Payment on interest on debt in considered an expense, preferred dividends are in arrears.
while payment of dividends is a return E. Both voting rights are granted to preferred stockholders if
on capital. preferred dividends are in arrears; and no payment of
C. Unpaid debt is a liability of the firm, and if not paid, can dividends to common shareholders.
result in liquidation of the firm. Unpaid common stock 25. Preferred stock has both a tax advantage and a tax
dividends cannot force liquidation. disadvantage. These two are:
D. One of the costs of issuing equity is the possibility of A. in default there are no taxes and dividends are taxed in
financial distress, while no financial distress is associated with corporate hands at 70%.
debt. B. corporate dividends are taxed on 30% of the dividends
E. None of these. received and expenses are deductible.
C. dividends are not a tax-deductible expense but are 70% D. There is no difference in the voting rights of preferred and
exempt from corporate taxation. common stockholders.
D. dividends are fully tax deductible but are not equity capital. E. None of these.
E. None of these. 30. If a debt issue is callable, the call price is generally ____
26. Preferred stock may be desirable to issue for which of the par.
following reason(s)? A. greater than
A. If there is no taxable income, preferred stock does not B. less than
impose a tax penalty. C. equal to
B. The failure to pay preferred dividends, cumulative or D. unrelated to
noncumulative, will not cause bankruptcy. E. It varies widely based on the risk of the firm.
C. Preferred dividends are not tax deductible and therefore will 31. There was an upward trend in the ratio of the book value of
not provide a tax shield but will debt to the book value of debt and equity throughout the
reduce net income. 1990s. Some of this was due to the repurchasing of stock. The
D. Both the failure to pay preferred dividends, cumulative or market value ratio of debt to debt and equity exhibited no
noncumulative, will not cause upward trend. This can be explained by:
bankruptcy; and preferred dividends are not tax deductible A. the change in the accounting rules of the period.
and therefore will not provide a tax B. the difference between tax accounting and accounting for
shield but will reduce net income. financial accounting purposes.
E. Both if there is no taxable income, preferred stock does not C. a large increase in the market value of equity that was
impose a tax penalty; and the greater than the increase in debt.
failure to pay preferred dividends, cumulative or D. All of these.
noncumulative, will not cause bankruptcy. E. None of these.
27. Preferred stock may exist because: 32. Financial deficits are created when:
A. losses before income taxes prevent a company from A. profits and retained earnings are greater than the capital-
enjoying the tax advantages of debt spending requirement.
interest while there is no tax advantage for preferred B. profits and retained earnings are less than the capital-
dividends. spending requirement.
B. an advantage exists for the firm; preferred shareholders C. profits and retained earnings are equal to the capital-
cannot force the company into bankruptcy because of unpaid spending requirement.
dividends. D. All of these.
C. corporations get a 70% tax exemption on preferred E. None of these.
dividends received. 33. Financial economists prefer to use market values when
D. All of these. measuring debt ratios because:
E. None of these. A. market values are more stable than book values.
28. The written agreement between a corporation and its B. market values are a better reflection of current value than
bondholders might contain a prohibition against paying historical value.
dividends in excess of current earnings. This prohibition is an C. market values are readily available and do not have to be
example of a(n): calculated like book values.
A. maintenance of security provision. D. market values are more difficult to calculate which makes
B. collateral restriction. financial economists more valuable.
C. affirmative indenture. E. None of these.
D. restrictive covenant. 34. Corporate financial officers prefer to use book values when
E. None of these. measuring debt ratios because:
29. Which of the following statements about preferred stock is A. book values are more stable than market values.
true? B. debt covenant restrictions are usually expressed in book
A. Unlike dividends paid on common stock, dividends paid on value terms.
preferred stock are a tax-deductible expense. C. rating agencies measure debt ratios in book values terms.
B. Unpaid dividends on preferred stock are a debt of the D. All of these.
corporation. E. None of these.
C. If preferred dividends are non-cumulative, then preferred 35. Holden Bicycles has 1,000 shares outstanding each with a
dividends not paid in a particular year par value of $0.10. If they are sold to
will be carried forward to the next year. shareholders at $10 each, what would the capital surplus be?
A. $100 41. James Yachts has 2,000 shares outstanding each with a par
B. $900 value of $0.07. If they are sold to shareholders at $7 each,
C. $9,900 what would the capital surplus be?
D. $10,000 A. $10,000
E. $11,000 B. $12,140
36. The Lory Bookstore used internal financing as a source of C. $13,250
long-term financing for 80% of its total D. $13.860
needs in 2011. The company borrowed an additional 27% of its E. $14,000
total needs in the long-term debt 42. Mike's Mopeds used internal financing as a source of long-
markets in 2011. What were Lory's net new stock issues in that term financing for 70% of its total
year? needs in 2011. The company borrowed an additional 20% of its
A. -20% total needs in the long-term debt
B. -7% markets in 2011. What were Calhoun's net new stock issues, in
C. 7% percentage terms, for 2011?
D. 20% A. -10%
E. 27% B. -5%
37. Michael's Motor Scooters has 1,000 shares outstanding C. 5%
each with a par value of $0.05. If they are sold to shareholders D. 10%
at $5 each, what would the capital surplus be? E. 15%
A. $4,400
B. $4,500
C. $4,750
D. $4,950
E. $5,000
38. Calhoun Computech used internal financing as a source of
long-term financing for 80% of its total needs in 2011. The
company borrowed an additional 15% of its total needs in the
long-term debt markets in 2011. What were Calhoun's net new
stock issues, in percentage terms, for 2011?
A. -10%
B. -5%
C. 5%
D. 10%
E. 15%
39. Holden Bicycles has 2,000 shares outstanding each with a
par value of $0.50. If they are sold to shareholders at $12 each,
what would the capital surplus be?
A. $1,000
B. $12,000
C. $15,000
D. $23,000
E. $24,000
40. The Lory Bookstore used internal financing as a source of
long-term financing for 85% of its total needs in 2011. The
company borrowed an additional 25% of its total needs in the
long-term debt markets in 2011. What were Lory's net new
stock issues in that year?
A. -20%
B. -10%
C. 10%
D. 20%
E. 30%