1) A bond's rating can depend on all of the following except
A.the corporation's debt-equity ratio.
B.the corporation's size.
C.the ability of the firm to make interest payments.
D.the coupon rate on the bond.
2) The effect of a rights offering on a stockholder is
A.to increase his/her wealth.
B.to increase his/her wealth only if the new stock is purchased.
C.to decrease his/her wealth unless the stock is purchased.
D.to decrease his/her wealth if nothing is done.
3) Preferred stock dividends are a deductible expense for a corporation.
A. True
B. False
4) The costs of bond refunding are the call premium, and the underwriting costs on the old and new bond issue.
A. True
B. False
5) A "subordinated debenture"
A.must be transferred with the bond to which it is attached.
B.is used mainly by railroad companies and usually specifies equipment as collateral.
C.entitles the bondholder to purchase shares of common stock at a specific price.
D.is an unsecured bond with an inferior claim on assets in the event of liquidation.
6) Stockholders always have preemptive rights when new issues of stock are offered.
A. True
B. False
7) Debentures are commonly issued by small companies.
A. True
B. False
8) The subscription rate is generally _______ than the rights-on price and _______ than the ex-rights price.
A.higher, higher
B.higher, lower
C.lower, higher
D.lower, lower
9) Bondholders never have any control over the actions of a firm.
A. True
B. False
10) The increasing sophistication of individual investors has decreased the role of institutional investors in the stock market.
A. True
B. False
11) Stock purchased through a rights offering may carry lower margin requirements.
A. True
B. False
12) The term debenture refers to
A.long-term, secured debt.
B.long-term, unsecured debt.
C.the after-acquired property clause.
D.a 100-page document covering the specific terms of the offering.
13) The difference between the initial bond price and the maturity value is amortized for tax purposes over the life of a zero-coupon bond.
A. True
B. False
14) With regard to interest rates and bond prices it can be said that
A.a 1% change in interest rates will cause a greater change in long-term bond prices than short-term prices.
B.a 1% change in interest rates will cause a greater change in short-term bond prices than long-term prices.
C.long-term rates are more volatile than short-term rates.
D.a decrease in interest rates will cause bond prices to fall.
15) An increasing proportion of shares in the U.S. are owned by:
A.individual investors.
B.corporations (Treasury Stock).
C.institutions.
D.governments.
16) Under normal operating conditions, the board of directors is elected by
A.the common stockholders.
B.the preferred stockholders.
C.the bondholders.
D.two of the above.
17) If a corporate charter includes a provision for preemptive rights, the stockholders
A.must sell their stock to the company.
B.get first option to buy additional issues of common stock.
C.may purchase existing treasury stock.
D.cannot utilize cumulative voting procedures.
18) The higher the bond rating
A.the higher the interest rate on a bond.
B.the lower the interest rate on a bond.
C.the higher the call premium.
D.the lower the call premium
19) The purpose of cumulative voting is
A.to maintain majority control of the board of directors.
B.to allow minority stockholders the possibility of a voice on the board of directors.
C.to obstruct unfriendly mergers and takeover efforts.
D.to prevent the dilution of common stock through pre-emptive rights offerings.
20) The weighted average cost of capital is generally used as the discount rate in a bond-refunding decision.
A. True
B. False
21) Preferred stock is the least used of all long-term securities because
A.investors can get higher returns after taxes in other investments.
B.preferred dividends are considered regular (fixed) obligations but are not tax-deductible.
C.flotation costs are extremely high compared to bonds.
D.all of these.
22) Which of the following is not a form of yield on a bond?
A.coupon rate (nominal yield)
B.current yield
C.dividend yield
D.yield to maturity
23) There are a number of possible advantages to a rights offering:
A.current shareholders are protected against dilution.
B.the firm has a built-in market of knowledgeable investors.
C.distribution costs are lower than a public offering.
D.all of these.
24) The yield to maturity is the internal rate of return on a bond.
A. True
B. False
25) When a company defaults on a secured debt, it is rare for the secured asset to be sold and the proceeds distributed to the debtor.
A. True
B. False