If a corporate charter includes a provision for preemptive rights,

1. 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.

2. “Preemptive rights” means that:
A. existing shareholders can prevent management from issuing additional common stock.
B. common shareholders can “preempt” preferred shareholders for dividends.
C. existing shareholders are guaranteed an opportunity to retain their proportional share of ownership of the firm.
D. management can preempt the right of shareholders to receive dividends if earnings are down.

3. A rights offering:
A. gives a firm a built-in market for new securities.
B. will likely lead to considerably higher distribution costs.
C. will increase the shareholder’s total valuation.
D. is the least expensive way to raise capital.

4. Which of the following are benefits of a rights offering?
A. Rights offerings increase return on equity.
B. Rights offerings substantiate higher debt to equity ratios.
C. Rights offerings have lower margin requirements.
D. None of the above

5. The possible advantage(s) to a rights offering is/are:
A. current shareholders are protected against dilution.
B. the firm has a built-in market of knowledgeable investors.
C. distribution costs are l.ower than a public offering.
D. All of the above

6. A rights offer made to existing shareholders with the sole purpose of making it more difficult for another firm acquire the company is called:
A. a preemptive right.
B. a poison pill.
C. ex-rights.
D. rights-on.

7. Preferred stock may be good for a company because it:
A. expands the capital base of the firm without diluting the common stock ownership.
B. does not require interest payment in times of financial trouble, but is tax-deductible when dividends are paid.
C. is not as costly as common stock or bonds.
D. gives up no control even when dividend payments are missed.

8. The par value on a preferred stock entitles the holder to:
A. priority on all cumulative dividends.
B. an established amount of money if the company is liquidated.
C. a minimum amount of convertible common stock.
D. None of the above

9. Preferred stock is often sold by companies:
A. wanting to balance their capital structures.
B. that have a large amount of debt relative to equity.
C. looking for the taxable advantages of preferred dividends over common stock dividends.
D. Both A and B

10. Stockholders may prefer dividends to reinvestment by the firm:
A. because dividends resolve some uncertainty.
B. because dividend payments have an information content.
C. because investors may prefer current cash to future cash.
D. All of the above
11. A major desire of stockholders regarding dividend policy is:
A. frequent stock dividends.
B. dividend stability.
C. high payouts when earnings are up and lower payouts when earnings are down.
D. payment of dividends at frequent intervals.

12. Which of the following is not an advantage of private placement?
A. No expensive registration process
B. Lower interest rates
C. More flexibility in negotiation
D. No extensive public relations requirements

13. Lucas, Inc., earned $10 million last year and retained $6 million. Lucas has 5 million shares outstanding, and the current price of Lucas shares is $30 per share. What is the payout ratio?
A. 2.67%
B. 4%
C. 40%
D. 60%

14. Mirrlees Furniture earned $500,000 last year and had a 40 percent payout ratio. How much did the firm add to its retained earnings?
A. $200,000
B. $300,000
C. $100,000
D. $500,000

15. The stockholders’ equity section of the balance sheet of the XYZ Corp. is as follows:
Common stock ($5 par) $20,000,000
Retained earnings $176,000,000
Total $196,000,000
If the company now splits its stock 5-for-1, which of the following is correct?
A. The par value per share will remain at $5.
B. The market price per share will probably remain unchanged.
C. The book value per share will decline to $17.60.
D. The par value per share will decline to $1.00.

16. The marginal principle of retained earnings means that each potential project to be financed by retained earnings must:
A. provide a higher rate of return than the stockholders can achieve after paying taxes on the distributed dividends.
B. yield a return equal to or greater than the marginal cost of capital.
C. provide enough return to pay the corporation’s marginal tax rate.
D. have an internal rate of return greater than the corporate growth rate of dividends.

17. Which of the following statements is FALSE?
A. Corporations are partially exempt from taxes on dividends received from other corporations.
B. Prior to the Tax Relief Act of 2003, investors in high marginal tax brackets preferred stocks that generated capital gains.
C. The Tax Relief Act of 2003 created equal taxation of long-term capital gains and dividends at a 15 percent rate.
D. Because the capital gains tax is so high, there are no real tax advantages to a stock repurchase option.

18. Firm X has declared a stock dividend that pays one share of stock for every 7 shares owned. After the stock dividend, earnings per share will:
A. remain the same.
B. decline 14.3%.
C. decline 7.0%.
D. Not enough information

19. A stock dividend will:
A. increase the value of a share of stock.
B. decrease the capital in excess of par account.
C. decrease the retained earnings account.
D. None of the above



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