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Finance Flashcards

Finance Exam II (Multiple Choice: Ch 7)

Which of the following is an advantage for a firm to issue common stock over long-term debt?A) the cost of equity financing is less than the cost of debt financingB) the primary claim of equityholders on income and assets in the event of liquidationC) no maturity date on which the par value of the issue must be repaidD) the tax deductibility of dividends which lowers the cost of equity financing C) no maturity date on which the par value of the issue must be repaid
Because equityholders are the last to receive any distribution of assets as a result of bankruptcy proceedings, they expect ________.A) fixed dividend paymentsB) greater returns from their investment in the firm’s stockC) all profits to be paid out in dividendsD) warrants to be attached to the stock issue B) greater returns from their investment in the firm’s stock
Which of the following typically applies to common stock but not to preferred stock?A) par valueB) dividend yieldC) legally considered as equity in the firmD) voting rights D) voting rights
Which of the following is true of equity?A) equityholders do not have voting rights.B) It does not mature, so repayment is not required.C) It is a temporary form of financing for a firm.D) Equity financing is obtained from creditors. B) It does not mature, so repayment is not required.
Which of the following is true of common stock?A) It is often considered quasi-debt due to fixed payment obligation.B) It has less restrictive covenants than debt.C) It gives the holder voting rights which permit selection of the firm’s directors.D) Its holders have priority over preferred stockholders in the event of liquidation of assets. C) It gives the holder voting rights which permit selection of the firm’s directors.
________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.A) Rights offeringB) Treasury stocksC) Preemptive rightsD) Proxy statements A) Rights offering
The preemptive right gives shareholders the right ________.A) to caste one vote for each share owned at the annual meeting of the companyB) to give up their vote to another party if they do not attend the annual meetingC) to maintain their proportionate ownership in the corporation when new common stock is issuedD) to sell their share of stock at a premium in the event of liquidation C) to maintain their proportionate ownership in the corporation when new common stock is issued
________ are promised a fixed periodic dividend that must be paid prior to paying any common stock dividends.A) Preferred stockholdersB) Common stockholdersC) BondholdersD) Creditors A) Preferred stockholders
Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common stockholders are ________.A) cumulativeB) nonparticipatingC) participatingD) convertible A) cumulative
The cost of preferred stock is ________.A) lower than the cost of long-term debtB) higher than the cost of common stockC) higher than the cost of long-term debt and lower than the cost of common stockD) lower than the cost of convertible long-term debt and higher than the cost of common stock C) higher than the cost of long-term debt and lower than the cost of common stock
Regarding the tax treatment of payments to securities holders, it is true that ________.A) interest and preferred stock dividends are not tax-deductible, while common stock dividends are tax deductibleB) interest and preferred stock dividends are tax-deductible, while common stock dividends are not tax-deductibleC) common stock dividends and preferred stock dividends are tax-deductible, while interest is not tax-deductibleD) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible D) common stock dividends and preferred stock dividends are not tax-deductible, while interest is tax-deductible
________ are financial instruments that allow stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares.A) Rights offeringB) Treasury stocksC) Preemptive rightsD) Proxy statements A) Rights offering
If expected return is less than required return on an asset, rational investors will ________.A) buy the asset, which will drive the price up and cause expected return to reach the level of the required returnB) sell the asset, which will drive the price down and cause the expected return to reach the level of the required returnC) sell the asset, which will drive the price up and cause the expected return to reach the level of the required returnD) buy the asset, since price is expected to increase B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return
In the Gordon model, the value of a common stock is the ________.A) net value of all assets which are liquidated for their exact accounting valueB) actual amount each common stockholder would expect to receive if the firm’s assets are soldC) present value of a non-growing dividend streamD) present value of a constant growing dividend stream D) present value of a constant growing dividend stream

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