Financial Management

301. The document containing all of the legal details of the bond is:

  1. the debenture
  2. the indenture
  3. the bond agreement
  4. the debt agreement
Correct answer: (B)
the indenture

302. A bond issue should be refunded when:

  1. bondholders desire the return of their funds
  2. it is too expensive to issue additional common stock
  3. interest rates drop and you believe they will increase again
  4. the existing bonds contain no call provision
Correct answer: (C)
interest rates drop and you believe they will increase again

303. All income not paid out to creditors or preferred shareholders:

  1. is paid out as common stock dividends
  2. is distributed as interest to bondholders
  3. automatically belongs to common shareholders
  4. is subject to a higher federal income tax rate
Correct answer: (C)
automatically belongs to common shareholders

304. Preferred stock may be justified in that it:

  1. expands the capital base without diluting common equity
  2. it is lower cost source of financing than debt
  3. dividends are tax-deductible
  4. really has no justification
Correct answer: (A)
expands the capital base without diluting common equity

305. Which of the following statements is correct:

  1. Dividend amounts are first determined, and the residual retained
  2. In achieving the highest overall return, dividends are irrelevant
  3. Most shareholders prefer retained earnings over dividends
  4. There is conclusive proof that investors prefer dividends over retained earnings
Correct answer: (B)
In achieving the highest overall return, dividends are irrelevant

306. All of the following are key dates associated with the declaration of a dividend except:

  1. the ex-dividend date
  2. the holder of record date
  3. the payment date
  4. the dividend receipt date
Correct answer: (D)
the dividend receipt date

307. If a firm repurchases it own stock:

  1. in theory, the action is equivalent to paying cash dividends
  2. the price of the stock is lowered into a more popular trading range
  3. shareholders benefit less than with a stock split
  4. shareholders benefit less than with a stock dividend
Correct answer: (A)
in theory, the action is equivalent to paying cash dividends

308. Rights, warrants and convertible securities behave like call options but are different from call options because:

  1. they do not trade in a financial market
  2. they are used by the firm to raise money
  3. they do not trade at a speculative premium
  4. they are less risky
Correct answer: (B)
they are used by the firm to raise money

309. The speculative premium of a warrant is equal to

  1. warrant price-intrinsic value
  2. intrinsic value-warrant price
  3. (Market Value of Common Stock-Warrant Option Price) X Number of Shares per warrant
  4. the minimum value
Correct answer: (A)
warrant price-intrinsic value

310. A firm with a tax loss carryforward:

  1. is able to reduce their taxes for previous years
  2. provides a tax motive and a cash flow opportunity for an acquiring firm
  3. allows tax payments to be carried forward to the next year
  4. is not a good merger target because they are unprofitable
Correct answer: (B)
provides a tax motive and a cash flow opportunity for an acquiring firm
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