Financial Management
301. The document containing all of the legal details of the bond is:
- the debenture
- the indenture
- the bond agreement
- the debt agreement
Correct answer: (B)
the indenture
302. A bond issue should be refunded when:
- bondholders desire the return of their funds
- it is too expensive to issue additional common stock
- interest rates drop and you believe they will increase again
- 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:
- is paid out as common stock dividends
- is distributed as interest to bondholders
- automatically belongs to common shareholders
- 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:
- expands the capital base without diluting common equity
- it is lower cost source of financing than debt
- dividends are tax-deductible
- really has no justification
Correct answer: (A)
expands the capital base without diluting common equity
305. Which of the following statements is correct:
- Dividend amounts are first determined, and the residual retained
- In achieving the highest overall return, dividends are irrelevant
- Most shareholders prefer retained earnings over dividends
- 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:
- the ex-dividend date
- the holder of record date
- the payment date
- the dividend receipt date
Correct answer: (D)
the dividend receipt date
307. If a firm repurchases it own stock:
- in theory, the action is equivalent to paying cash dividends
- the price of the stock is lowered into a more popular trading range
- shareholders benefit less than with a stock split
- 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:
- they do not trade in a financial market
- they are used by the firm to raise money
- they do not trade at a speculative premium
- 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
- warrant price-intrinsic value
- intrinsic value-warrant price
- (Market Value of Common Stock-Warrant Option Price) X Number of Shares per warrant
- the minimum value
Correct answer: (A)
warrant price-intrinsic value
310. A firm with a tax loss carryforward:
- is able to reduce their taxes for previous years
- provides a tax motive and a cash flow opportunity for an acquiring firm
- allows tax payments to be carried forward to the next year
- 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