13. Some companies choose to issue preferred stock in addition to common stock.
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13. Some companies choose to issue preferred stock in addition to common stock. Most issues of preferred stock are known as cumulative preferred stock. This means that: A. The firm must pay all past preferred dividends before common shareholders are paid. B. The firm can pay preferred dividends only when all corporate taxes have been paid. C Dividends can be deferred by the shareholder and carried over into a subsequent year to reduce their tax liability D. Interest expense will be accumulated on unpaid dividends. 14. When a company chooses to borrow money, it must decide to borrow short term or long term. If a company intended to purchase a new factory, which of the following would be true? A. They would borrow short term (i.e. Line of Credit) because they could get their money faster B. They would trade stock with the bank to avoid depleting their cash reserves C. They would borrow long term to match the nature of the asset being purchased so as not negatively impact their current ratio. They would have difficulty obtaining funds because of the high price of real estate. D. 15. Ownership of stock, or equity, in a company is a residual claim. This means that: A. All employees who own stock must reside in the same geographical region as the corporate office. B. The shareholder participates in the ups and downs of the company after debt claims are satisfied C. Stock cannot be sold unless approved by the Board of Directors D. Additional stock cannot be purchased unless all debtholders have been paid. 16. Standard & Poor's is in the business of rating corporate bonds. These ratings are very important to corporations because they control what the interest rate will be on the related bond. Which bond rating below would prompt the lowest possible interest rate for the company? A B88 B BAA D. CBB 17. When Enron declared bankruptcy in 2002, it represented the largest corporate bankruptcy in US corporate history. Unfortunately, the sub-prime mortgage crisis caused several larger bankruptcies to occur. What company was forced to close its doors forever in the wake of the crisis thereby becoming the largest bankruptcy, by far, in our history? A. EF Hutton B. General Motors C. Lehman Brothers D. AIG 18. If a company is considering an Initial Public Offering, they must choose an underwriter. Which of the following does an underwriter do? A· They provide the company with procedural and financial advice B. They buy the stock issue C. They sell the issue to the public D. All the above E. None of the aboveExplanation / Answer
13. In the case of cumulative preferred stock, the firm must pay all past preferred dividends before common shareholders are paid. The preferred stockholders always get preference over common stockholders in dividend payment and in case of cumulative preferred stock, before paying to the common stockholders all the past dues to the preferred stockholders should be cleared.
Therefore correct answer is option a. The firm must pay all past preferred dividends before common shareholders are paid.
14. When a company chooses to borrow money, it must decide to borrow short term or long term. If a company intended to purchase a new factory, they should borrow long term to match the nature of assets being purchased so as not negatively impact their current ratio. There matching principal suggests that long term investments like investment in factory or other infrastructure, long term borrowing should be used.
Therefore correct answer is option C. they should borrow long term to match the nature of assets being purchased so as not negatively impact their current ratio.
15. Residual claim of common stock holders means that they have claim on the profit of the company after paying all other liabilities like interest to debt, taxes and dividends to preferred stock holder. The common stock holders also have to bear the risk if the company is not performing well and making losses.
Therefore correct answer is option B. The shareholders participate in ups and downs of the company after debt claim are satisfied.
16. Lowest possible interest rate for the company is possible if the rating of the company bond in highest which is AAA. The highest rating of the company’s corporate bonds suggest that the company is financially sound and investing in its bonds bears minimum risk therefore as per risk and rewards principal, the investors are ready to invest at lower interest rate.
Therefore correct answer is option C. AAA
17. The company Lehman Brothers was forced to close its doors forever in wake of sub-prime crises in 2008 with $639 billion assets. It becomes the largest bankruptcy by far in our history, as it was bigger than previous bankruptcies Enron and WorldCom.
Therefore correct answer is option C. Lehman Brothers
18. If the company is going for initial public offerings, the underwriters helps the company in procedures, gives them financial advice, decide the right price of the issue, buy the stock issue from the company and sells the shares to the public.
Therefore correct answer is option D. All of the above
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