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Exam 17: Common and Preferred Stock Financing

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Question 41

Multiple Choice

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Which of the following is not true about preferred stock?

A) 100% of dividends are nontaxable to other corporations which hold preferred stock
B) the aftertax cost is higher than debt with the same yield
C) dividends are legal obligations of the firm
D) preferred stocks are often cumulative in respect to dividends

E) C) and D)
F) None of the above

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Question 42

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To the individual recipient, preferred stock dividends offer no advantage over common stock dividends.

A) True
B) False

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Question 43

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Fritz Corporation has 800,000 shares of preferred stock and 1,800,000 shares of common stock. The cumulative preferred stock has a stated dividend of $2.50 per share. Under normal conditions, Kreisler pays out 30% of earnings available to common shareholders, however, because of a severe recession, Fritz retained all earnings last year. This year, Fritz earned net income of $6.4 million. Calculate the dividend per share to be received by the common shareholders this year.

Occasionally, a company will have several classes of common stock, with each class carrying different rights to dividends and income.

Convertible exchangeable preferreds give the holder the sole right to exchange their preferred shares for common shares.

Describe income trusts. What is the purpose of an income trust?

Corporation A is issuing preferred stock yielding 9%, and Corporation B is considering buying the stock. Corp A's tax rate is 23% and Corp B's tax rate is 39%. What is the aftertax preferred yield for Corp A?

Kuhns Corp. has 200,000 shares of preferred stock outstanding that is cumulative. The dividend is $6.50 per share and has not been paid for 3 years. If Kuhns earned $3 million this year, what could be the maximum payment to the preferred shareholders on a per share basis?

Shares purchased through a rights offering usually carry lower margin requirements.

A share is said to sell "ex-rights"

Preferred stock is often sold by companies

Floating rate preferred stock allows shareholders to receive more or less than the quoted dividend based on the firm's success.

Share classes are similar to bond ratings in that they are used to rank the performance of different corporation's stock.

The difference between the rights-on and ex-rights common stock price is equal to the value of a right.

To the corporate investor, preferred stock offers which of the following advantages

Preferred stock is the least used of all long-term securities because

To the corporate investor, preferred stock offers which of the following advantages?

Which of the following statements about floating rate preferred stock is true?

If a corporate charter includes a provision for preemptive rights, the shareholders

Some preferred shares are participating preferreds and this may allow for an increase in the preferred share dividend when the common share dividend equals the preferred share dividend.