22. Which of the following statements is correct? a. Because bonds can generally be called only at a premium meaning that the bondholder will enjoy a capital gain including a call provision (other than a sinking fund call) in the indenture increases the value of the bond and lowers the bond’s required rate of return. b. You are considering two bonds. Both are rated double A (AA) both mature in 20 years both have a 10 percent coupon and both are offered to you at their $1 000 par value. However Bond X has a sinking fund while Bond Y does not. This probably is not an equilibrium situation as Bond X which has the sinking fund generally would be expected to have a higher yield than Bond Y. c. A sinking fund provides for the orderly retirement of a debt (or preferred stock) issue. Sinking funds generally force the firm to call a percentage of the issue each year. However the call price for sinking fund purposes is generally higher than the call price for refunding purposes. d. Zero coupon bonds are bought primarily by pension funds and other tax exempt investors because they avoid the tax that non-tax exempt investors must pay on the accrued value each year. e. All of the above statements are false. 23. Which of the following statements is correct? a. Once a firm declares bankruptcy it is liquidated by the trustee who uses the proceeds to pay bondholders unpaid wages taxes and lawyer fees. b. A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market if the price of the bond exceeds the sinking fund call price. c. Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds. d. One disadvantage of zero-coupon bonds is that issuing firms cannot realize the tax savings from issuing debt until the bonds mature. e. Other things held constant callable bonds should have a lower yield to maturity than noncallable bonds. 24. The sale of new common stock at a price greater than par value will affect which balance sheet accounts? (Choose the most complete answer.) a. Common stock paid-in capital retained earnings. b. Assets common stock paid-in capital. c. Liabilities common equity. d. Common stock retained earnings. e. Common stock paid-in capital. 25. Which of the following statements is false? a. When a corporation’s shares are owned by a few individuals who are associated with or are the firm’s management we say that the firm is “closely held.” b. A publicly owned corporation is simply a company whose shares are held by the investing public which may include other corporations and institutions as well as individuals. c. Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm’s shares. d. When stock in a closely held corporation is offered to the public for the first time the transaction is called “going public” and the market for such stock is called the new issue market. 26. Which of the following statements concerning common stock and the investment banking process is false? a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue. b. If a firm sells 1 000 000 new shares of Class B stock the transaction occurs in the primary market. c. Listing a large firm’s stock is often considered to be beneficial to stockholders because the increases in liquidity and status probably outweigh the additional costs to the firm. d. Stockholders have the right to elect the firm’s directors who in turn select the officers who manage the business. If stockholders are dissatisfied with management’s performance an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a margin call. e. A large issue of new stock could cause the stock price to fall. This loss is called “market pressure ” and it is treated as a flotation cost because it is a cost associated with the new issue. 27. Which of the following statements concerning preferred stock is correct? a. Preferred stock generally has a higher component cost to the firm than does common stock. b. By law in most states all preferred stock issues must be cumulative meaning that the cumulative compounded total of all unpaid preferred dividends must be paid before dividends can be paid on the firm’s common stock. c. From the issuer’s point of view preferred stock is less risky than bonds. d. Preferred stock because of the current tax treatment of dividends is bought mostly by individuals in high tax brackets. e. Unlike bonds preferred stock cannot have a convertible feature. 28. Which of the following statements is correct? a. One of the advantages of common stock financing is that there is no dilution of owners’ equity as there is with debt. b. If the market price of a stock falls below its book value the firm can be liquidated with the book value proceeds then distributed to the shareholders. Thus a stock’s book value per share sets a floor below which the stock’s market price is unlikely to fall. c. The preemptive right gives a firm’s preferred stockholders preference to assets over common stockholders in the event the firm is liquidated. d. The steeper the demand curve for a firm’s stock the higher will be its flotation costs when it sells a new issue of common stock other things held constant. e. All of the above statements are false.
