- A company has cumulative preferred stock outstanding. It suspended dividend payments for the last three quarters but now wishes to pay a dividend to its common stockholders. Before paying the common shareholders, the company must pay its cumulative preferred shareholders
Answer: the three missed dividends plus the current quarter's dividend.
The 'cumulative' feature requires that all missed dividends (known as dividends in arrears) must be paid in full to preferred shareholders before any dividends can be distributed to common shareholders. This would include the three missed payments plus the current one.
- A key feature of convertible preferred stock is that it allows the holder to
Answer: exchange the preferred shares for a specified number of the company's common shares.
The 'convertible' feature grants the stockholder the right to convert their preferred shares into a predetermined number of common shares of the same company. This allows the investor to participate in the potential capital appreciation of the common stock.
- When a company is liquidated, which of the following statements regarding the priority of claims is most accurate?
Answer: Preferred stockholders have a higher claim on assets than common stockholders.
The standard order of claims in a liquidation places all classes of preferred stock ahead of all classes of common stock. Bondholders (creditors) are senior to all stockholders. The convertibility feature does not change a preferred stock's liquidation priority relative to other preferred issues.
- A company issues both Class A and Class B common stock. If the Class B shares are designated as 'non-voting,' this means the holders of Class B shares
Answer: cannot vote for the board of directors.
The primary distinction for non-voting stock is the lack of the right to vote on corporate matters, such as the election of the board of directors. Holders of non-voting shares still have an equity stake and are eligible for dividends, and typically have the same liquidation priority as other common stockholders.
- Under a statutory (straight) voting method, a shareholder with 200 shares who is voting in an election for four board of director seats can cast
Answer: up to 200 votes for each of the four candidates.
Statutory voting permits one vote per share for each director seat. Therefore, the shareholder can cast a maximum of 200 votes for each of the four candidates. They cannot pool their votes to cast more than 200 for any single candidate.
- Which of the following equity securities typically has no voting rights?
Answer: Preferred Stock
Preferred stock typically has no voting rights in exchange for dividend priority and a senior claim on assets compared to common shareholders. While some preferred stock may have voting rights in certain circumstances, it is the security type most commonly issued without voting rights among the choices given.
- An investor holding common stock in a publicly traded corporation would typically have the right to vote on which of the following matters?
Answer: The election of members to the board of directors
A primary right of common stockholders is the ability to vote on significant corporate matters, most notably the election of the board of directors. Decisions regarding dividend declarations, hiring executives, and operational strategy are made by the board and management, not put to a direct shareholder vote.
- For preferred stock, the par value is most relevant when evaluating its
Answer: claim on assets in a corporate liquidation.
For preferred stock, the par value (or stated liquidation value) establishes the amount the holder is entitled to claim per share during a corporate liquidation, after creditors have been paid but before common shareholders. This liquidation preference is a key feature that distinguishes preferred stock from common stock.
- Regarding the order of payment in a corporate bankruptcy, holders of preferred stock
Answer: have a claim on assets junior to bondholders but senior to common stockholders.
In a corporate liquidation, the established priority of claims is: secured creditors, unsecured creditors (including bondholders), preferred stockholders, and finally common stockholders. Therefore, preferred stock is senior to common stock but junior to all debt instruments.
- What is the primary purpose of preemptive rights granted to common stockholders?
Answer: To allow them to maintain their proportional ownership by purchasing new shares before the public.
Preemptive rights protect common stockholders from dilution of ownership. They provide the right of first refusal to purchase a proportional amount of any new stock issuance, thereby allowing them to maintain their percentage ownership in the company.
- An investor's primary objective is to have influence over a company's management and policies. Which of the following securities would be the most suitable investment?
Answer: Common stock, because it typically carries voting rights.
The primary way shareholders influence management is through the exercise of voting rights on matters such as electing the board of directors. These rights are a key feature of common stock. Preferred stock and debt instruments typically have no voting rights.
- A growth-oriented company that wishes to conserve cash might choose to issue convertible preferred stock primarily because this feature allows it to
Answer: offer a lower dividend rate than on non-convertible preferred stock.
The conversion feature offers investors potential upside appreciation, making the security more attractive. In exchange for this feature, the issuer can typically offer a lower fixed dividend rate compared to a similar non-convertible preferred issue, thus reducing its cash outflow for dividends.
- In the event of a corporate liquidation, which of the following securities generally has the lowest priority claim on the company's assets?
Answer: Common stock
Common stockholders have a residual claim on corporate assets, meaning they are paid last in a liquidation, after all creditors (including senior bondholders and debenture holders) and preferred stockholders have been paid in full.
- Upon liquidation of a corporation, the holder of a share of preferred stock with a stated liquidation value of $100 is entitled to receive
Answer: a pro-rata share of assets remaining after debt holders are paid, up to the stated value.
In a liquidation, preferred stockholders have a claim on assets up to the stated liquidation value (or par value). They are paid after all creditors. They are not guaranteed to receive the full amount if insufficient assets remain, but their claim is for that amount and is senior to the claims of common stockholders.
- Based on the standard priority of claims, how will the remaining $10 million be distributed?
Answer: The $10 million will be paid to the general creditors.
In the liquidation hierarchy, general creditors (including bondholders) have priority over all equity holders. Since the claims of the general creditors ($12 million) exceed the available assets ($10 million), they will receive all of the remaining funds. The preferred and common stockholders will receive nothing.
- A convertible preferred stock has a conversion ratio of 25. If the common stock is trading at $5 per share, what is the parity price of the preferred stock?
Answer: $125.00
The parity price represents the value of the preferred stock if it were converted into common stock. It is calculated by multiplying the common stock's market price by the conversion ratio (25 shares x $5/share = $125).
- A proposed merger between two publicly traded companies would typically require the approval of the
Answer: companies' common stockholders.
Major corporate actions, such as mergers and acquisitions, fundamentally alter the company's structure and thus require the approval of the company's owners. The owners are the common stockholders, who exercise their control through a shareholder vote.
- The 'residual claim' of common stockholders refers to their right to
Answer: any corporate assets remaining after all senior claims have been satisfied.
Common stockholders are the last in line to be paid during a corporate liquidation. Their 'residual claim' means they are entitled to a share of whatever assets are left over (the residue) after all debts and obligations to creditors and preferred stockholders have been fully paid.
- An investor who cannot attend a company's annual meeting can still vote by authorizing another person to vote on their behalf. This authorization is known as a
Answer: proxy.
A proxy is a legal document that allows a shareholder to delegate their voting authority to someone else, typically the company's management or another designated third party, to vote on their behalf at a shareholder meeting.
- A corporation issued convertible preferred stock with a par value of $100 and a conversion ratio of 4-to-1. This means that each preferred share can be converted into
Answer: four shares of common stock.
The conversion ratio directly states how many shares of common stock an investor receives for one share of preferred stock. A 4-to-1 ratio means one preferred share converts into four common shares.
