Financial Management

161. The main pressure on Canadian corporations to raise capital has come from:

  1. shareholder pressure
  2. securities analysts
  3. the expansion of the economy
  4. institutional pressure
Correct answer: (C)
the expansion of the economy

162. A call provision allows the firm to:

  1. call the bond and common stock
  2. redeem bonds prior to the call date
  3. pay a discount 5-10% below par
  4. redeem the bond prior to maturity
Correct answer: (D)
redeem the bond prior to maturity

163. Preferred shareholders:

  1. play a primary role in the financing of the firm
  2. have a subordinated claim to dividends
  3. possess an ownership interest in the firm
  4. normally have no vote on corporate issues
Correct answer: (D)
normally have no vote on corporate issues

164. When a rights offering is announced:

  1. common shareholders may purchase one new share for each share owned
  2. a stock will initially trade rights-on
  3. the share price increases when the stock goes ex-rights
  4. the shareholder increases the value of his holdings by exercising the rights
Correct answer: (B)
a stock will initially trade rights-on

165. To institutional investors, preferred stock may be very attractive because:

  1. dividend payments are assured
  2. dividends from another corporation are usually tax-exempt
  3. the preferred yield is normally higher than that of debt
  4. it provides balance to the issuing firm's capital structure
Correct answer: (B)
dividends from another corporation are usually tax-exempt

166. By maintaining a relatively stable dividend level, the firm:

  1. hopes to increase holdings of its common shares
  2. hopes to decrease holdings of its common shares
  3. hopes to increase the discount rate applied to future dividends
  4. hopes to decrease the discount rate applied to future dividends
Correct answer: (D)
hopes to decrease the discount rate applied to future dividends

167. If investors are optimistic about expectations for the future performance of the underlying stock of a convertible security:

  1. the conversion premium will be large
  2. the conversion premium will be small
  3. the bond is overpriced
  4. the bond is underpriced
Correct answer: (A)
the conversion premium will be large

168. Convertible securities are subject to all of the following disadvantages except:

  1. interest rates are normally below market rates
  2. the convertible is purchased at a premium
  3. the holder has no downside protection
  4. the convertible may be subject to a call provision
Correct answer: (C)
the holder has no downside protection

169. All of the following are financial motives for mergers except:

  1. the portfolio effect
  2. the dividend effect
  3. improved financing posture
  4. tax loss carry-forwards
Correct answer: (B)
the dividend effect

170. If the acquiring firm has a higher P/E ratio than the acquired firm, the resulting earnings per share will be:

  1. the same as pre-merger
  2. lower
  3. higher
  4. cannot be determined
Correct answer: (C)
higher
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