FM14e-TB-CHAPTER 7 VALUATION OF STOCKS AND CORPORATIONS
1. A proxy is a document giving one party the authority to act for another party,
including
... [Show More] the power to vote shares of common stock. Proxies can be important tools relating to control
of firms.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 7-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Proxy KEY: Bloom’s: Knowledge
2. The preemptive right gives current stockholders the right to purchase, on a pro rata
basis, any new shares issued by the firm. This right helps protect current stockholders against both
dilution of control and dilution of value.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 7-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Preemptive right KEY: Bloom’s: Knowledge
3. If a firm's stockholders are given the preemptive right, this means that stockholders
have the right to call for a meeting to vote to replace the management. Without the preemptive right,
dissident stockholders would have to seek a change in management through a proxy fight.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 7-1 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Preemptive right KEY: Bloom’s: Knowledge
4. Classified stock differentiates various classes of common stock, and using it is one
way companies can meet special needs such as when owners of a start-up firm need additional equity
capital but don't want to relinquish voting control.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 7-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Classified stock KEY: Bloom’s: Knowledge
5. Founders' shares are a type of classified stock where the shares are owned by the
firm's founders, and they generally have more votes per share than the other classes of common stock.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 7-2 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Founders' shares KEY: Bloom’s: Knowledge
6. The total return on a share of stock refers to the dividend yield less any commissions
paid when the stock is purchased and sold.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 7-4 NAT: BUSPROG: Reflective Thinking STA: DISC: Stocks and bonds
LOC: TBA TOP: Total stock returns KEY: Bloom’s: Knowledge
7. The cash flows associated with common stock are more difficult to estimate than those
related to bonds because stock has a residual claim against the company versus a contractual obligation
for a bond. [Show Less]