© 2000 John Petroff
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© 2000 John Petroff |
Questions for Chapter 12 Capital Sources
Review questions
Q-12.1
Which sources of capital are obtained automatically?
Q-12.2 Which source of capital
is referred to as spontaneous?
Q-12.3 Which forms of capital
are not obtained without serious efforts?
Q-12.4 Is obtaining capital
a smooth and continuous process?
Q-12A1.1
List different types of retained earnings appropriations.
Q-12A1.2 Do prior year errors
or reevaluation of assets affect retained earnings? How?
Q-12A2.1
Is there an optimal dividend strategy applicable to all firms?
Q-12A2.2 List the different
types of dividends a firm can distribute.
Q-12A2.3 From where ordinary
dividends come from?
Q-12A2.4 Which source for
dividends is prohibited in most countries?
Q-12A2.5 When are extraordinary
dividends distributed?
Q-12A2.6 What makes preferred
stock dividends preferred?
Q-12A2.7 Give examples of
additional benefits preferred shareholders may receive.
Q-12A2.8 What distinguishes
stock dividends from stock splits?
Q-12A2.9 What is the name
given to the proportion of earnings paid out as dividends?
Q-12A2.10 What is the name
given to the proportion of earnings not paid out as dividends?
Q-12A2.11 Which is a more
important objective for a dividend policy: stable dividend or
stable payout rate? How does investors' perception of stock stability
affects the decision?
Q-12A2.12 Do stock dividends
and stock splits affect shareholders' wealth? Does the stock price
go up or down immediately? Does it go up or down later?
Q-12A2.13 What benefits
shareholders derive from stock dividends and stock splits? Is
the benefit changing the fractional ownership of each shareholder?
Q-12A2.14 Do stock splits generate new capital for the corporation?
Q-12A2.15 How is the capital
gains tax affecting shareholders' benefits from stock dividends?
Q-12A2.16 What are the reasons
why studies have shown that dividend policies are irrelevant?
Q-12A2.17 For which firms
the irrelevance of dividend policy applicable? Which not?
Q-12A2.18 What is the clientele
effect? List the different types of clienteles and their respective
expectations.
Q-12A2.19 What is the proper
dividend policy for a growth firm?
Q-12A2.20 What is the proper
dividend policy for a fully standardize product company? Can such
a company be dangerously too conservative?
Q-12A2.21 Is dividend policy
affected by the vitality of capital markets? Compare different
countries.
Q-12B.1
When do firms need to issue new stock?
Q-12B.2 What are the reasons
why issuing stock is difficult for most corporations?
Q-12B1.1
What is the name given to an issue of stock in the stock market
by a corporation for the first time ever?
Q-12B1.2Why is timing so
important in an IPO?
Q-12B1.3 What are the major
legal requirements for an IPO?
Q-12B1.4 Why is an investment
banker often necessary?
Q-12B1.5 What function
an underwriter preforms?
Q-12B1.6 What document
is distributed to prospective purchasers of a new stock issue?
Q-12B1.7 What is the name
given to a prospectus for which the corporation has not yet received
a registration certificate from the SEC?
Q-12B1.8 Does the SEC check
the accuracy of the registration filing? What does it check?
Q-12B1.9 What is the range
of fees charged by an underwriter? Distinguish between best effort
and guaranteed sale.
Q-12B1.10 What the name
given to a group of brokers that are willing to sell a new stock
issue?
Q-12B1.11 How does trading on-line affect selling IPO's?
Q-12B1.12 What is the common
stock price behavior during the first year of an IPO issue?
Q-12B1.13 What are the
special difficulties of newly formed corporations? What must they
sometimes give up in order to raise capital? What is the name
of firms specially organized to serve such new corporations?
Q-12B1.14 What is shelf-registration?
What are its advantages?
Q-12B2.1
Why must existing shareholders be given preemptive rights to new
stock issues?
Q-12B2.2 What is the value
of each right, if ten rights are needed to buy a share at the
exercise price of $80 (the current market stock price is $100)?
Q-12B2.3 What is the value
of each right, if four rights are needed to buy a share at the
exercise price of $50 (the current market stock price is $70)?
Q-12B2.4 What is the value
of each right, if seven rights are needed to buy a share at the
exercise price of $40 (the current market stock price is $35)?
Q-12B2.5 What do corporations
do to encourage shareholders to take advantage of their preemptive
rights and not let them lapse?
Q-12B2.6 What is the disadvantage
of setting the exercise price too high?
Q-12B2.7 What is the disadvantage
of setting the exercise price too low?
Q-12B2.8
What is the name given to a new stock issue to the public of an
established corporation?
Q-12B2.9 Why are shareholders
willing to allow corporations to issue new shares without preemptive
right given to existing shareholders?
Q-12B2.10 What the stock
price behavior after a seasoned stock issue?
Q-12B2.11 What is the name
given to the sale of a large block of previously issued shares?
Q-12B2.12 Which is more
expensive using seasoned share issue or preemptive rights?
Q-12B2.13 What is the name
given to rights to purchase common shares attached to some bonds
and preferred stock?
Q- 12B2.14What are the
advantages to the corporation of issuing warrants and convertible
securities?
Q-12B2.15 What is the difference
between issuing a bond with a warrant and issuing a convertible
security, from the stand point of the corporation?
Q-12B2.16 What are the
similarities and differences between warrants and rights?
Q-12B2.17 What is the problem
with using warrants from the point of view of the corporation?
Q-12B3.1
What is achieved by issuing different classes of stock?
Q-12C.1
Under what circumstances, corporations will issue preferred stock?
Q-12C.2 What designation
is given capital generated from preferred stock?
Q-12C.3 Why is preferred
stock easier to sell?
Q-12C.4 Why is preferred
stock safer to the corporation than other forms of funds?
Q-12C.5 What sweeteners
are common to make preferred stock even more attractive?
Q-12C.6 What provisions
are used to assure that the preferred stock is temporary?
Q-12C.7 What type of investors
are often eager to buy large portion of preferred stock?
Q-12D.1
Compare advantages and disadvantages of bonds over preferred stocks
for the corporation to investors.
Q-12D.2 How similar are
bonds and preferred stocks?
Q-12D.3 What advantages
do bonds have over other forms of borrowing?
Q-12D.4 Why are the provisions
in bond indentures of a corporation all different?
Q-12D1.1
List the different forms of protection a corporation must offer
bondholders.
Q-12D1.2 What types of
companies issue bonds with little protective covenants?
Q-12D2.1
Why stating very precise retirement provisions is important for
both corporation and bondholders?
Q-12D2.2 Give typical retirement
provisions.
Q-12D3.1
List the major types of sweeteners present in bond indentures.
Q-12D3.2 What are the advantages
of having a conversion right to the bondholder?
Q-12D3.3 What are the advantages
of warrants over conversion right to bondholders?
Q-12D4.1
What determines the coupon size?
Q-12D4.2 What are the advantages
and disadvantages of a low coupon to bondholders?
Q-12D4.3 What are the advantages
and disadvantages of a low coupon to the corporation?
Q-12D4.4 What are the advantages
and disadvantages of a high coupon to bondholders?
Q-12D4.5 What are the advantages
and disadvantages of a high coupon to the corporation?
Q-12D5.1
What is the name given to bonds issued by management of a corporation
in a leveraged buy-out?
Q-12D5.2 How much higher
are rates on junk bonds compared with similar industry corporate
bonds?
Q-12E.1
How similar are term loans and leasing?
Q-12E1.1 Compare advantages
and disadvantages of bank loans over bonds for the corporation.
Q-12E2.1
What is the name given to leases that non-cancelable for the life
of the asset, with payments representing close to the asset value?
Q-12E2.2 What is the name
given to the user of leased equipment?
Q-12E2.3 What is the name
of the owner of leased equipment?
Q-12E2.4 What is the name
given to a lease whereby a finance company purchases the equipment
from the company to whom it leases the equipment subsequently?
Q-12E2.5 What are the accounting
requirements for a lease to be classified as a capital lease?
Q-12E2.6 How is a capital
lease reported in financial statements by the lessee?
Q-12E2.7 What are the advantages
of using capital leases to the lessee?
Q-12E2.8 In which type
of lease does a lessee report a deferred gain? How is this deferred
gain handled in terms of accounting treatement?
Q-12E3.1
What is the name given to leases that are short term, cancelable
and renewable?
Q-12E3.2 How are operating
leases reported in financial statements by the lessee?
Q-12E3.3 What are the advantages
and disadvantages of operating leases to the lessee?
Q-12E3.4 Who is responsible
for maintenance in an operating lease?
Q-12E3.5 Is maintenance
provided by the lessor often cheaper than that obtained by the
lessee from third party?
Q-12E3.6 Who bears obsolescence
risk in an operating lease?
Q-12E3.7 Why is the lessor
better equipped to deal with obsolescence risk than the lessee?
Q-12F.1
Why should all firms use trade credit?
Q-12F.2 If a firm is found
not to use trade credit in an industry known to use it, is this
a sign of potential problems? Discuss. Comment on cash discounts.
Q-12F.3 Which prevailing
terms in construction, manufacturing, wholesale and retail US
industries are suggested by empirical data on days sales outstanding
statistics?
Q-12F.4 Why seasonal credit
and revolving credit should be used or be available for all firms?
Q-12F.5 If a seasonal credit
is not extinguished over a twelve months period, is this a sign
of a problem? Explain.
Q-12F.6 Where can one find
out about unused short term bank credit?
Q-12F.7 When a company issues
commercial paper, is this a sign of problem for the company? Explain.
Q-12F.8 Why should a sudden
large jump in other current liabilities be investigated by an
analyst?
Q-12G.1
What sector is most commonly engaged in extensive liability management?
Q-12G.2 What constitutes
liability management for a nonfinancial corporation?
Q-12G1.1
What are some legitimate reasons for a corporation to buy its
own stock?
Q-12G1.2 Why is retiring
of stock a cause for concern about company future?
Q-12G2.1
Is buying back of bonds subject to the same legal restrictions
as buying back stock?
Q-12G2.2 When a bond has
been issued with a low coupon and market rates are unchanged,
which is cheaper: buying bond in the secondary market or forcing
redemption?
Q-12G2.3 When a bond has
been issued with a high coupon and market rates have remained
unchanged, which is cheaper: buying bond in the secondary market
or forcing redemption?
Q-12G2.4 What is used to
force redemption? What has to be offered to make sure it works?
Q-12G2.5 What is the name
given to the process of buying back one bond by issuing another
comparable one?
Q-12G2.6 If market rates
went up, will the corporation buy its bonds at a gain?
Q-12G2.7 What limits the
willingness of the corporation to buy back its bonds when rates
went up?
Q-12G2.8 If market rates
went down, will the corporation buy its bonds at a gain?
Q-12G2.9 What motivates
a corporation to redeem its bonds when market rates went down?
Q-12G2.10 If rates went
down, which is more beneficial to the company: buying bonds in
the market or forcing redemption
Q-12G3.1
What is the general term for replacing one liability by a substantially
similar one?
Q-12G3.2 Describe the method
and purpose of an interest rate swap.
Q-12G3.3 Describe a maturity
swap.
Q-12G3.4 Describe a currency
swap.
Q-12G4.1
What is the general term used for liability management techniques
that reduce financial exposure?
Q-12G4.2 List the different
type of financial exposures, hedging is intended to deal with.
Q-12G4.3 List the different
methods of hedging.
Q-12G4.3 Describe how hedging
techniques to deal with foreign exchange exposure.
Q-12G4.5 Where can one
find information about hedging tools used by a corporation?
Q-12H.1
Describe how a pro forma liability/equity side of the balance
sheet can be constructed.
Q-12H.2 Why is the pro form
liability necessary for constructing a pro forma income statement?
Q-12H.3 Which is the last
item determined in the pro forma liability/equity?
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