A201 Exam 4

True or false: An advantage of the corporate form of ownership is that the stockholders have limited liability.

True
In the event of bankruptcy, creditors have claims against the corporation's assets, not the personal assets of the company's stockholders.

The laws governing corporations ______.
Multiple choice question.
-require that a company be incorporated in the state in which it does most of its business
-require that all companies be incorporated in Delaware
-allow a company to be incorporated in a d

allow a company to be incorporated in a different state from the one in which it operates

Which of the following are typical benefits to being a shareholder? (Check all that apply.)
Multiple select question.
-voting rights
-dividends
-interest
-principal
-residual claim

- A voice in management. You may vote in the stockholders' meeting on major issues concerning management of the corporation.
-Dividends. If a company pays dividends, you receive a proportional share of the distribution of profits.
-Residual claim. You wil

EPS is a good predictor of ______.
Multiple choice question.
-future interest costs
-future cash receipts
-financial leverage
-future stock prices

future stock prices

The owners of a(n)_____________ , are not personally responsible for the debts of the business.

corporation, LLC, or limited liability company

T/F
Bonds are a short-term liability

False
- They are a long-term liability

Rather than borrowing a large amount of money from banks, how do many companies raise capital in a more practical way?

Since borrowing large amounts from one bank is often impractical, companies and governments issue bond securities to the investing public instead

What is a company's capital structure?

It is a mixture of its debt and equity it uses to finance its operations

T/F
After bonds are issued they are traded on exchanges like the New York bond exchange

TRUE

What is an advantage that bonds give to investors?

The ability to sell a bond is an advantage for investors because it provides them with liquidity (The ability to convert investment to cash)

What is an advantage issuing bonds give to companies?

By issuing more liquid debt that investors can buy and sell on the bond market, companies are able to reduce the cost of long-term borrowing

T/F
The default risk is the likelihood that a bond issuer will be able to meet the requirements specified in the prospectus.

FALSE
Default Risk is the risk that a bond issuer will NOT be able to meet the requirements specified in the prospectus.

T/F
Higher quality bonds have a higher default risk, while lower quality bonds have a lower default risk

FALSE
Higher-quality bonds have a lower default risk, while lower quality bonds have a higher default risk

In the US, what is considered the safest type of bond?

The US treasury bonds
- They are backed by the US government

What determines whether a bond is issued at par, at a premium, or at a discount?

The relationships between the market interest rate and the bonds coupon rate determines whether the bond is issued at par, at a premium, or at a discount.

How does the bond market determine the price of the bonds?

The bond market determines the price of the bonds by computing the present value of the bonds using the market rate of interest on the day the company issues the bonds

Do you calculate present value with coupon or market rate?

You always use the market rate

If the effective rate is %6 and the stated rate is 4%, is the bond issued at a discount, at par, or at a premium?

Since the effective rate is higher than the stated rate, the bond is issued at a premium

What is the equation to compute interest expense?

Bonds Payable Book Value x Market Interest Rate PER PERIOD

What is the equation to compute cash owed on interest?

Bond Face Value x Coupon Rate PER PERIOD

What is the equation to compute discount amortization amount?

Interest expense - Cash owed for interest

T/F
Over time, the book value of a bond at premium increases

FALSE
Over time the book value of a bond at premium decreases

T/F
Over time, the book value of a bond at discount increases

TRUE
Over time, the book value of a bond at discount increases

T/F
Bond prices change inversely to interest rates

TRUE
As interest rates go up, bond prices fall, and vice versa

If interest rates go up enough, a company can decide to ____________ its bonds by purchasing them on the open market.

Retire

What is the authorized number of shares?

Authorized number of shares is the maximum number of shares of stock a corporation can issue as specified in its charter

What are the two types of issued shares?

-Outstanding->Owned by stockholders
-Treasury->Reacquired by the corporation