Exam 3 UCF - FIN 3403 Questions with
Guaranteed Pass Solutions.
Preferred stock - Answer A hybrid security with characteristics of both common stock and
bonds.
Preferred stock is similar to common stock in that
1. It has no fixed maturity date
2. The nonpayment of dividends does not bring on bankruptcy
3. Dividends are not deductible for tax purposes.
Preferred stock is similar to bonds in that dividends are limited in amount.
Cumulative feature - Answer A requirement that all past, unpaid preferred stock dividends be
paid before any common stock dividends are declared.
Purpose is to provide some degree of protection for the preferred shareholder.
Protective provisions - Answer Provision for preferred stock that protect the investor's
investment. The provision generally allows for voting in the event of nonpayment of dividends,
or they restrict the payment of common stock dividends if sinking-fund payments are not met
or if the firm is in financial difficulty.
Convertible preferred stock - Answer Preferred shares that can be converted into a
predetermined number of shares of common stock, if investors so choose.
Call provision - Answer Entitles a company to repurchase its referred stock from investors at
stated prices over a given time period.
Sinking-fund provision - Answer Requires the firm periodically to set aside an amount of
money for the retirement of its preferred stock.
The money is then used to purchase the preferred stock in the open market or to call the stock,
which ever method is cheaper.
, Limited liability - Answer A protective provision whereby the investor is not liable for more
than the amount he or she has invested in the firm.
Proxy - Answer A meeting for voting in which a designated party is provided with the
temporary power of attorney to vote for the signee at the corporation's annual meeting.
Majority voting - Answer Voting in which each share of stock allows the shareholder one vote
and each position on the board of directors is voted on separately. As a result, a majority of
share has the power to elect the entire board of directors.
Cumulative voting - Answer Voting in which each share of stock allows the shareholder a
number of votes equal to the number of directors being elected. The shareholder can then cast
all of his or her votes for a single candidate or split them among the various candidate.
Note: gives minority shareholders the power to elect a director
Preemptive right - Answer The right entitling the common shareholder to maintain his or her
proportionate share of ownership in the firm.
(When new shares are issued, common shareholders have the first right of refusal. If a
shareholder owns 25% of corporation's stock, then he or she is entitled to purchase 25% of new
shares.)
Right - Answer A certificate issued to common stockholders giving them an option to purchase
a stated number of new shares at a specified price during 2 to 10 week period.
Profit-retention rate - Answer The company's percentage of profits retained.
Dividend payout ratio - Answer Dividends as a percentage of earnings.
Expected return - Answer The rate of return investors expect to receive on an investment by
paying the current market price of the security.
Required rate of return - Answer
Guaranteed Pass Solutions.
Preferred stock - Answer A hybrid security with characteristics of both common stock and
bonds.
Preferred stock is similar to common stock in that
1. It has no fixed maturity date
2. The nonpayment of dividends does not bring on bankruptcy
3. Dividends are not deductible for tax purposes.
Preferred stock is similar to bonds in that dividends are limited in amount.
Cumulative feature - Answer A requirement that all past, unpaid preferred stock dividends be
paid before any common stock dividends are declared.
Purpose is to provide some degree of protection for the preferred shareholder.
Protective provisions - Answer Provision for preferred stock that protect the investor's
investment. The provision generally allows for voting in the event of nonpayment of dividends,
or they restrict the payment of common stock dividends if sinking-fund payments are not met
or if the firm is in financial difficulty.
Convertible preferred stock - Answer Preferred shares that can be converted into a
predetermined number of shares of common stock, if investors so choose.
Call provision - Answer Entitles a company to repurchase its referred stock from investors at
stated prices over a given time period.
Sinking-fund provision - Answer Requires the firm periodically to set aside an amount of
money for the retirement of its preferred stock.
The money is then used to purchase the preferred stock in the open market or to call the stock,
which ever method is cheaper.
, Limited liability - Answer A protective provision whereby the investor is not liable for more
than the amount he or she has invested in the firm.
Proxy - Answer A meeting for voting in which a designated party is provided with the
temporary power of attorney to vote for the signee at the corporation's annual meeting.
Majority voting - Answer Voting in which each share of stock allows the shareholder one vote
and each position on the board of directors is voted on separately. As a result, a majority of
share has the power to elect the entire board of directors.
Cumulative voting - Answer Voting in which each share of stock allows the shareholder a
number of votes equal to the number of directors being elected. The shareholder can then cast
all of his or her votes for a single candidate or split them among the various candidate.
Note: gives minority shareholders the power to elect a director
Preemptive right - Answer The right entitling the common shareholder to maintain his or her
proportionate share of ownership in the firm.
(When new shares are issued, common shareholders have the first right of refusal. If a
shareholder owns 25% of corporation's stock, then he or she is entitled to purchase 25% of new
shares.)
Right - Answer A certificate issued to common stockholders giving them an option to purchase
a stated number of new shares at a specified price during 2 to 10 week period.
Profit-retention rate - Answer The company's percentage of profits retained.
Dividend payout ratio - Answer Dividends as a percentage of earnings.
Expected return - Answer The rate of return investors expect to receive on an investment by
paying the current market price of the security.
Required rate of return - Answer
