Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook
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150 QUESTIONS AND PROBLEMS
5. The DD Corporation issued a zero-coupon, $1,000 face
value bond on January 1, 2001. The bond was issued at
$875 and matures on December 31, 2003.
a. If you bought these bonds when they were issued and
held them to maturity, what return would you earn?
b. What is the amount of interest expense on this bond that
DD can deduct each year?
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CHAPTER
16
151
Common Stock
FILL IN THE BLANKS
Refer to Chapter 16, pages 533–566 in Financial Manage-
ment and Analysis.
1. We refer to the equity of a corporation as
______________. A corporation’s stock may be divided
into two major types: ______________ stock and
______________ stock. Each of these classes is split into
smaller pieces called ______________, represented by
stock ______________. Owners of these shares are
referred to as ______________ or ______________. Share-
holders receive part of the ______________ on their
investment from ______________, which are periodic
______________ payments from the corporation.
2. There are a number of characteristics of ______________
stock that are important in the financial manager’s capital
structure decision and that affect investors’ decisions
regarding common stock as an investment. These charac-
teristics include: limited ______________, the number of
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152 QUESTIONS AND PROBLEMS
______________, stock ______________, ______________
stock, ______________ rights, and the right to
______________ more stock.
3. The number of ______________ a firm can issue is referred
to as the ______________ shares. If a firm wishes to issue
more shares, it does ______________ have to issue the
entire number of shares authorized. The number of
______________ shares is the number of shares
______________ sold and is equal to or ______________
than the number of ______________ shares. If a firm buys
back stock from investors, the number of shares
______________ in the hands of investors—referred to as
______________ shares—is fewer than the number of
______________ shares. Shares bought back from inves-
tors may be either ______________, reducing the number
of issued shares, or held as ______________ stock.
4. ______________ shareholders are generally granted rights
to ______________ members of the board of
______________, ______________ on the ______________
of the corporation with another corporation,
______________ additional shares of common stock, and
______________ on ______________ to the articles of
incorporation. Different ______________ of stock may
have different numbers of ______________ per share, or
different classes as a whole may have specified
______________ of the votes. The different classes can be
used by ______________ groups to ______________ con-
trol of the company.
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Common Stock 153
5. ______________ voting is designed to allow
______________ shareholders to gain representation on
the board. With ______________ voting, shareholders can
______________ their votes for members of the board of
directors. Cumulative voting allows shareholders to
______________ up their votes for one or more
______________, leading to more active participation in
the corporation’s ______________, especially by share-
holders with ______________ holdings.
6. Some corporations have divided their director positions
into classes, where only ______________ class of directors
is voted on each year, instead of the ______________
board. This system is referred to as a(n) ______________
board of directors or a(n) ______________ board of direc-
tors. The ______________ of this system is that, by stag-
gering terms there is ______________ in the board of
directors. Having multiyear terms insures that there are
______________ members of the board and allows the
board as a group to work on projects or issues that extend
beyond ______________.
7. Corporations can give the right to buy ______________
shares of new ______________ stock through a(n)
______________ offering which is an offering of
______________ to ______________ shareholders to pur-
chase shares in order to ______________ their current
______________ in the company.
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154 QUESTIONS AND PROBLEMS
8. The board of ______________ may declare a(n)
______________ at any time, but dividends are not a legal
______________ of the corporation. Most dividends are in
the form of ______________. In addition to cash divi-
dends, the corporation may provide shareholders with div-
idends in the form of additional ______________ of stock
or, rarely, other types of ______________ owned by the
corporation.
9. Many U.S. corporations allow shareholders to automati-
cally ______________ their dividends in the
______________ of the corporation paying them. A(n)
______________ reinvestment plan (______________) is a
program that allows ______________ to reinvest their
______________, buying ______________ shares of stock of
the company instead of receiving the ______________ divi-
dend. These ______________ shares representing dividends
reinvested may be currently ______________ or newly
______________.
10.A stock ______________ is something like a stock divi-
dend. A stock split ______________ the number of
______________ shares into ______________ shares how-
ever the ______________ of ownership has not changed.
Aside from a minor difference in accounting, stock splits
and stock dividends are essentially the ______________.
A(n) ______________ stock split, ______________ the
price of a stock by ______________ the number of shares
of stock.
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Common Stock 155
11.A(n) ______________ policy is a firm’s ______________
about the payment of ______________ dividends to share-
holders. There are several basic ways of describing a firm’s
dividend policy: ______________ dividends, constant
______________ in dividends per share, constant
______________ ratio, and ______________ dividends
with ______________ extra dividends. Several views that
attempt to explain why dividends are paid are: the Divi-
dend ______________ Theory, the “______________ in the
Hand” Theory, the ______________ Explanation, the
______________ Explanation, and the ______________
Explanation.
12.A corporation ______________ its own shares is effectively
paying a(n) ______________ dividend, with one important
difference: ______________. ______________ dividends
are ______________ taxable income to the shareholder. A
firm’s ______________ of shares, on the other hand,
results in a(n) ______________ gain or loss for the share-
holder, depending on the ______________ paid when they
were originally purchased. If the shares are repurchased at
a(n) ______________ price, the difference may be taxed as
capital ______________, which may be taxed at rates
______________ than ordinary income.
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156 QUESTIONS AND PROBLEMS
SHORT ANSWER QUESTIONS
Refer to Chapter 16, pages 533–566 in Financial Manage-
ment and Analysis.
1. Exactly what is a shareholder buying when shares are
purchased?
2. What is the difference between preferred stock and com-
mon stock?
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Common Stock 157
3. What is common equity and how is it created?
4. What does it mean when corporations are classified as
publicly held, privately held, or closely held?
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158 QUESTIONS AND PROBLEMS
5. Why would a company pay a dividend?
6. Explain the time line for issuing dividends.
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Common Stock 159
7. Why would a company do a reverse stock split?
8. Why would a company repurchase its own stock and how
would it go about doing so?
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