Chapter 7--Stocks (Equity)--Characteristics and Valuation
(Equity)--Characteristics and Valuation
1. American depository receipts (ADRs) are foreign stocks listed on a domestic exchange.
2. Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they
retain the sole voting rights to those shares but have restricted dividends for a specified time period.
3. A publicly owned corporation is simply a company whose shares are held by the investing public, which may
include other corporations and institutions.
4. After a new issue is brought to market it is the marginal investor who determines the price at which the stock
5. A stock's par value is equal to the market value of the stock on the last day of the fiscal year for a firm.
6. The book value per share is computed by taking the sum of common stock, additional paid in capital, and
retained earnings and dividing the number by the number of shares outstanding.
7. A proxy fight is an attempt by a group to gain control of a firm by convincing its stockholders to give the
group the authority to vote their shares in order to elect a new management team.
8. A preemptive right is a provision in the corporate charter or by laws that gives common stockholders the right
to purchase on a
basis new issues of common stock.
9. Preemptive rights are important to stockholders because they provide protection against a dilution of value
when new shares are issued.
10. One advantage of using common stock as a source of funds is that common stock does not legally obligate
the firm to make payments to stockholders.
11. One advantage of common stock as a source of funds is that the underwriting and distribution costs of
common stock are usually much lower than those for debt.
12. From a social welfare perspective, common stock is a desirable form of financing in part because it involves
no fixed charge payments. Its inclusion in a firm's capital structure makes the firm less vulnerable to the
consequences of unanticipated declines in sales and earnings than if only debt were available.
13. When a firm issues new equity, market pressure applies first to the new shares issued and then to existing
shares. Subsequent to the new issue, the value of the new shares will rise to the equilibrium price of the old
14. When management controls more than 50% of the shares of the firm, they must be concerned with the
potential of a proxy fights than can lead to takeovers of the firm and the replacement of management.
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