Chapter 7--Stocks (Equity)--Characteristics and Valuation Chapter 7--Stocks (Equity)--Characteristics and Valuation Student: ___________________________________________________________________________ 1. American depository receipts (ADRs) are foreign stocks listed on a domestic exchange. True False 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. True False 3. A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions. True False 4. After a new issue is brought to market it is the marginal investor who determines the price at which the stock will trade. True False 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. True False 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. True False 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. True False
8. A preemptive right is a provision in the corporate charter or by laws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock. True False 9. Preemptive rights are important to stockholders because they provide protection against a dilution of value when new shares are issued. True False 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. True False 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. True False 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. True False 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 shares. True False 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. True False
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