ch08 - Chapter 8 Equity: Characteristics and Valuation...

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Chapter 8 Equity: Characteristics and Valuation TRUE-FALSE QUESTIONS T 1. Common stock historically has provided protection against inflation. F 2. Common stock historically has failed to provide protection against inflation. T 3. Common stock historically has provided for growth in value. F 4. Common stock historically has failed to provide for growth in value. T 5. Common stock generally provides for growth in income. F 6. Common stock generally does not provide for growth in income. T 7. Common stock sales account for the majority of all equity sales. T 8. The common stockholders have the lowest standing when a business venture is liquidated. F 9. Preferred stock is an equity security that has a senior claim to the firm’s earnings and assets over bonds. T 10. Callable preferred stock gives the corporation the right to retire the preferred stock at its option. T 11. ADRs, or American Depository Receipts, which are traded on U.S. exchanges, represent shares of common stock that trade on foreign exchanges. F 12. In general, research has shown that the performance of tracking stocks has exceeded that of parent company stocks. F 13. Like common stocks, most bond issues have infinite maturities. F 14. The dividends paid on stock issued by corporations in the United States are tax deductible to the issuing corporation.
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F 15. Common stock possesses the highest claim on the assets and cash flow of the firm. T 16. Common stock possesses the lowest claim on the assets and cash flow of the firm. F 17. The par value of a common stock is the liquidation value or base price that a stockholder receives per share when the firm files for bankruptcy. T 18. The par value of a common stock is an accounting and legal concept that bears no relationship to a firm’s stock price or book value. T 19. The par value of a preferred stock is meaningful in that it is often used to determine the fixed annual dividend. F 20. The par value of a preferred stock is an accounting and legal concept that bears no relationship to a firm’s stock price or book value. F 21. The par value of a common stock is meaningful in that it is often used to determine the fixed annual dividend. T 22. Convertible preferred stock has a special provision that makes it possible to convert it to common stock of the corporation, generally at the stockholder’s option. T 23. During the past 75 years, treasury bills have provided the lowest return (compared to treasury bonds and common stock) but also have exhibited the least risk. T 24. During the past 75 years, common stock has provided the highest return (compared to treasury bills and treasury bonds) but also has exhibited the greatest risk. F 25. During the past 75 years, common stock has provided the highest return (compared to treasury bills and treasury bonds) but also has exhibited the least risk. T
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ch08 - Chapter 8 Equity: Characteristics and Valuation...

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