Long-Term Debt and Equity Financing Essay

1. Preferred and common stock differ in that
A. Failure to pay dividends on common stock will not force the firm into bankruptcy while failure to pay
dividends on preferred stock will force the firm into bankruptcy.
B. Common stock dividends are a fixed amount while preferred stock dividends are not.
C. Preferred stock has a higher priority than common stock with regard to earnings and assets in the event
of bankruptcy.
D. Preferred stock dividends are deductible as an expense for tax purposes while common stock dividends
are not.
2. Which one of the following statements correctly compares bond financing alternatives?
A. A bond with a call provision typically has a lower yield to maturity than a similar bond without a call
provision.
B. A convertible bond must be converted to common stock prior to its maturity.
C. A call provision is usually considered detrimental to the investor.
D. A sinking fund prohibits the firm from redeeming a bond issue prior to its final maturity.
3. Debentures are
A. Income bonds that require interest payments only when earnings permit.
B. Subordinated debt and rank behind convertible bonds.
C. Bonds secured by the full faith and credit of the issuing firm.
D. Mortgage bonds secured by a lien on specific assets of the firm.
4. Zero-coupon bonds issued by corporations
A. Are initially sold at par value (a zero discount).
B. Are initially sold for a price above par value.
C. Are tax free.
D. Require no cash outlay from the issuer until the bonds mature.
5. Junk bonds are
A. Securities rated at less than investment grade.
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B. Worthless securities.
C. Securities that are highly risky but offer only low yields.
D. Related only to issues of “fallen angel” companies whose securities have been downgraded.
6. The characteristics of venture capital include all of the following EXCEPT
A. Initial private placement for the majority of issues.
B. A minimum holding period of 5 years for new securities.
C. The use of common stock for most placements.
D. A lack of liquidity for a period of time.

Long-Term Debt and Equity Financing Essay

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