Chapter 1 Practice Question Answers
- 1. Answer: C. Common stockholders have the right to maintain their proportionate share of the company if more shares are issued. Holders of common stock have voting rights as a privilege of ownership. They vote to elect the corporate board of directors and to approve corporate resolutions, such as stock splits, mergers and acquisitions, and changes of business direction. They also have the right to inspect the books and records of the company. They do not have the right to vote on whether to declare a dividend. Instead, the board of directors declares the dividend.
- 2. Answer: D. Common stockholders have the right to transfer their shares to someone else. Holders of common stock can vote on relevant matters, such as mergers and acquisitions. Common stockholders have the right to access records, including the minutes from the board of directors’ meeting. Common stockholders receive their dividends after preferred shareholders.
- 3. Answer: D. In cumulative voting, shareholders may vote their total voting shares ((number of shares) x (number of candidates)) for a single candidate.
- 4. Answer: A. Treasury shares represent shares of issued stock that have been repurchased by the company and removed from public circulation. Treasury stock pays no dividends and has no voting rights.
- 5. Answer: B. To arrive at the outstanding shares, start with the number of issued shares and subtract the number of treasury shares (40 million – 5 million = 35 million). To calculate the market capitalization, multiply the outstanding shares times the market price (35 million x $20 = $700 million).
- 6. Answer: C. To receive a dividend, the purchaser must be an owner of record on or before the record date. Shares of stock take two business days to settle, so to be the owner of record, the stock must be purchased at least two business day before the record date. One business day before the record date is ca