Question

grant of authority by a shareholder allowing for another individual to vote his/her shares is a A) preferred stock B) proxy specialist D) cumulative voting right E) dual class stock C) Which of the following typically applies to common stock but NOT to preferred stock? A) Par value B) Dividend yield Legally considered as equity in the firm D) Voting rights E) The dividends are a tax-deductible expense 6. Preferred stock: I. generally has a fixed dividend. II. generally has a dividend that increases annually. III. receives preference in bankruptcy over bonds. IV. receives preference in bankruptcy over common stock. A) I only B) I and III only C) I and IV only D) II and III only E) II and IV only Rank the following decision rules from worst to best in terms of their overall usefulness in capital budgeting analysis. I. NPV II. Payback III. IRR A) II, III, I B) II, I, III C III, I, II D) I, III, II E) III, III

Answer 1

4. Option (B) is correct

A proxy is like an agent of the shareholder, who votes for the shareholder in his (shareholder's) absence.

5. Option (D) is correct

Voting rights are available to only common shareholders not preferred shareholders. Preferred shareholders cannot vote in a company.

6. Option (C) is correct

(I) Preferred stock generally has a fixed dividend.

(IV) Preferred stock receives preference in bankruptcy over common stock.

Options A, B and D are incorrect because II & III statements given about preferred stocks are not correct. In II statement, it is not necessary that preferred stocks' dividend increases annually. In III statement, it is incorrect that preferred stocks receive preference in bankruptcy over bonds. Bonds have highest preference in bankruptcy.

7. Option (A) is correct

Worst to best sequence is II, III I. Payback period is worst because it ignores time value of money. Net present value (NPV) is best because it considers time value of money togetherwith all the cash flows and cost of capital.