Ahram Canadian University

School of Business Administration Corporate Finance I

Quiz I _ A .

Name: ID:

Question 1: (5 marks)

a) Discuss the features of common stock.

Answer:

b) Mention the Common Stock Valuation by the Zero Growth Model

Question 2: State whether the following statements are true or false. (3 marks)

1) Holders of equity have claims on both income and assets that are secondary to the claims of creditors.
Answer: TRUE
2) Unlike creditors, equity holders are owners of the firm.

Answer: TRUE
3) In the case of liquidation, common stockholders are paid first, followed by preferred stockholders,
followed by bondholders.

Answer: FALSE
4) Preferred stock is a special form of stock having a fixed periodic dividend that must be paid prior to
payment of any interest to outstanding bonds.
Answer: FALSE

5) Cumulative preferred stocks are preferred stocks for which all passed (unpaid) dividends in arrears must
be paid in additional shares of preferred stock prior to the payment of dividends to common stockholders.
Answer: FALSE

6) Preferred stock has characteristics of debt since it provides fixed periodic cash payment.
Answer: TRUE
Question 3: Choose the correct answer . (2 marks)
1) Equity capital can be raised through

A) The money market.

B) The NYSE bond market.

C) retained earnings and the stock market.

D) A private placement with an insurance company as the creditor.

Answer: C
2) Holders of equity capital

A) Own the firm.

B) Receive interest payments.

C) Receive guaranteed income.

D) Have loaned money to the firm.

Answer: A

3) As a form of financing, equity capital

A) Has a maturity date.

B) Is only liquidated in bankruptcy.

C) is temporary.

D) Has priority over bonds.

Answer: B

4) If bankruptcy were to occur, stockholders would have prior claim on assets over

A) Preferred stockholders.

B) Secured creditors.

C) Unsecured creditors.

D) No one.

Answer: D

Good Luck