IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 681:

  The par value of a common stock represents

  A. The estimated market value of the stock when it was issued.

  B. The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings.

  C. The total value of the stock that must be entered in the issuing corporation's records.

  D. A theoretical value of $100 per share of stock with any differences entered in the issuing corporation's records as discount or premium on common stock

  Correct Answer: B

  Par value represents a stock's legal capital. It is an arbitrary value assigned to stock before it is issued. Par value represents a shareholder's liability ceiling because, as long as the par value has been paid in to the corporation, the shareholders obtain the benefits of limited liability.

• Question 682:

  On January 1 of the current year, Bongo Company issued convertible bonds with $1000 per value and a conversion ratio of 50. Which of the following should be the market price per share of the company's common stock on January 1?

  A. Under$20

  B. $20

  C. Between $20 and $50.

  D. Above $50

  Correct Answer: A

  The conversion price, in this case $20 ($1,000 ?50 shares), is normally greater than the market price at the time the bonds are issued. Therefore, the market price must be less than $20.

• Question 683:

  Growl Corporation's $1,000 par value convertible debentures are selling at $1,040 when its stock is selling for $46.00 per share. If the conversion ratio is 20, what will be the conversion price?

  A. $22.61

  B. $46.00

  C. $50.00

  D. $52.00

  Correct Answer: C

  The conversion price is the assumed price of the stock, which was set at the time the bonds were issued. Dividing the $1,000 face value by the 20 shares results in a conversion price of $50.

• Question 684:

  The market value of a share of stock is $50, and the market value of one right prior to the ex-rights date is $2.00 after the offering is announced but while the stock is still selling rights-on. The offer to the shareholder is that it will take three rights to buy an additional share of stock at a subscription price of $40 per share. If the theoretical value of the stock when it goes ex-rights is $47.50, then the shareholder

  A. Does not receive any additional benefit from a rights offering

  B. Receives an additional benefit from a rights offering.

  C. Merely receives a return of capital

  D. Should redeem the right and purchase the stock before the ex-rights date

  Correct Answer: A

• Question 685:

  A company's stock trades rights-on for $50.00 and ex-rights for $48.00. The subscription price for rights holders is $40.00, and four rights are required to purchase one share of stock. The value of a right when the stock is trading ex-rights is

  A. $0.40

  B. $0.50

  C. $2.00

  D. $2.50

  Correct Answer: C

  If a stock can be purchased for $48 on the open market, or for $40 with four rights, each right must be worth $2.00 ($8 savings ?4 rights).

• Question 686:

  A company's stock trades rights-on for $50.00 and ex-rights for $48.00. The subscription price for rights holders is $40.00, and four rights are required to purchase one share of stock.The value of a right while the stock is still trading rights-on is

  A. $0.40

  B. $0.50

  C. $1.60

  D. $2.00

  Correct Answer: D

• Question 687:

  The formula for determining the value of one stock right when the price of the stock is rights-on is

  

  If: Ron = market value of one right when the stock is selling rights-on. Pon = market value of one share of stock with rights-on. N = number of nights necessary to purchase one share of stock. S = subscription price per share. If the market price of a stock is $50 per share, the subscription price is $40 per share, and three rights are necessary to buy an additional share of stock, the theoretical market value of one right used to buy the stock prior to the ex-rights date is

  A. $2.00

  B. $2.50

  C. $10.00

  D. $40.00

  Correct Answer: B

• Question 688:

  The equity section of Smith Corporation's Statement of Financial Position is presented below. Preferred stock, $100 par $12,000,000 Common stock, $5 par 10,000,000 Paid-in capital in excess of par 18,000,000 Retained earnings 9,000000 Net worth $49,000,000

  The common shareholders of Smith Corporation have preemptive rights. If Smith Corporation issues 400,000 additional shares of common stock at $6 per share, a current holder of 20,000 shares of Smith Corporation's common stock must be given the option to buy

  A. 1,000 additional shares

  B. 3,774 additional shares.

  C. 4,000 additional shares.

  D. 3,333 additional shares.

  Correct Answer: C

  Common shareholders usually have preemptive rights, which means they have first right to purchase any new issues of stock in proportion to their current ownership percentages. The purpose of a preemptive right is to allow stockholders to maintain their current percentages of ownership. Given that Smith had 2,000,000 shares outstanding ($10,000,000?$5 par), an investor with 20.000 shares has a 1% ownership. Hence, this investor must be allowed to purchase 4,000 (400,000 shares x 1%) of the additional shares.

• Question 689:

  In general, it is more expensive for a company to finance with equity capital than with debt capital because

  A. Long-term bonds have a maturity date and must therefore be repaid in the future.

  B. Investors are exposed to greater risk with equity capital.

  C. The interest on debt is a legal obligation

  D. Equity capital is in greater demand than debt capital

  Correct Answer: B

  Providers of equity capital are exposed to more risk than are lenders because the firm is not obligated to pay them a return. Also, in case of liquidation, creditors are paid before equity investors. Thus, equity financing is more expensive than debt because equity investors require a higher return to compensate for the greater risk assumed.

• Question 690:

  The term `underwriting spread" refers to the

  A. Commission percentage an investment banker receives for underwriting a security issue.

  B. Discount investment bankers receive on securities they purchase from the issuing company.

  C. Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold.

  D. Commission a broker receives for either buying or selling a security on behalf of an investor.

  Correct Answer: C

  An investment banker performs an underwriting or insurance function when it purchases an issue of securities and then resells them. The risk of price fluctuations during the distribution period is borne entirely by the investment banker. Investment banking is also an efficient vehicle for marketing the securities because investment bankers are specialists in such activities The profit earned is the underwriting spread, or the difference between the purchase and resale prices of the securities (effectively, the wholesale and retail prices).