39The term used to describe the reduction in the percentage ownership of existin

Question

39The term used to describe the reduction in the percentage ownership of existing stockholders when a new investor is brought in is called: A. Tunneling B. Fraud C. Dilution D. Classified board structure E. Shareholder exploitation 40. If Corporation A has senior debt with Shyster Bank and junior subordinated debt with Fraudco Bank, what would be the order of payment when bankruptcy would dictate a distribution of assets? A. Preferred shareholders then common shareholders, then Shyster Bank then Fraudco Bank B. Common shareholders then preferred shareholders then Fraudco Bank then Shyster C. Shyster Bank then Fraudco Bank then preferred shareholders then common shareholders D. Fraudco Bank then Shyster Bank then preferred then common E. Depends on the corporate bylaws 41. Aconvertible bond is a financial instrument where: A B. Amortgage bond is converted to a short-term bond The amount owed the bond holder is waived as uncollectable and the company pays capital gains tax on the debt forgiveness C The bond, and any accrued interest, is converted into equity with the applicable shares determined by the current stock price. A bond is converted to a stock option and the bond holder retains a seat on the Board of Directors D. 42 In companies where the stocks are classified as either Growth/Income stocks or Income stocks, investors either require dividends or have an expectation of receiving them. How do dividends differ from interest payments? G The SEC requires that dividends be paid before interest it paid H. The company typically produces a profit before interest payments are made L Interest is tax-deductible, but dividends are not J. Dividend payments are paid only to common stock shareholders K. All the above L None of the above 43, UBOR (London Interbank Offered Rate) is a benchmark rate used by many of the world's leading banks for short term loans made to each other. In the USA, what is another common benchmark for determining interest rates on loans? A Fixed overhead rate B. Prime Rate C. Subordinated Rate D. Mezzanine Rate 44. A floating rate on debt means that A. The rate is too high to be paid until profits reach a certain level 8. The rate can only apply to short term loans C. The rate will/could vary over time and is typically tied to a general benchmark. D. Can be retroactive to earlier periods at the discretion of the lending institution.

Explanation / Answer

39. When new investors are brought, they are issued new shares to bring their investment into the company and thus total number of shares issued increases and thus the existing shareholders now hold less percentage of total shares. They are thus diluted. So Option C is the correct choice.

40. Dentors are paid first in case of bankruptly (seniro debt is given a priority over junior debt). Post that preferred equity share holders are paid and then at last common shareholders are paid.

So choice C is the correct answer.

41. Convertible bond means that after a certain amount of time, bondholders will get equity shares. e,g, CCDs which are compulsory convertible debentures are one such example.

Thus choice C is the correct answer.

42. Interest is tax deductible as it is deducted before the taxes are applied to the profit. Dividends are paid from PAT (i.e. Profit After Tax) and thus are NOT tax deductable. Thus option "I" is the correct option.

43. Prime rate is the other common benchmark for determining interest rate on loans.

44. There are broadly 2 types of loan. Fixed and floating. Fixed, as the name suggests, is fixed over the tenure of the loan whereas floating loan varies as per the prime lending rate. eg. if floating rate is LIBOR + 2% then rate will always be LIBOR + 2% over its tenure. If LIBOR at any tme is 3%, then interest rate would be 5% and if LIBOR at any time increases to 4%, interst rate would increase to 6%.

Thus, choice C is the correct answer.

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