Question 1. Ulrich Inc.'s articles of incorporation authorize the firm to issue 500,000 shares of $5 par-value common stock, of which 325,000 shares have been issued. Thos shares were sold at an average of 12 percent over par. In the quarter that ended last week, Ulrich earned $260,000 net income; 4 percent of that income was paid as a dividend. Prior to the close of the books, Ulrich had $3,545,000 in retained earnings. The company owns no treasury stock.
a. Create the equity statement for Ulrich.
b. Create a new equity statement that reflects the sale of $25,000 authorized but unissued shares at the price of $4 per share.
Question 2.
a. Distinguish between straight voting and cumulative voting.
b. The shareholders of the Unicorn Company need to elect seven new directors. There are 2 million shares outstanding. How many shares do you need to be certain that you can elect at least one director if
1. Unicorn has straight voting?
2. Unicorn has cumulative voting?
Question 3: Raeo Corp. bonds trade at 100 today. The bonds pay semiannual interest that is paid on January 1 and July 1. The coupon on the bonds is 10 percent. How much will you pay for a bond if today is
a. March 1.
b. October 1.
c. July 1.
d. August 15
Question 4: Which of the following are characteristics of public issues, and which are characteristics of direct financing?
a. SEC registration required
b. Higher interest costs
c. Higher fixed cost
d. Quicker access to funds
e. Active secondary market
f. Easily renegotiated
g. Lower flotation costs
h. Regular amortization required
i. Ease of repurchase at favorable prices
j. High total cost to small borrowers
k. Flexible terms
l. Less intensive investigation required
Question 5: Consider a European call option on Stock A that expires on December 21 and has a strike price of $50.
a. If Stock A is trading at $55 on December 21, what is the payoff to: (1) the owner of the option? (2) the seller of the option?
b. If Stock A is trading at $45 on December 21, what is the payoff to (1) the owner of the option? (2) the seller of the option?
c. If the seller of a call option never receives cash at expiration, why would anyone ever sell a call option?