Multiple Choice Answers

Which of the following is correct with regard to a holder in due course?
A.  A holder in due course can obtain greater rights to payment of an instrument than his transferor had.
B.  A holder in due course can give greater rights to a transferee than he has as a holder in due course.
C.  A holder in due course is primarily liable on an instrument.
D.  A holder in due course must notify subsequent transferees of his holder in due course status.

Which of the following firms would be LESS likely to use more debt?
a. A firm owns many buildings and real estates.
b. A firm has stable taxable income.
c. A firm has large agency costs of equity.
d. A firm has used up all other tax saving strategies.
e. A firm has low-rated (B or below) bonds.

Which of the following is a sensible reason to pay (or increase) cash dividends to shareholders?
a. Since a share price is the present value of expected future dividends, higher dividends payout increases a share price.
b. Since cash dividends are the shareholders’ wages, a firm should pay dividends to shareholders like it pays wages to workers.
c. Cash dividends are safer than future capital gains.
d. Expected return on a new project is lower than return on a diversified portfolio in the capital market.
e. Capital loss should be compensated by additional dividends.

According to the compromise theory (by DeAngelo and Masulis), which of the following is true?
a. Firms with stable and large future taxable income ought to borrow less.
b. Firms with other tax saving means should borrow more.
c. As the debt ratio increases, value of a firm increases initially but decreases later.
d. Value of a firm is independent of capital structure.
e. Firms should use debt as much as possible.

A stock dividend:
a. reduces both the cash balance and the equity in a firm.
b. increases the number of shares outstanding, but does not affect shareholder wealth.
c. is generally expressed as a ratio.
d. increases shareholder wealth without creating any tax liabilities by doing so.
e. is basically the same as a stock repurchase.

Which one of the following is the prime objective of a residual dividend policy?
a. maintaining a stable dividend
b. increasing the dividend at a steady pace
c. adhering to a constant dividend payout ratio
d. decreasing the debt-equity ratio at a steady pace
e. meeting the firm’s investment needs

Signature liability on a negotiable instrument is also known as:
A.  Secondary liability.
B.  Shelter liability.
C.  Contract liability.
D.  Agent liability.
E.  Warranty liability.

How would Modigliani & Miller (MM) respond to the following statements?
“Dividends are the shareholder’s wages. Therefore, if a government adopts a minimum wage policy, it should establish a minimum dividend policy too.”
President of the USA (United Shareholders Alliance)