Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 451:

  Which of the following securities are corporate debt securities?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Choice "c" is correct.

  Rules: Bonds are debt securities. Thus, convertible bonds and debenture bonds are debt securities. A

  warrant is a contractual right to purchase stock, which constitutes a share of corporate equity.

  Choices "a", "b", and "d" are incorrect, per the above rules.

• Question 452:

  Which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled to?

  A. Conversion of the preferred stock into common stock.

  B. Voting rights.

  C. Dividend carryovers from years in which dividends were not paid, to future years.

  D. Guaranteed dividends.

  Correct Answer: C

  Choice "c" is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year. Choice "a" is incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted. Choice "b" is incorrect. Preferred stock need not have voting rights. Choice "d" is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.

• Question 453:

  Carr Corp. declared a 7% stock dividend on its common stock. The dividend:

  A. Must be registered with the SEC pursuant to the Securities Act of 1933.

  B. Is includable in the gross income of the recipient taxpayers in the year of receipt.

  C. Has no effect on Carr's earnings and profits for federal income tax purposes.

  D. Requires a vote of Carr's stockholders.

  Correct Answer: C

  Choice "c" is correct. A stock dividend means that the corporation issues its existing shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has no effect on the corporation's earnings and profits for federal income tax purposes. Choice "a" is incorrect. There is no requirement that stock dividends be registered with the SEC because no "sale" is involved. Choice "b" is incorrect. The receipt of a stock dividend is not the recognition of income. It merely divides the stockholders' current ownership interests into more pieces; it does not increase proportional ownership interest in the corporation. Choice "d" is incorrect. The issuance of dividends, including stock dividends, is at the directors' discretion; shareholders do not vote on dividends.

• Question 454:

  Absent a specific provision in its articles of incorporation, a corporation's board of directors has the unilateral power to do all of the following, except:

  A. Repeal the bylaws.

  B. Declare dividends.

  C. Fix compensation of directors.

  D. Amend the articles of incorporation.

  Correct Answer: D

  Choice "d" is correct. Amendment of the articles of incorporation, albeit proposed by the directors, cannot usually be effected without the affirmative vote of the shareholders. Choice "a" is incorrect. The directors ordinarily have the power to repeal bylaws unless the articles or the specific bylaw to be repealed provides otherwise. Choice "b" is incorrect. The directors have the power to declare dividends at their discretion as long as the dividends do not violate any statute, article provision, bylaw, or contract with a creditor. Choice "c" is incorrect. Although it seems like there would be a conflict of interest, directors do have the power to set their own compensation, limited only by the fiduciary duties owed to the corporation (e.g., the directors cannot set salaries so high as to constitute waste).

• Question 455:

  Which of the following actions may a corporation take without its stockholders' consent?

  A. Consolidate with one or more corporations.

  B. Merge with one or more corporations.

  C. Dissolve voluntarily.

  D. Purchase 55% of another corporation's stock.

  Correct Answer: D

  Choice "d" is correct. Directors are free to make most corporate decisions unilaterally. However, decisions

  that might fundamentally change the nature of the corporation require the consent of the shareholders. The

  purchase of 55% of another corporation's stock can be quite insignificant to the purchaser and is not a

  fundamental corporate change.

  Choice "a" is incorrect because a consolidation is a fundamental corporate change.

  Choice "b" is incorrect because a merger is a fundamental corporate change.

  Choice "c" is incorrect because a dissolution is a fundamental corporate change.

• Question 456:

  Generally, a corporation's articles of incorporation must include all of the following, except the:

  A. Name of the corporation's registered agent.

  B. Name of each incorporator.

  C. Number of authorized shares.

  D. Quorum requirements.

  Correct Answer: D

  Choice "d" is correct. A corporation's articles of incorporation need not contain any information regarding quorum requirements. Choices "a", "b", and "c" are incorrect because under the Revised Model Business Corporations Act a corporation's articles of incorporation must include:

  (1)

  The name of the corporation,

  (2)

  The name and address of the corporation's registered agent,

  (3)

  The names and addresses of each of the incorporators, and

  (4)

  The number of shares authorized to be issued.

• Question 457:

  The corporate veil is most likely to be pierced and the shareholders held personally liable if:

  A. The corporation has elected S corporation status under the Internal Revenue Code.

  B. The shareholders have commingled their personal funds with those of the corporation.

  C. An ultra vires act has been committed.

  D. A partnership incorporates its business solely to limit the liability of its partners.

  Correct Answer: B

  Choice "b" is correct. Generally, a corporation is treated as an entity distinct from its shareholders and shareholders are not liable for the corporation's debts. However, where the shareholders do not treat the corporation as a distinct entity, such as where they commingle their personal funds with the corporation's funds, courts are likely to ignore the corporate form as well. Choice "a" is incorrect. An election to be taxed like a partnership under Subchapter S is not grounds to pierce the corporate veil. Choice "c" is incorrect. An ultra vires act is one beyond the corporation's powers. The persons who authorized the ultra vires act can be held personally liable for damages caused, but it is not a ground for piercing the corporate veil. Choice "d" is incorrect. Limiting personal liability is the main reason to incorporate. It is a ground for piercing the corporate veil only if it is done fraudulently (i.e., to avoid paying present creditors).

• Question 458:

  Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter?

  I. Provision for the authorization of voting stock.

  II.

  Name of the corporation.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: C

  Choice "c" is correct. Both I and II.

  Rule: In order to obtain a corporate charter, a for-profit corporation must include in its articles of

  incorporation the name of the corporation and a provision for the authorization of voting stock. In addition,

  the articles of incorporation must include the names of the incorporators and the name and address of the

  registered agent.

  Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 459:

  Under the Revised Model Business Corporation Act, a merger of two public corporations usually requires all of the following, except:

  A. A formal plan of merger.

  B. An affirmative vote by the holders of a majority of each corporation's voting shares.

  C. Receipt of voting stock by all stockholders of the original corporations.

  D. Approval by the board of directors of each corporation.

  Correct Answer: C

  Choice "c" is correct. A merger can be effected by giving some parties cash or property; not everyone need

  receive voting shares.

  Choice "a" is incorrect. The merger must be pursuant to a formal plan.

  Choice "b" is incorrect. The majority of each corporation generally must approve a merger.

  Choice "d" is incorrect. A plan of merger must be approved by the boards of the merging corporations.

• Question 460:

  Under the Revised Model Business Corporation Act, which of the following must be contained in a corporation's articles of incorporation?

  A. Quorum voting requirements.

  B. Names of stockholders.

  C. Provisions for issuance of par and nonpar shares.

  D. The number of shares the corporation is authorized to issue.

  Correct Answer: D

  Choice "d" is correct. The articles must set out the corporation's authorized shares.

  Choice "a" is incorrect. Quorum requirements, if stated at all, usually are in the bylaws; they need not be

  included in the articles of incorporation.

  Choice "b" is incorrect. The articles need not include the names of stockholders.

  Choice "c" is incorrect. The RMBCA has eliminated the concept of par value and so does not have a

  requirement that par value be established in the articles.