[1940] Ch. 48 SOME …
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Some fundamental multiple-choice questions derived from this chapter:

1. Which of the following is NOT a negative effect of corporate pyramiding?
A) Creation and sale of unsound senior securities.
B) Rapid increases in earning power leading to wild speculation.
C) Equitable distribution of control among investors.
D) Exaggeration of indicated earnings and facilitation of market manipulation.

2. How do holding companies typically overstate their earnings?
A) By underestimating operational costs.
B) By valuing stock dividends from subsidiaries at an unduly high price.
C) By reporting losses as gains.
D) By avoiding taxes through legal loopholes.

3. What is the impact of the issuance of subscription rights on stock value perception in the context of pyramided enterprises?
A) It reduces the overall stock value due to market saturation.
B) It has no significant impact on stock value.
C) It creates a circular reasoning, elevating stock value through speculative enthusiasm.
D) It directly correlates with the company’s actual financial performance.

4. What was a notable outcome of the exploitation of the stock-purchase-warrant device by Electric Bond and Share Company in 1929?
A) A significant decrease in the market value of their shares.
B) A legislative action to restrict such practices.
C) An absurdly high breakup value for Electric Bond and Share common stock.
D) The development of a new financial model for public utilities.

5. According to the text, which of the following companies was initially involved in pyramiding but later rectified this issue?
A) United States Steel Corporation.
B) Central States Electric Corporation.
C) American Light and Traction Company.
D) United Light and Railways Company.

6. What legislative measure was taken in response to the disastrous effects of public-utility pyramiding in the 1920s?
A) The creation of the Securities and Exchange Commission.
B) The Public Utility Holding Company Act of 1935.
C) The introduction of the Sarbanes-Oxley Act.
D) The Dodd-Frank Wall Street Reform and Consumer Protection Act.

7. In 1929, what was the market value transmutation of $6,500,000 earnings of American and Foreign Power Company's common stock due to speculative practices?
A) $100,000,000
B) $320,000,000
C) $500,000,000
D) $1,560,000,000

Answers: CBCCA BD

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