Deck 12: Capital Structure Policy

Question 1

What is the name of the entity with which a prospectus must be lodged?

A)The Australian Competition and Consumer Commission
B)The Australian Prudential Regulatory Authority
C)The Australian Securities and Investments Commission
D)The Australian Securities Exchange

Answer 1

The Australian Securities and Investments Commission

Question 2

Management has just discovered an excellent investment opportunity and needs additional funding for it.According to the pecking order theory,the company should:

A)Use debt financing if management believes the shares are undervalued
B)Use equity financing if management believes the shares are undervalued
C)Use debt financing if management believes the shares are overvalued
D)Forego the investment opportunity

Answer 2

Use debt financing if management believes the shares are undervalued

Question 3

An initial public offering in which the offer price is determined by value of bids placed by institutional investors is known as what?

A)A book build offer
B)An underwritten offer
C)A fixed price offer
D)None of the above

Answer 3

A book build offer

Question 4

The securitisation of a pool of underlying financial assets into a tranched debt structure is known as:

A)Collateralised Debt Obligations
B)Collateralised Loan Obligations
C)Both A and B
D)Some other term

Question 5

Which of the following is not a characteristic of debt?

A)Debtholders are paid before shareholders are paid the value of their shares
B)Debt has an infinite life
C)Debtholders do not have voting rights at general meetings
D)None of the above

Question 6

A debenture differs from an unsecured note for what primary reason?

A)The issuing company normally does not offer security.
B)Some form of security is normally offered by the issuing company.
C)The lending company does not require security over any assets of the issuer.
D)None of the above

Question 7

What is a rights issue?

A)An offer to existing shareholders giving them the right to purchase new shares in the company in proportion to the number of shares held
B)An offer to existing shareholders giving them the right to purchase an unlimited number of new shares in the company at a discount to the current market price
C)An offer to existing shareholders giving them the right to purchase an unlimited number of new shares in the company at a premium to the current market price
D)An offer to existing shareholders giving them the right to sell their existing shares back to the company at a premium to the current market price

Question 8

Which of the following is not a characteristic of the majority of the equity issued by companies listed on the ASX?

A)The liability of shareholders is limited to the amount of capital they have invested.
B)They have an infinite life.
C)Shareholders cannot vote on resolutions put forward at annual general meetings.
D)They pay dividends,which are set annually.

Question 9

The price of a share following a rights issue is known as what?

A)The issue ratio
B)The issue price
C)The rights issue cleansing price
D)The theoretical ex- rights price

Question 10

Which of the following pieces of information is not usually included in a prospectus?

A)Historical and forecast financial information
B)The price at which the stock will be issued to the public in a fixed- price offer
C)The number of shares to be issued
D)All of the information above is usually included in a prospectus.

Question 11

In order to list upon the Australian Stock Exchange for the first time,a company must prepare what?

A)An ASX code
B)10 years of audited financial statements
C)A dividend reinvestment plan
D)A prospectus

Question 12

The price of a share can change following a rights issue.Why?

A)The value of new cash raised through the rights issue is spread across a greater number of shares.
B)The value of new cash raised through the rights issue is spread across a fewer shares.
C)The increased value of the company following the rights issue is passed on to share holders.
D)The increased number of share holders after the rights issue increases the value per share.

Question 13

Which of the following is true about the pecking order theory?

A)Management will raise equity when the shares are overpriced on the market.
B)Management will raise debt finance before using excess retained earnings.
C)Management will raise equity when the shares are underpriced on the market.
D)None of the above

Question 14

What are rights that cannot be sold to third parties known as?

A)Non- renounceable rights
B)Non- exchangeable rights
C)Non- tradeable rights
D)Non- redeemable rights

Question 15

Which of the following is a not a hybrid security?

A)A non- step- up preference share
B)A convertible bond
C)A bank accepted bill
D)A reset preference share

Question 16

Which of the following Modigliani and Miller assumptions regarding dividend irrelevance is true?

A)There are no personal or corporate taxes.
B)Investors can borrow at the same rate as the company.
C)All market participants (e.g.management and shareholders)have the same information.
D)There are no costs of trading shares.
E)None of the above

Question 17

Firms that borrow excessively face which one of the following possibilities?

A)The impact of differing tax rates on corporate versus personal tax
B)The possibility of financial distress
C)The existence of information asymmetry
D)All of the above
E)None of the above

Question 18

Which of the following occurs when a company issues new stock to a small number of,typically,institutional investors?

A)A dividend reinvestment plan
B)A share buy- back
C)A private placement
D)A rights issue

Question 19

What is the role of an underwriter in an initial public offer?

A)Organise the initial public offering
B)Generate interest in the initial public offering amongst institutional investors
C)Purchase any shares not acquired by the public
D)All of the above

Question 20

A contract in which one party pays another series of cash flows is known as what?

A)A financial lease
B)A debenture
C)An unsecured note
D)A commercial bill

Question 21

An accelerated renounceable rights issue is also known as a(n).

A)FAST
B)SWIFT
C)SPEED
D)AREO

Question 22

Without resorting to a conditional placement,a company may issue no more than of its stock in through private placements.

A)15 per cent
B)10 per cent
C)20 per cent
D)5 per cent

Question 23

Which of the following is not a feature of ordinary shares?

A)Lowest priority in the event the company is liquidated
B)A finite life
C)The payment of dividends which are set annually
D)The right to vote at annual general meetings

Question 24

Under Modigiliani and Miller's dividend irrelevance theory,the company's degree of financial leverage will be affected by:

A)The company's share price
B)The company's weighted average cost of capital
C)The value of the company's debt
D)None of the above

Question 25

The value of a company is measured by:

A)The book value of its debt plus book value of equity
B)The market value of its debt plus book value of equity
C)The market value of its debt plus market value of equity
D)The book value of its debt plus market value of equity

Question 26

Which of the following is not a Modigliani and Miller assumption regarding dividend irrelevance?

A)There are no costs of trading shares.
B)Investors can borrow at the same rate as the company.
C)There are personal and corporate taxes.
D)All market participants (e.g.management and shareholders)have the same information.

Question 27

What is hybrid finance?
Why do companies use this type of capital?

Question 28

According to the Modigliani and Miller proof,capital structure is irrelevant to firm value because of _.

A)'Home made' leverage
B)'Asset' leverage
C)'Financial' leverage
D)'Gearing' leverage

Question 29

Under the dividend imputation system of tax,investors will:

A)Prefer the personal tax rate to be greater than the company tax rate
B)Be indifferent to the tax rates
C)Prefer the personal tax rate to be equal to the company tax rate
D)Prefer the personal tax rate to be less than the company tax rate

Question 30

Which of the following best describes a floating- charge debenture?

A)Holders are entitled to the total proceeds from the sale of pledged assets.
B)A specific corporate asset is pledged as security.
C)Holders are entitled to the proceeds from the sale of unpledged assets.
D)Several corporate assets are pledged as security.

Question 31

The day in which the rights detach from the underlying share is known as:

A)The 'ex- rights' date
B)The 'at- rights' date
C)The 'cum- rights' date
D)The 'div- rights' date

Question 32

On 1 February AF Publishing announced a 1 for 9 rights issue at an issue price of $2.48.Its share price immediately before the announcement was $5.42.What is the theoretical
ex- rights price?

Question 33

Which of the following describes a firm's capital structure?

A)The gearing ratio established by the firm
B)The mix of debt and equity employed by the firm
C)The degree of firm leverage
D)All of the above

Question 34

The following information is available concerning Speedy Couriers Ltd: (a)Calculate the market value of Speedy Couriers' outstanding debt.
(b)What is the market value of Speedy Couriers' equity?
(c)Calculate the debt to equity ratio.

Question 35

Which of the following pieces of information is usually included in a prospectus?

A)The price at which the stock will list at the beginning of the first day of trading
B)The price of the stock at the end of the first day of trading
C)The price at which the stock will be issued to the public in a fixed- price offer
D)None of the above

Question 36

Which of the following is not a method for raising additional capital?

A)A rights issue
B)A private placement
C)A share buy- back
D)A dividend reinvestment plan

Question 37

Which of the following equations gives a firms leverage ratio?

A)Leverage ratio = ^{net debt} market capitalisation of equity
B)Leverage ratio = ^{net debt} gross equity
C)Leverage ratio = ^{gross debt} market capitalisation of equity
D)Leverage ratio = ^{net debt} net equity

Question 38

Modigliani and Miller's dividend irrelevance theory states that the total value of a firm is dependent on its capital structure.

Question 39

On 1 October 2003,PK Industries Ltd announced a 1 for 5 rights issue at $2.35.The new shares were not entitled to participate in the final distribution for FY2003 of 15 cents per share.
(a)Calculate the ex- distribution theoretical ex- rights price for PK Industries Ltd if the share price prior to announcement was $2.57 and the discount to the pre- announcement share price that the rights were issued at.
(b)Now assume that the new shares to be issued under the entitlement issue were entitled to participate in the final distribution for FY2003 of 15 cents per share.

Question 40

The fees in relation to a smaller capital raising will typically be _ _ than those in relation to a larger capital raising due to the high level of costs.

A)Lower,fixed
B)Higher,fixed
C)Higher,variable
D)Lower,variable

Question 41

Firms that have high leverage ratios have a lower probability of experiencing financial distress because they have a known fixed- interest expense to pay regardless of market conditions.

Question 42

Company shareholders with a low personal rate of tax will receive value from any tax shields available under a system of dividend imputation.

Question 43

Because information asymmetry exists between the management (and directors)of a company and its shareholders,shareholders are kept fully informed of the company's future prospects.

Question 44

Underwriters bear no risk in underwriting an IPO and hence are only paid a small fee.

Question 45

The legal document that outlines a firm's intention to carry out an IPO is known as a 'prospectus'.

Question 46

The market value of a company's total equity is given by its market capitalisation.

Question 47

Modigliani and Miller's dividend irrelevance theory states that the total value of a firm is not affected by the ratio of debt to equity in the capital structure.

Question 48

According to the pecking order theory,external funding is used to fund new projects after internal funding is exhausted.

Question 49

Rights issues are seen as advantageous over seasoned equity offerings because they do not dilute shareholder wealth.

Question 50

In order for a company to seek further capital from the share market,it must first have previously carried out an IPO.

Question 51

If an underwriter does not sell all of its clients' securities to other institutions or investors,it is generally obliged to purchase the unsold shares itself.

Question 52

The level of a company's gearing relative to other stocks in the industry will play a role in determining the company's capital structure.

Question 53

Private placements are often the cheapest means to issue new equity because they do not require the preparation and distribution of a prospectus.

Question 54

The difference between a jumbo placement and a AERO is that,under the AERO the rights are renounceable and therefore shareholders receive the value of their rights even if they choose not to take them up.