Deck 5: Corporations Issuing Equity in the Share Market

Question 1

Which of the following statements is NOT a feature of ordinary shares?

A) Ordinary shares are a major source of external equity financing for companies.
B) Ordinary shares entail voting rights at annual general meetings.
C) Ordinary shares have no fixed payment obligation.
D) Dividends of ordinary shares are always tax deductible.

Answer 1

D

Question 2

Which of the following statements is correct for an investment proposal with a positive NPV?

A) The discount rate exceeds the required rate of return.
B) The IRR is greater than the required rate of return.
C) Accepting the investment proposal has an uncertain effect on shareholders.
D) The present value of the cash flow equals the cost of the investment.

Answer 2

B

Question 3

The finance required by a company to fund its day-to-day operations is called:

A) daily financing.
B) operational financing.
C) operational capital.
D) working capital.

Answer 3

D

Question 4

Financial risk refers to the:

A) risk of owning financial assets.
B) overall risk of a financial services firm.
C) risk faced by the shareholders when debt is used.
D) risk of not finding finance for a firm's investment.

Question 5

The claims of the equity holders on the assets of the firm have priority over those of:

A) the debt holders.
B) the preferred shareholders.
C) the unsecured debt holders.
D) no other holder.

Question 6

What is the function of a proxy statement for a shareholder?

A) It gives them the right of a vote for each share they own.
B) It gives them the right to transfer their share to another party.
C) It gives them the entitlement to new shares when issued.
D) It gives them the right to sell their shares at a premium.

Question 7

Which of the following statements about financial risk is incorrect?

A) The higher the debt-to-equity ratio, the higher the degree of financial risk.
B) Interest payments on debt must be paid when they fall due.
C) When a business fails equity holders rank ahead of providers of debt due to their higher financial risk.
D) The higher the proportion of debt the higher the potential return on shareholders' funds.

Question 8

Increasing the financial leverage of a company will _______ shareholders' expected returns and ______ their risk.

A) increase; not affect
B) increase; decrease
C) increase; increase
D) decrease; increase

Question 9

An increase in a firm's level of debt will:

A) reduce the business risk of the firm.
B) increase the variability in earnings per share.
C) lower the expected return on shareholders' funds.
D) increase the return to the debt holders.

Question 10

Which of the following statements about financial risk is incorrect?

A) A rise in interest rates will adversely affect the cost of a corporation's variable debt.
B) If a corporation imports goods from overseas then an appreciation in the exchange rate will adversely affect the company's profits.
C) If a company (A) has sold goods to another company (B) with payment due in 30 days but company B has gone into liquidation then company A faces credit default.
D) If a company breaches its debt-to-equity ratio loan covenants the value of the company may be adversely affected.

Question 11

Which of the following criteria would be determinants of the appropriate ratio of debt to equity if a company should not take on more debt than can be serviced under conservative economic forecasts?
I)Maximisation of shareholder wealth
Ii)Industry norms
Iii)History of the ratio for the firm
Iv)The stage of the current economic cycle
V)Limit imposed by lenders
Vi)The company's capacity to service debt

A) i, iii, v, vi
B) ii, iii, v, vi
C) ii, iii, iv, v
D) iii, iv, v, vi

Question 12

Restrictions placed on borrowers by lenders in the loan agreement are called loan:

A) covenants.
B) limits.
C) arrangements.
D) contracts.

Question 13

An investment decision differs from a financing decision in that:

A) investment decisions relate to assets that the firm has invested in, while financing decisions relate to the firm's financial assets.
B) an investment decision first determines what assets the firm will invest in, while a financing decision considers if the existing investments should be refinanced.
C) a financing decision first determines what financial assets the firm will invest in, while an investment decision considers how the funds will be invested.
D) an investment decision first determines what assets the firm will invest in, while a financing decision considers how the investments under consideration are to be funded.

Question 14

When a company's project results in a return and profits which exceed the cost of its debt borrowing:

A) both the debt holders and shareholders can share in the profits.
B) only the shareholders may share in the profits.
C) the interest payments to the debt holders may increase.
D) its cost of capital increases.

Question 15

When a company decides to issue an unsecured note to pay for a new machine,it has made a/an:

A) capital market decision.
B) money market decision.
C) financing decision.
D) investment decision.

Question 16

Who are sometimes referred to as the residual owners of the corporation?

A) The secured creditors
B) The unsecured creditors
C) The common shareholders
D) The preferred shareholders

Question 17

When a company decides to pay for an investment project using a short-term bank loan,this is best described as a/an:

A) capital market decision.
B) money market decision.
C) financing decision.
D) investment decision.

Question 18

Compared with retail sector companies,banks have a:

A) high equity-to-debt ratio.
B) low gearing ratio.
C) high debt-to-equity ratio.
D) conservative gearing ratio.

Question 19

A company's business risk depends on:

A) its use of debt in financing the business.
B) the risk of the company's operations and assets.
C) how much debt a company has used.
D) the amount of shareholder equity in the company.

Question 20

Problems associated with calculating an internal rate of return include:

A) negative cash flows during the project's lifetime.
B) choosing one project from two or more projects.
C) timing of cash flows.
D) All of the given answers.

Question 21

A financial institution involved in underwriting the sale of new securities by buying them from the issuing firms and then reselling them to the public in the primary capital market is an:

A) investment agent.
B) investment broker.
C) investment dealer.
D) investment banker.

Question 22

Financing for high-risk companies is often in the form of:

A) limited liability shares.
B) no-liability shares.
C) limited instalment receipts.
D) contributing shares.

Question 23

Which of the following statements best describes the role or function of the promoter of a flotation?

A) The manager of the sub-underwriting panel or group
B) The broker responsible for the initial sale of shares to investors
C) The party seeking the flotation of the company
D) The agency responsible for marketing the issue to the public

Question 24

Most companies raise funds by selling their securities in a:

A) public float.
B) private placement.
C) stock exchange.
D) direct placement.

Question 25

Ordinary shares in limited liability companies are the major source of external equity funding for Australian companies.Which of the following statements regarding the issuance of ordinary shares by a newly listed limited liability company is incorrect?

A) Shares may be issued on a fully paid or partly paid basis.
B) A holder of instalment receipts only has to pay the remaining amount when due or called.
C) Share price is determined with reference to a range of variable factors.
D) No liability company can issue shares only on a fully paid basis because of the risk.

Question 26

As part of the listing process for an unlisted organisation,a document that provides detailed information on the past and forecast performance for it is a:

A) flotation statement.
B) prospectus.
C) promotion report.
D) memorandum offering.

Question 27

Which of the following is NOT a role of an underwriter in a public offering of shares?

A) To provide pricing of the issue
B) To provide advice on the structure of the issue
C) To invest the funds raised in the offering
D) To provide guidance on the timing of the issue

Question 28

Compared with raising debt through a bank,the raising of equity through an IPO is generally:

A) cheaper.
B) dearer.
C) roughly the same.
D) much cheaper.

Question 29

When a company undertakes an initial public offering (IPO)it may:

A) issue and list debentures in the capital markets.
B) offer shares to a few public institutional investors.
C) issue and list shares in the primary share market.
D) directly list corporate bonds in the capital markets.

Question 30

Generally,an initial public offering is:

A) an offer to potential investors of ordinary shares to newly list a company on a stock exchange.
B) an offer to potential investors of preference shares to newly list a company on a stock exchange.
C) an offer to potential investors of company debentures to newly list a company on a stock exchange.
D) an offer to potential investors of unsecured notes to newly list a company on a stock exchange.

Question 31

Potential investors learn of the information concerning the company and its new issue by being sent a _____ by the broker.

A) registration statement
B) prospectus
C) letter of commitment
D) memorandum offering

Question 32

A company may seek to raise further funds by issuing additional ordinary shares.The terms and conditions of the new share issue are determined by the board of directors in consultation with its financial advisers and others,and having regard to the preferences of existing shareholders and the needs of the company.Which of the following is LEAST likely to be a determinant of the price that is eventually struck?

A) The discount to current market price that can be offered to shareholders.
B) The company's cash requirements.
C) The projected earnings flow from the new investments.
D) The cost of alternative funding sources.

Question 33

Common shareholders are:

A) guaranteed a periodic distribution of dividends
B) guaranteed a distribution in the wind-up of the company.
C) guaranteed both a periodic distribution of dividends and a distribution in the wind-up of the company.
D) not guaranteed a periodic distribution or a distribution in the wind-up of the company.

Question 34

Which of the following requirements does NOT apply to a company seeking a public listing on the Australian Securities Exchange (ASX)?

A) The entity must adhere to minimum standards of quality.
B) The entity must adhere to minimum standards of disclosure.
C) The company must issue a prospectus that is to be lodged with the ASX.
D) The company must have a structure and operation appropriate for a listed entity.

Question 35

Holders of equity capital:

A) receive interest payments.
B) own the company.
C) have lent money to the company.
D) have a guaranteed right to income from the company.

Question 36

A person who is authorised to vote on a shareholder's behalf is called:

A) an underwriter.
B) a proxy.
C) an authorised shareholder.
D) a substitute.

Question 37

Companies can raise equity capital through:

A) the money markets.
B) the inter-bank market.
C) retained earnings and the share market.
D) a major bank.

Question 38

If,for an IPO,circumstances change and the issue becomes unattractive,the underwriters:

A) charge the company more for raising the funds.
B) charge the company less for the IPO.
C) may purchase unsubscribed shares.
D) offer the shares at a lower price.

Question 39

Which of the following statements about a no liability company is incorrect?

A) A no liability company will issue shares on a partly paid basis.
B) In Australia only mining companies can list as a no liability company.
C) A no liability company may also offer shareholders an option to sell shares back to the company if the company exploration is not successful.
D) If a no liability gold-mining company discovers gold then for the product phase the company may issue a further call on the partly paid shares.

Question 40

If,for an IPO,market prices have fallen,then underwriters with an out-clause that gives a level of a specified price index that the index cannot fall below,then:

A) the underwriters have the right to charge the company more for raising the funds.
B) the underwriters need to only purchase a specified number of shares and not the total unsold.
C) the underwriters may be released from their obligations.
D) the underwriters may offer the shares at a lower price.

Question 41

If a company raises equity funds by issuing shares to a selected number of institutional investors,this is known as:

A) a share appointment.
B) a placement.
C) a share rights issue.
D) share transfer.

Question 42

Which of the following is generally NOT a characteristic of rights?

A) No expiration date
B) If exercised, results in the dilution of earnings for existing shareholders
C) Saleability
D) Potential listing on a stock exchange

Question 43

The main advantage of placements to raise additional equity funds compared to a rights issue is:

A) the discount to current market price may be less.
B) it can be carried out much more quickly.
C) a selective placement can sell shares to friendly institutional investors.
D) it reduces the proportion of ownership by existing shareholders.

Question 44

Compared with a pro-rata issue of shares,placements usually:

A) take a longer time to organise.
B) can be carried out much more quickly.
C) involve a far greater discount to the current market price.
D) involve no more than 50 participants.

Question 45

A rights offering is the issue of:

A) proxies to the shareholders to use their voting rights at the annual general meeting.
B) options on shares to the general public.
C) an option to purchase shares directly to the shareholders.
D) special options to the management.

Question 46

Share placements may,subject to compliance with certain regulations,be made to institutional investors.Which of the following conditions is NOT a requirement of the Australian authority ASIC for share placements?

A) The placement should consist of minimum subscriptions of $500 000, or be made up of not more than 20 participants.
B) The discount from current market price should not be excessive.
C) Under no circumstances should placements be in excess of 10% of the issued shares permitted.
D) There is no need to register a prospectus, but a memorandum of information detailing the company's activities should be sent to all participants.

Question 47

For a share placement,the Australian authority ASIC requires:

A) that a placement must consist of subscriptions of not less than $1 000 000.
B) that any discount from the current market price not be more than 10%.
C) a memorandum of information to be sent to all participating institutions.
D) a prospectus, which can be filed with them after the event.

Question 48

A pro-rata share rights offer of 1: 5 gives existing shareholders:

A) the right to purchase one new share for every five shares held.
B) the right to purchase five new shares for every one share held.
C) the right to purchase one share for every 1/5 shares held.
D) the right to purchase 10 shares for every five shares held.

Question 49

The subscription price in a rights offering is generally:

A) below the current share price.
B) equal to the current share price.
C) above the current share price.
D) not related to the share price.

Question 50

Which of the following is NOT a feature of a dividend reinvestment scheme for a company?

A) Shareholders can acquire company shares at little or no transaction cost.
B) Shareholders can increase their return on the company share concerned.
C) The company can obtain additional equity funding.
D) The shareholders can redeem shares for dividends.

Question 51

A dividend reinvestment plan generally _______ on the security.

A) decreases the return
B) increases the return
C) has no effect on the return
D) has an uncertain effect

Question 52

Which of the following does NOT apply to a dividend reinvestment plan?

A) A dividend reinvestment plan forms additional equity financing for the company.
B) For a dividend reinvestment scheme the company typically bears the associated transaction costs.
C) Companies have encouraged shareholders to use dividend reinvestment plans.
D) Shareholders have the chance of purchasing additional shares through a dividend reinvestment plan.

Question 53

When a takeover company issues additional shares to fund the acquisition of the shares in a target company this is called:

A) a seasoned share offering.
B) an equity-funded takeover.
C) an initial share takeover.
D) a rights offering.

Question 54

Dividend reinvestment schemes are a significant source of equity for many Australian companies.Which of the following advantages of dividend reinvestment schemes may,at times,also be regarded as a disadvantage?

A) The shareholder avoids transaction costs on the share issue.
B) The share issue price is usually at a discount to the average market price.
C) Such schemes allow dividends to be paid while retaining cash for future growth.
D) The company is able to pass on franking credit to its shareholders.

Question 55

Before making a rights issue,a company's management must consider several important variables.Which of the following is NOT one of these variables?

A) The ability of the company to service the increased equity on issue
B) The costs of alternative funding sources
C) Whether there will be a sufficient take-up rate of the issue
D) The effect on the firm's profits

Question 56

A right that can only be exercised by the shareholder and not sold is called a:

A) non-saleable right.
B) renounceable right.
C) non-renounceable right.
D) pro-rata right.

Question 57

A pro-rata share rights offer means that the offer:

A) must be made to all the stakeholders of a company.
B) must be made to bond holders and shareholders who get their offer in before a cut-off date.
C) must be made to shareholders on the basis of the number of shares already held.
D) is made only to the shareholders with the largest number of shares on the share register at a cut-off date.

Question 58

A company may raise additional equity capital through:

A) a rights issue.
B) a placement.
C) a dividend reinvestment scheme.
D) all of the given answers.

Question 59

Some of the main principles that form the basis of a stock exchange's listing rules are:

A) sufficient investor interest must be shown to warrant an entity's participation in the markets.
B) information must be produced according to the highest standards.
C) minimum standards of quality size, operations and disclosure must be satisfied.
D) security holders must be consulted on matters of significance except for agreements between the entity and related parties.

Question 60

For a share placement,the Australian authority ASIC or ASX listing rules require:

A) that a placement must consist of subscriptions of not less than $1 000 000.
B) there must be no more than 20 participants.
C) the discount from market price must not be above 50 per cent.
D) that for a company that has had total placements of more than 15 per cent in the last 12 months, agreement for another must be sought from shareholders at the annual general meeting.

Question 61

An advantage of a convertible security for a company is that it can generally be sold with interest rates _______ other non-convertible debt securities.

A) higher than
B) equal to
C) lower than
D) unrelated to

Question 62

Convertible preference shares are normally converted into:

A) debentures.
B) bonds.
C) shares.
D) warrants.

Question 63

A convertible note is a/an:

A) equity instrument that converts into debt at maturity.
B) equity instrument that converts into a specified number of shares at maturity.
C) debt instrument that the holder has the option to convert into an initially specified number of shares.
D) warrant that the holder has the option to convert into an initially agreed-upon number of shares.

Question 64

Which of the following is NOT a feature of convertible notes?

A) Convertible notes are usually issued at a price close to the market price of the share.
B) The expectation of the note holder is that the share price will increase over the term of the note.
C) Convertible notes offer a higher interest rate than straight debt instruments.
D) A convertible note may be made by direct placement to shareholders.

Question 65

Preference shares:

A) have their dividend fixed at the issue date.
B) rank behind ordinary shares in the payment of dividends.
C) rank behind ordinary shareholders in their claim on company assets in the event of liquidation.
D) rank ahead of the company creditors.

Question 66

A company is likely to issue _____ if it has reached its optimal gearing level.

A) options
B) rights
C) ordinary shares
D) preference shares

Question 67

Which of the following statements is NOT a feature of convertible notes?

A) Convertible notes offer a lower interest rate than straight debt instruments.
B) Convertible notes are usually made available to ordinary shareholders.
C) Maturity of convertible notes is usually shorter than straight debt instruments.
D) Note holders can generally participate in new issues of equity.

Question 68

Compared with straight debt,convertible notes may offer a company:

A) lower borrowing costs.
B) higher borrowing costs.
C) a chance to issue more shares at maturity.
D) the opportunity to reduce debt.

Question 69

When a company wants to increase the marketability of a rights issue,it may offer:

A) preference shares attached.
B) options attached.
C) convertible notes attached.
D) dividends attached.

Question 70

Holders of _________ preference shares are entitled to dividend payments beyond the stated dividend rate.

A) participating
B) cumulative
C) non-cumulative
D) secured

Question 71

_______ are promised a fixed periodic dividend,the payment of which must be paid before that of ordinary shares.

A) Common shareholders
B) Preferred shareholders
C) Stakeholders
D) Creditors

Question 72

Which of the following is NOT a feature of preference shares?

A) Convertible
B) Redeemable
C) Cumulative
D) An important source of company funding

Question 73

The buyer of a convertible security accepts a lower rate of interest because of:

A) a lower default risk.
B) the possibility that the company may recall the security.
C) the accessibility of funds.
D) the possibility of becoming a shareholder in the future.

Question 74

A company is advised to issue convertible notes.They are advised of the conditions applicable to the convertible note issue.Which of the following conditions is incorrect?

A) The holder of the note has the right to convert the note into preference shares.
B) Notes are generally available on a pro-rata entitlement to shareholders.
C) Entitlements to convertible notes are generally not renounceable.
D) Notes are usually issued at a price close to the current share price at the time of issue.

Question 75

Which of the following is NOT an advantage for a company that issues a convertible note?

A) A lower interest rate can be offered, compared with straight debt.
B) It offers a method of raising cheap funds for the time being.
C) A longer maturity can often be offered.
D) There is an increase in financial leverage upon conversion.

Question 76

Any unpaid dividends that must be paid before payment of dividends to ordinary shareholders are called _________ preference shares.

A) participating
B) cumulative
C) non-cumulative
D) secured

Question 77

Compared with ordinary shares,preference shares usually:

A) rank ahead of a company's creditors in the case of a wind-up.
B) have dividends set at issue.
C) are viewed as debt financing.
D) pay their dividends after ordinary shares.

Question 78

A preference share issue offers all of the following advantages to a company except:

A) a flexible dividend policy.
B) fixed interest borrowings that can count as equity.
C) extension of the equity base of the company.
D) an indefinite maturity.

Question 79

When a convertible security is issued,the issue price is usually _______ the current market price of the company's share.

A) well below
B) close to
C) well above
D) not related to

Question 80

Preference shares have a number of features similar to debt that distinguish them from ordinary shares.Which of the following features may be incorporated in a preference share issue?
I)Cumulative or non-cumulative
Ii)Convertible or non-convertible
Iii)Redeemable or non-redeemable
Iv)Issued at different rankings
V)Participating or non-participating

A) i, ii, iii, iv
B) i, ii, iv, v
C) ii, iii, iv, v
D) All of the given answers