Deck 4: The Share Market and the Corporation

Question 1

Which of the following is NOT an advantage of the corporate form of organisation?

A) The corporate form is particularly suited to large-scale business operations.
B) There is a separation of ownership (shareholders) and management control.
C) The corporate form allows for continuity of business activities.
D) Large amounts of funding can be raised on relatively favourable terms.

Answer 1

B

Question 2

A publicly listed corporation:

A) has its shares listed on a formal exchange.
B) is a legal entity (as part of the Corporations law of a nation-state).
C) has to comply with the rules of the exchange where it is listed.
D) is all of the given choices.

Answer 2

D

Question 3

Which of the following about a corporation is incorrect?

A) The executive management group of a corporation is responsible to its board of directors.
B) Under corporation law the board of directors of a corporation must report to its shareholders.
C) The directors of a corporation have a legal responsibility to make sure the corporation acts in the shareholders' best interests.
D) The shareholders of a publicly listed small corporation have the right to participate in the day-to-day management of the business.

Answer 3

D

Question 4

A business organisation that is a separate legal entity,can buy property in its own name and can enter into contracts with other entities is a:

A) sole proprietorship.
B) partnership.
C) special partnership.
D) corporation.

Question 5

The liability of shareholders in 'limited liability' companies means:

A) creditors of a company can call upon the shareholders in the case of company default to contribute an amount based only on the current market price of the shares.
B) shareholders are only liable for any amount that is unpaid on the shares of a company.
C) in the event of company default, the creditors have no claim on the shareholders for any contribution.
D) shareholders do not have a right to participate directly in the day-to-day management of a company.

Question 6

When the owners of a company hire full-time executives to be responsible for the day-to-day decisions,this _____ the _____ problem.

A) lessens, shareholder-lender
B) lessens, managers-shareholders
C) brings on, managers-shareholders
D) brings on, shareholder-lender

Question 7

All of the following are advantages of a corporation except:

A) freely transferable ownership.
B) limited liability.
C) access to capital markets.
D) low management costs.

Question 8

The _______ is/are responsible for the objectives and policies of the company,but not its day-to-day affairs.

A) board of directors
B) executive management group
C) shareholders
D) creditors

Question 9

If a growing organisation wanted to set itself up so it had greater access to a wider range of capital,it would become a:

A) sole proprietorship.
B) partnership.
C) general partnership.
D) listed corporation.

Question 10

A corporation:

A) has a widely dispersed ownership amongst its shareholders.
B) has its objectives and policies decided by a board of directors.
C) has an executive management group responsible for day-to-day management of the corporation.
D) is all of the given choices.

Question 11

Which of the following is an advantage of the corporate form of organisation?

A) The managers that control day-to-day operations have a strong incentive to act in the best interests of shareholders.
B) As agents of the shareholders, the managers want to follow a growth maximisation strategy.
C) The managers want to increase the number of staff so they can grow.
D) A wide pool of investors can supply large amounts of corporate funding to the corporation.

Question 12

The actual owners of a company is/are the:

A) board of directors.
B) executive management group.
C) shareholders.
D) creditors.

Question 13

Which of the following forms of business organisation is characterised by limited liability?

A) Sole partnership
B) Partnership
C) General partnership
D) Corporation

Question 14

Which of the following statements regarding companies is incorrect?

A) A company is a discrete legal entity.
B) Since shares represent ownership in a company, ownership cannot be readily transferred to new owners.
C) A company has a potentially unlimited life.
D) The shareholders' liability is limited.

Question 15

The _______ is/are responsible for conducting the day-to-day financial and operational affairs of the company.

A) board of directors
B) executive management group
C) shareholders
D) creditors

Question 16

When a corporation continues to operate regardless of changes in ownership,this is known as:

A) the right of perpetual succession.
B) perpetual shares.
C) perpetual trading.
D) unlimited succession.

Question 17

When a no-liability company defaults on its loans with its creditors,this means the:

A) creditors have a legal claim against the directors only.
B) creditors have a legal claim against the CEO only.
C) creditors have a legal claim against the chairman of the company.
D) shareholders do not have to meet any remaining payment on shares.

Question 18

If a sole proprietorship fails to meet its obligations to its creditors,then:

A) the creditors have a legal right to take possession of the personal assets of the owner(s).
B) the creditors are restricted in what rights they have over the personal assets of the owner(s).
C) the liability of the sole proprietorship is restricted to the value of the original issue price.
D) the rights of the creditors are restricted to the financial assets of the owner(s).

Question 19

The owners of _______ face unlimited liability.

A) sole proprietorships only
B) sole proprietorships and partnerships only
C) corporations only
D) partnerships and corporations only

Question 20

Because of their _____ liability,corporate stockholders are more interested in chances of _____.

A) limited; failure than success
B) limited; success than failure
C) unlimited; success than failure
D) unlimited; failure than success

Question 21

Consider the following statements:
I)A corporation differs from other forms of business organisation only in that it tends to be larger.
Ii)The corporate form of business organisation is destined to fail because 'managers',and not the 'owners',run the business.
Iii)The corporate entity ceases on the death or bankruptcy of the individual shareholders.
Iv)The stock exchange is important to the corporation only because it provides the institutional framework through which new shares may be sold to the public.
V)Maximisation of shareholder utility is presumed when managers maximise possible profit.
How many of these statements are true and how many are false?

A) 1 statement is true and 4 are false
B) 2 statements are true and 3 are false
C) 3 statements are true and 2 are false
D) 4 statements are true and 1 is false

Question 22

Which of the following is NOT a feature of a share?

A) Part ownership in the company
B) The right to vote in the control of the company
C) Readily transferable
D) The right to periodic payments

Question 23

Agency problems would be less likely to exist in a:

A) sole proprietorship.
B) partnership.
C) private company.
D) public company.

Question 24

An issue of new shares to the public must have:

A) a prospectus attached.
B) an underwriter.
C) detailed documents called covenants.
D) a memorandum of understanding in place.

Question 25

Which of the following would NOT relate to agency costs involving management's desire to maximise its benefits?

A) Management goals to achieve sales growth.
B) Management goals to achieve market share.
C) Management remuneration packages.
D) Management reports to shareholders.

Question 26

The number of listed companies in the ASX is approximately:

A) 1000
B) 1200
C) 2000
D) 2200

Question 27

Agency theory is concerned with:

A) a conflict between owners and managers.
B) the agents who act on behalf of the company.
C) the relationship between employees.
D) the conflict of interests between outside agents and the company.

Question 28

Which of the following statements about share markets is false?

A) They help carry out direct financing.
B) Most of the trading takes place in already-issued shares.
C) Share markets have aided in the increase in importance of corporations.
D) Every time a listed company's shares are bought or sold, the company receives funding.

Question 29

Many companies use ______ to align the interests of shareholders with those of management.

A) bond options
B) share options
C) company cars
D) debentures

Question 30

A _______ represents a financial claim to the cash flow of a business after all other claims have been deducted.

A) bond
B) debenture
C) share
D) preference share

Question 31

The total number of equity raisings on the Australian Securities Exchange (ASX)primary market over the past 20 years has:

A) increased.
B) decreased.
C) remained stable.
D) decreased significantly.

Question 32

The members of the board of directors of a corporation are elected by the:

A) executive management group.
B) shareholders.
C) creditors.
D) debt holders.

Question 33

Which of the following security types is NOT usually listed on the ASX?

A) Ordinary shares
B) Treasury bonds
C) Debentures
D) Commercial paper

Question 34

The most appropriate goal for corporate management,according to finance theory,is to:

A) maximise the company's market share.
B) maximise the current profits of the company.
C) maximise the company's share price.
D) minimise the company's liabilities.

Question 35

A primary aim of corporate management should be to:

A) maximise the company's profit.
B) maximise the number of shareholders.
C) maximise the shareholders' wealth.
D) minimise the company's costs.

Question 36

The key aspect of the agency relationship for the corporate form of business is that:

A) the firm's owners will always act in the best interests of the managers.
B) the managers will always act in the best interests of the firm's owners.
C) with their management contracts, the managers have the incentive to act in the best interests of the shareholders.
D) the managers have different incentives from the shareholders.

Question 37

Agency problems are reduced by:

A) monitoring management behaviour.
B) the shareholders' ability to sell their shares.
C) the threat of takeover by another firm.
D) all of the given answers.

Question 38

The greatest number of issues of equity capital on the ASX over recent years has involved:

A) rights issues.
B) placements.
C) dividend reinvestment.
D) new floats.

Question 39

The listing of new companies on an exchange such as the ASX is known as:

A) share buybacks.
B) initial public offerings.
C) share issues.
D) rights issues.

Question 40

The conflict of interests between the goals of the firm's owners and those of its managers is:

A) the antagonism theory.
B) the agency problem.
C) reduced when the company is large.
D) serious only when sales volumes decline dramatically.

Question 41

The strategy of lowering risk exposure by holding a number of investments in a portfolio is called:

A) augmentation.
B) diversification.
C) expansion.
D) optimisation.

Question 42

If a stock exchange provides a market for the trade of specific share market-related derivative products,which of the following options is generally incorrect?

A) The derivative products provide an investment tool to take advantage of future share price movements.
B) The derivative products facilitate the management of risk within an existing share portfolio.
C) The derivative products provide protection against adverse movements in share prices.
D) The derivative products remove the share price volatility of stocks listed on the stock exchange.

Question 43

The basic role of a company underwriter about to list a new share issue on a stock exchange is to:

A) provide advice on the timing of the share issue.
B) ensure the company complies with the stock exchange's listing rules.
C) establish a deep and liquid secondary market in the shares.
D) purchase any unsold shares on issue.

Question 44

Compared with other forms of equity raisings,share placements:

A) can be quicker but more expensive because of the short time frame involved.
B) can be quicker if a prospectus is available for distribution.
C) can be quicker and often cheaper.
D) involve stricter regulatory requirements for meeting the shorter time frame involved.

Question 45

The distribution of extra shares by a company to all existing shareholders is called a:

A) new float
B) private placement
C) secondary float
D) rights issue

Question 46

Which of the following securities would you expect to buy on the primary market?

A) A bond that has no maturity left.
B) A bond with a very long maturity date.
C) A newly issued share.
D) A previously issued share.

Question 47

Compared with an exchange-traded derivative product,over-the-counter derivative products:

A) are discussed and agreed upon by the parties involved.
B) are standardised.
C) have margin calls.
D) are traded between banks, not on the exchange.

Question 48

A well-developed secondary market is likely to:

A) aid in raising extra finance.
B) help manage risk exposures of investors.
C) help with corporate agency problems.
D) include all of the given answers.

Question 49

Compared with an over-the-counter derivative product,exchange-traded derivative products:

A) are standardised.
B) involve margin calls.
C) are not negotiated between the buyer and seller of the contract.
D) include all of the given answers.

Question 50

Secondary markets:

A) can provide liquidity but do not raise new funds.
B) make capital-raising in the primary market more attractive.
C) help borrowers raise long-term funds.
D) include all of the given choices.

Question 51

In relation to a share market the ratio of the value of turnover to market capitalisation is called:

A) market depth.
B) market flow.
C) market transfer.
D) market liquidity.

Question 52

If the depth and liquidity of a share market is high,it means:

A) corporations may raise funds at higher costs.
B) investors will experience higher risk exposures.
C) investors can passively manage their risk exposure.
D) corporations may raise funds at lower costs.

Question 53

A characteristic of secondary markets for shares is that:

A) only highly risky shares are traded.
B) only low-risk shares are traded.
C) they are where companies borrow funds for the second time.
D) companies do not get funds from the secondary market in shares.

Question 54

An initial public share offering represents the share market's _____ role.

A) interest rate
B) information
C) primary
D) secondary

Question 55

The selling of new shares to a selected number of institutional investors is called a/an:

A) share release.
B) share placement.
C) share float.
D) initial offering.

Question 56

The document drawn up by a company stating the terms and conditions of a public share issue is called a:

A) share directory.
B) memorandum.
C) share plan.
D) prospectus.

Question 57

From a company's viewpoint,the existence of an active,liquid,well-organised market in existing shares:

A) facilitates the raising of further capital in the secondary market.
B) maintains the share price above the initial issue price.
C) encourages successful primary market issues.
D) is of little or no consequence.

Question 58

The company process that gives the shareholders the chance to change their dividends into additional company shares is called:

A) share placement.
B) dividend reinvestment scheme.
C) secondary public offering.
D) rights issue.

Question 59

The primary market role of a stock exchange is:

A) to trade the shares of the largest corporations.
B) to ensure the sale of new-issue securities.
C) to ensure deep trades in listed securities.
D) to ensure that information about listed companies is quickly reflected in share prices.

Question 60

To protect their portfolio of shares from a possible share price fall,an investor could buy a:

A) call option.
B) put option.
C) warrant on a matching share index.
D) matching share index future.

Question 61

The Australian Stock Exchange,the ASX now operates a system known as ASX Trade.Which of the following statements is correct in relation to ASX Trade?

A) It allows individual investors direct access to execute buy/sell orders on the ASX.
B) At opening of trade, overlapping bids and offers are shared between existing orders.
C) Share trading is also conducted on the floor of the ASX using 'chalkies'.
D) It facilitates the efficient processing and settlement of market transactions through multiple platforms.

Question 62

The risk that arises from the failure of parties to complete and resolve a transaction is called:

A) Herstatt risk.
B) default risk.
C) settlement risk.
D) market risk.

Question 63

Which of the following are incorrect?

A) On completion of a trade each stock broker will send a contract note to the buyer and settle.
B) Overlapping bids and offers for shares are executed at each price level in the order they are recorded in the system.
C) ASX Trade provides a fair, efficient trading system, developing latency down to the 1 second.
D) Shares listed on the ASX are known as uncertified securities.

Question 64

Units sold in a managed investment scheme that follows the performance of a specified share market index are called:

A) contracts for difference.
B) exchange traded funds.
C) option funds.
D) warrant funds.

Question 65

The Clearing House Electronic Subregister System (CHESS)is operated by the ASX.Which of the following statements regarding CHESS is incorrect?

A) The system allows settlement of transactions within three working days.
B) A shareholder must conduct a CHESS transaction with a sponsor.
C) Shareholders can still hold traditional share certificates.
D) The clearing house issues holding statements to uncertified shareholders.

Question 66

Which of the following statements,in regard to the provision of an interest rate market by a stock exchange,is NOT correct?

A) It is beneficial to both borrowers and lenders because it can add liquidity.
B) It can provide ease of access to information about debt securities.
C) It can reduce investors' transaction costs.
D) Its main function is to serve as a primary market for debt issues.

Question 67

Which of the following is incorrect?

A) A real estate investment trust may purchase industrial property.
B) An infrastructure fund may hold investments in power stations.
C) The units of a listed REIT purchases property are generally illiquid.
D) An investor may use a CFD to go long in a rising market.

Question 68

The writer of a put option expects the share price to:

A) decrease.
B) increase.
C) remain unchanged.
D) pay a dividend.

Question 69

A holder of a call index warrant:

A) benefits when the underlying index price increases.
B) makes a loss when the underlying physical share prices increase.
C) has to pay the warrant issuer the difference between share price and index price.
D) is not entitled to any dividend payment for the underlying security.

Question 70

A security that pays a fixed dividend and usually converts to ordinary shares at a future date is called a:

A) corporate bond.
B) floating rate note.
C) preference share.
D) debenture.

Question 71

Examples of debt instruments listed on a stock exchange do NOT include:

A) corporate bonds.
B) floating rate notes.
C) convertible notes.
D) promissory notes.

Question 72

In options markets,option premiums are paid by:

A) option writers to buyers.
B) option buyers to sellers.
C) both option buyers and sellers.
D) put option buyers only.

Question 73

Which of the following is NOT used by the Australian Stock Exchange (the ASX)to promote an efficient market?

A) Rapid release of new information
B) A clearing house
C) Stock trading systems
D) Transaction settlement systems

Question 74

An investor holding an investment portfolio who purchases a put option is expecting:

A) share prices to go up in the short term.
B) share prices to fall in the short term.
C) interest rates to go up.
D) interest rates to go down.

Question 75

A contract for difference is:

A) the difference between a put and a call option on the same security.
B) the difference between an option and a warrant on the same security.
C) the difference between a physical stock market and the futures market.
D) an agreement to exchange the difference between a contract start and close values.

Question 76

If an investor buys a put option on shares he owns and then the price of the shares rises,the investor:

A) must exercise the option.
B) must pay the difference between the contract start and close values.
C) has no obligation to exercise the option.
D) has to pay an additional premium to the option writer.

Question 77

The corporate bond that pays a variable rate of interest based on interest rate changes for a reference rate is a/an:

A) adjustable note.
B) convertible note.
C) floating rate note.
D) straight corporate bond.

Question 78

Which of the following debt securities is often quoted on the Australian Stock Exchange (ASX)?

A) Bank bills
B) Certificates of deposit
C) Floating rate notes
D) Commercial paper

Question 79

A stock exchange may also list some debt issues of companies and governments.This provision by a stock exchange is known as a/an:

A) subordinate debt market.
B) interest rate market.
C) primary debt market.
D) secondary bond market.

Question 80

A futures contract is a:

A) contract that provides a specified commodity or instrument to be bought at a future date at a price determined at the expiry date.
B) contract that provides a specified commodity or instrument to be bought at a future date at a price decided today.
C) right to buy a specified commodity or instrument at a price determined today.
D) right to buy a specified commodity or instrument at a price determined at the expiry date.