Question 1

Details of a government bailout of a large Canadian auto parts company signed late on Friday were released to the press on Monday. If the market reflects a strong form of efficiency, when would a change in share price reflecting the news of the bailout have happened?

Accepted Answer

A)   At the time when agreement was reached on the details of the plan.
B)   At the time when the government was first approached for a bailout.
C)   On the Friday that the deal was signed.
D)   On the Monday that the deal was officially announced.
E)   At the time the government and the auto parts company sat down to talk. A

Question 2

Kiera Jones bought 100 shares of XLNX at $4.00 per share. One year later the share price of XLNX was $10.00 per share. During this period the S&P/TSX went from 8,000 to 12,000, the NASDAQ went from 1,600 to 2,400, the Dow-Jones Industrial average went from 6,000 to 11,000 and the S&P 500 went from 750 to 1,300. Which of the following statements best describes this market action?

Accepted Answer

A)   A weak form of efficiency mispriced XLNX a year ago.
B)   A semi-strong form of efficiency mispriced XLNX a year ago.
C)   A strong form of efficiency mispriced XLNX a year ago.
D)   An inefficient market a year ago had mispriced the stock of XLNX.
E)   The market is creating a bubble in the price of XLNX stock. D

Question 3

Assuming the share price did not change much, when would an investor be worse off?

Accepted Answer

A)   An investor buys the rights shares.
B)   An investor ignores the rights shares.
C)   An investor sells the rights shares.
D)   An investor receives a stock dividend.
E)   An investor's stock has a stock split. B

Question 4

On June 3, CapiCal who had 2,500,000 common shares outstanding executed a two-for-one stock split. The company's shares that had been trading for $96.50 a share at the close of yesterday's trading, closed June 3rd at $48.50. What is the increase/decrease in market capitalization that CapiCal experienced?

Accepted Answer

A)   No increase or decrease
B)   An increase of $1,250,000
C)   An increase of $122,500,000
D)   A decrease of $1,121,250
E)   A decrease of $121,250,000

Question 5

Which of the following is an example of a primary capital market?

Accepted Answer

A)   The government issues new securities to raise short term funds.
B)   Forward contracts and derivatives are bought and sold.
C)   Shares that have been previously purchased are offered for sale to others.
D)   Equity shares held in another company are sold.
E)   Dealers trade in shares not listed on the stock exchanges.

Question 6

For a market to exhibit semi-strong form of efficiency, which of the following situations must exist?

Accepted Answer

A)   New information is available to all investors who immediately act upon it establishing the best estimate of the worth of the stocks.
B)   The cost of capital is the same for each investor in the market.
C)   A large numbers of investors are immediately motivated by new information to trade shares establishing the best estimate of the worth of the stocks.
D)   A single investor is motivated by new information to trade shares resulting in the best estimate of the worth of the stocks.
E)   The risk premium demanded is the same for each investor in the market.

Question 7

Terri-Tech Inc. is a small company made up of two twenty-something software developers. Terri-Tech requires financing to market an innovative application. The dealer with whom the developers have worked has suggested that the developers offer a new issue of shares by means of a direct invitation to the public, through an advertisement in the Globe and Mail Report on Business. The dealer will not assume the risk of the issue being bought. What is the name of this method of equity financing?

Accepted Answer

A)   Private placement.
B)   A bought deal.
C)   A best efforts deal.
D)   A tender issue.
E)   A reserve deal.

Question 8

Pioneer Logging owns a tug boat to manage floating booms of felled trees off the Queen Charlotte Islands. The boat was purchased in February of 2006 for $128,000. If the rate for the asset class is 15%, what is the amount of CCA (capital cost allowance) that the company can claim on their 2008 income tax return?

Accepted Answer

A)   $12,832
B)   $13,872
C)   $14,076
D)   $15,096
E)   $16,320

Question 9

Which of the following best describes an efficient capital market?

Accepted Answer

A)   All information is freely available and accessible. There is no assumption that it is accurately reflected in share price.
B)   Not all information is freely accessible. However, that which is available, is quickly and accurately reflected in share prices.
C)   All information is freely available and accessible. It is also assumed that the short term profit taking perspective of most investors may lead to inaccurate share prices.
D)   All information is freely available, accessible and accurately reflected in share price.
E)   Available information is assumed not always to be accessible and what is accessible is not always reflected accurately in share price.

Question 10

M Dana's Dressmakers and Alterations Ltd. is looking at the purchase of several serging machines for their new third location. The company can buy the equipment for $6,000 and finance it with a three-year operating loan at 6% where interest is paid at the end of each year and the principal is paid at the end of the term. The capital cost allowance rate (CCA) is 25% and the income tax rate is 30%. What is the present value of the tax shield from the equipment purchase over the first three years if the cost of capital is 6%?

Accepted Answer

A)   $1,099
B)   $1,165
C)   $2,336
D)   $3,664
E)   $3,884

Question 11

Silverman Ltd. has five million common shares outstanding at $24.00 a share. The Board of Directors has authorized a one-for-three rights issue at $20 per share. What is the ex-rights price?

Accepted Answer

A)   $11
B)   $21
C)   $23
D)   $28
E)   $31

Question 12

Dirkin and Trente Inc. (DTI) has decided to lease its electronic switching system for four years. The useful lifetime of the asset is seven years, the present value of the lease payments account for less than 60% of the fair value of the switching system and the outsourcing company which is leasing the equipment to DTI will hold title to the assets and reclaim the equipment at termination of the contract. What are the accounting implications of the leasing charges?

Accepted Answer

A)   Ignored as a capital lease is treated as asset ownership. Both the asset and the long-term liability side of the balance sheet increase and capital cost allowance is taken.
B)   Treated as an operating expense and appearing on the income statement. There is no impact on the balance sheet and no capital cost allowance is taken.
C)   An operating expense is recorded on the income statement and the book value of the asset increases both the asset and the long-term liability sides of the balance sheet. No capital cost allowance is taken.
D)   Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the principle portion increasing total assets and long-term liabilities on the balance sheet. Capital cost allowance is taken.
E)   Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the present value of the principle portion increasing total assets and long-term liabilities on the balance sheet. No capital cost allowance is taken.

Question 13

What is the interest rate that a plant manager is being charged if she decides to lease the robotic welders with no salvage value at $12,000 per year for ten years, starting with an immediate payment, instead of paying a negotiated cash price for them of $74,593.20?

Accepted Answer

A)   22%
B)   20%
C)   18%
D)   13%
E)   10%

Question 14

The day Michael liquidated his old portfolio and rolled the cash into a new portfolio, he calculated the market capitalization of his former holdings and set that as a baseline equal to 1000. On the day of sale it represented ownership in five companies: 1,500 shares of A selling at $23.50, 1,000 shares of B at $32.00, 6,500 shares of C at $7.29, 200 shares of D at $128.45 and 1,200 shares at $56.78 of E. A year later his old portfolio had an index value of 1102 and Michael's new portfolio was at 872. How much more money would Michael have had if he had kept his old portfolio?

Accepted Answer

A)   $2,300
B)   $23,000
C)   $26,683
D)   $43,508
E)   $47,946

Question 15

What is an advantage to a small business in listing on the stock exchange?

Accepted Answer

A)   Increasing the competitive information that will be made available to it.
B)   Being taken over by a larger business during a period of low sales and profits.
C)   The guarantee of an immediate increase in earnings to initial owners through the inflow of cash from the initial share offering.
D)   The opportunity to raise its profile and thus improving its chances in attracting better strategic partnerships and financing opportunities.
E)   The significant cost reductions available for future debt and equity financing.

Question 16

From which of the following does a venture capital company usually achieve its greatest return?

Accepted Answer

A)   The dividends distributed by the company it has bought into.
B)   Capital gains upon the sale of the company it has invested in.
C)   Through the acquisition of buy-in capital (MBI) .
D)   From the spread it achieves by borrowing at a lower interest rate than it lends to the company it has invested in.
E)   By hedging its investment risk in the company it has acquired through the use of derivatives.

Question 17

What is the purpose of investment analysts dividing the universe of listed companies into small cap, medium cap and large cap companies?

Accepted Answer

A)   It is required to meet various government regulations.
B)   It measures whether certain sectors are outperforming others.
C)   It is done in order to calculate the stock market indexes.
D)   It determines which companies qualify for the small business deduction.
E)   It is used by the TSX to try to get more listings.

Question 18

Why does the secondary market reduce the risk of investing in debt and equity instruments?

Accepted Answer

A)   Offers a secure electronic forum for exchanging these securities.
B)   Has regulations against insider trading of these securities.
C)   Has minimum income requirements for its members.
D)   Provides a wide range of potential investment opportunities.
E)   Improves the liquidity of these securities.

Question 19

Which of the following is a significant implication of stock market efficiency?

Accepted Answer

A)   The market offers managers an informed and objective critique of their performance.
B)   Timing of a new share issue is critical to its success.
C)   A search for undervalued businesses will provide lucrative take-over targets.
D)   Businesses must take seriously the setting of the level of risk and appropriate return on an investment.
E)   Altering the type of security may make the initial offering more appealing to investors.

Question 20

Assuming the market takes on the characteristics of a weak form of efficiency, which of the following would be the worst investment strategy to practice?

Accepted Answer

A)   Technical Analysis.
B)   Fundamental Analysis.
C)   A comparison of price/earnings ratios.
D)   A comparison of the EPS.
E)   Diversification.

Exam 9: Financing a Business 2: Raising Long-Term Funds