Deck 9: Sources of Finance: Equity

Question 1

A plan in which payments are made to employees based on the achievement of certain performance criteria is known as a/an:

A)replicator plan.
B)option plan.
C)fully paid share plan.
D)employee share trust.

Answer 1

replicator plan.

Question 2

Before applications by investors can be accepted for unlisted securities,a waiting period is imposed of at least:

A)14 days.
B)7 days.
C)21 days.
D)28 days.

Answer 2

7 days.

Question 3

A rights issue can be contrasted to a bonus issue in that:

A)companies do not issue bonus shares to raise capital.
B)the right to receive bonus shares can be traded separately from the underlying share.
C)a bonus issue can dilute share ownership but a rights issue does not.
D)a rights issue only applies to companies listed on the stock exchange.

Answer 3

companies do not issue bonus shares to raise capital.

Question 4

Dill owns five per cent of the outstanding shares in Pickle Ltd,which has just announced a one for five rights issue with a subscription price of $1.90.The current 'cum rights' price for Pickle shares is $2.20.The number of outstanding shares in Pickle Ltd is 5000.Calculate the theoretical ex-rights share price.

A)$2.58
B)$2.25
C)$2.10
D)$2.15

Question 5

Which of the following statements is true?

A)Companies cannot issue shares at less than par value.
B)Companies can issue shares at a premium to par value.
C)Ordinary shareholders have a residual claim on the proceeds from liquidation.
D)Limited liability means that shareholders can only lose the paid-up value of their shares.

Question 6

The reason for the requirement by the Australian Stock Exchange (ASX)for a minimum of 500 shareholders in a new listed company is:

A)to ensure that administration costs per shareholder are kept to a minimum.
B)to ensure that there will be an active market in the company's shares.
C)to convince the ASX of the issuing company's credit-worthiness.
D)to assist in the raising of new capital.

Question 7

No-liability companies have been created because of:

A)the high rate of business failure.
B)the high rate of business failure in the mining sector.
C)the need to encourage investment in high-growth companies.
D)the risk of losing one's investment when a business fails.

Question 8

An offer of securities to investors cannot proceed until a disclosure document has been lodged with:

A)the ASX.
B)APPRA.
C)ASIC.
D)all of the given options.

Question 9

Private equity investments typically have:

A)a higher level of risk than most other investments.
B)a lower level of risk than most other investments.
C)30 per cent more risk than most other investments.
D)a similar risk to most other investments.

Question 10

Private equity is also known as:

A)start-up financing.
B)venture capital.
C)turnaround financing.
D)none of the given options.

Question 11

Funds from operations can be written as:

A)profit after tax + depreciation.
B)profit before tax - depreciation.
C)profit before tax + income tax paid.
D)profit before tax + depreciation.

Question 12

Brown Ltd has decided to raise capital by issuing 200 new shares.Marketing Ltd has prepared a report to Brown Ltd listing the following potential investors together with the number of shares each is prepared to purchase at the following price:

At what price should Brown issue in order to maximise the amount of capital to be raised?

A)$160
B)$170
C)$180
D)>$180

Question 13

Typically,a company employs the services of an underwriter:

A)if it has pre-marketed its shares before a new share issue.
B)to issue new shares at a discount.
C)if the shares are no-liability shares.
D)to take up any under-subscription of new shares.

Question 14

The voting rights of a company's shareholders must be specified in:

A)the AGM.
B)the constitution.
C)a deed.
D)both the constitution and the AGM.

Question 15

Dill owns five per cent of the outstanding shares in Pickle Ltd,which has just announced a one for five rights issue with a subscription price of $1.90.The current 'cum rights' price for Pickle shares is $2.20.If the number of outstanding shares in Pickle Ltd is 5000,what is the theoretical value of the right to one new share?

A)$0.05
B)$0.25
C)$0.30
D)$0.45

Question 16

Ordinary shares can be best described as:

A)securities with an ownership interest in a company with no voting rights.
B)securities with an ownership interest with voting rights.
C)having a residual interest in the net assets of the issuing company.
D)securities with an ownership interest with voting rights which have a residual interest in the net assets of the issuing company.

Question 17

A owns 1000 shares in XYZ Ltd whose current share price (cum rights)is $2 per share.XYZ Ltd makes a one for four rights issue with a subscription price of $1.40 per share.Calculate the value of R,of the right to one new share.

A)8 cents.
B)40 cents.
C)48 cents.
D)84 cents.

Question 18

A measure of internal equity finance is:

A)accounting profit.
B)total revenues.
C)funds from operations.
D)profit before tax.

Question 19

Which act requires that the rights of preference shareholders be fully stated in the company's constitution?

A)Corporations Law 2001.
B)Corporations Act 2000.
C)Corporations Act 2001.
D)Corporations Act 1999.

Question 20

A plan in which employees initially purchase an option to buy shares at some future time at a specified price is known as a/an:

A)fully paid share plan.
B)option plan.
C)replicator plan.
D)employee share trust.

Question 21

Which of the following statements regarding employee share plans is false?

A)The Commonwealth Government provides tax concessions where shares are issued to employees at a discount.
B)An employee's gains under an employee share plan are taxable if the shares are purchased after 28 March 1995.
C)Tax concessions are available if an employee purchases a qualifying share.
D)Fringe benefits tax,capital gains tax and payroll tax are applicable under an employee share plan.

Question 22

Which of the following is not a cost of floating a company?

A)Brokerage fees.
B)Underwriters' fees.
C)Costs incurred in the preparation of an investigating accountant's report.
D)None of the given options.

Question 23

Which of the following is not a major provision of an option agreement?

A)The exercise price.
B)The period during which the option may be exercised.
C)The rights of the option holder in the event of new issues by the company.
D)The volatility of the underlying share.

Question 24

Venture capitalists can dispose of their investment via:

A)a sale.
B)a private placement.
C)an involuntary liquidation.
D)either a sale or an involuntary liquidation.

Question 25

If an investor purchases shares cum-rights,it means that:

A)the investor will not participate in the rights issue.
B)the investor will participate in the rights issue.
C)the investor will participate in the rights issue without having to pay the subscription price.
D)the investor cannot sell the right separately.

Question 26

Which of the following statements is true?

A)Under ASX listing rules,shareholders must approve a proposed employee share plan.
B)Under ASX listing rules,a company is not allowed to pay dividends from current year profits.
C)Under ASX listing rules,a company is not permitted to raise capital beyond 15 per cent of issued shares in any six-month period via private placements without shareholders' consent.
D)None of the given options.

Question 27

The closer the subscription price on a rights issue is set to the market price of the share:

A)the greater is the market value of the right.
B)the smaller is the dilution in investors' wealth.
C)the more likely that the rights issue will be fully subscribed.
D)the greater is the need to have the issue underwritten.

Question 28

Dill owns five per cent of the outstanding shares in Pickle Ltd,which has just announced a one for five rights issue with a subscription price of $1.90.The current 'cum rights' price for Pickle shares is $2.20.The number of outstanding shares in Pickle Ltd is 5000.Calculate the value of Dill's investment ex-rights.

A)$537.50
B)$645.00
C)$550.00
D)$615.00

Question 29

For legal purposes,preference shares are:

A)debt.
B)equity.
C)hybrids of debt and equity in some circumstances.
D)none of the given options.

Question 30

A bonus issue:

A)is made by companies with thinly traded shares.
B)is a free offer of shares made to potential shareholders.
C)is the same as a private placement with a zero subscription price.
D)involves no cash flows and does not dilute the shareholders' wealth.

Question 31

Which of the following is not a source of finance for new ventures?

A)Loans from banks.
B)Funds from venture capitalists.
C)Rights issues.
D)Initial public offerings (IPOs).

Question 32

Which of the following statements is false?

A)A venture capitalist expects to be the managing director of the newly-established company.
B)Business angels invest in weak businesses.
C)Venture capitalists require a high rate of return on their investment,whereas business angels do not as their investment is generally small.
D)All of the given options.

Question 33

Which of the following does not represent an advantage of retained profits as a source of funds?

A)Control of the company is not affected.
B)Capital structure is unaffected.
C)The company is not committed to paying higher dividends in the future.
D)No issue costs are involved.

Question 34

IPOs are generally underpriced because:

A)informed investors will avoid overpriced stocks,thereby resulting in lower demand,which will also deter wary uninformed investors.
B)it is very difficult to set an offer price for a new company.
C)shares of new company are illiquid.
D)none of the given options.

Question 35

Which of the following statements is false?

A)Costs are larger in percentage terms when a smaller amount of capital is raised.
B)Book-building is more common for large floats and privatisations in Australia than the open pricing mechanism of price setting.
C)An underwriter may no longer be obligated to take up the shortfall of an issue during times of war.
D)A possible reason for floating a private company is to realise capital gains.

Question 36

Which of the following do not affect shareholders' wealth?

A)Rights issues.
B)Private placements.
C)Announcements of rights issues.
D)All the given options.

Question 37

Rights issues in Australia are underwritten:

A)because shareholders may be unaware of the rights issue because they do not always open their mail.
B)because the share price may fall after the rights issue is announced,thereby making it less attractive to shareholders.
C)either because shareholders may be unaware of the rights issue because they do not always open their mail or because the share price may fall after the rights issue is announced,or both,thereby making it less attractive to shareholders.
D)none of the given options.

Question 38

In practice,there may be an increase in the share price following the announcement by a company of a forthcoming bonus issue.Which of the following is a likely explanation of this phenomenon?

A)Companies tend to increase their total dividend payout following a bonus issue.
B)Bonus issues create wealth for shareholders.
C)Bonus issues reduce the debt/equity ratio and,therefore,the riskiness of the firm.
D)Bonus issues increase the dividend payout ratio of companies.

Question 39

Dividend reinvestment plans (DRPs)are:

A)more popular under the dividend imputation tax system than under the classical tax system.
B)cheaper than private placements.
C)limited by the company's profits in their ability to raise capital.
D)all of the given options.

Question 40

Which of the following is not an advantage of raising equity via the issue of ordinary shares?

A)Dividend payment is not an obligation.
B)It reduces borrowing costs.
C)Borrowing entails higher transaction costs than raising equity,as the company has to prepare disclosure documents to attract lenders.
D)None of the given options.

Question 41

Total internal equity finance is equal to:

A)operating profit before tax less depreciation charges less income tax paid less dividend payments.
B)revenue less expenses requiring the use of funds plus funds from operations less income tax paid.
C)operating profit before tax plus depreciation charges less income tax paid less dividend payments.
D)none of the given options.

Question 42

If all shareholders take up a rights issue with a subscription price less than the share price,then there will be a net increase in wealth to all investors.

Question 43

The primary purpose of ______________________ is to reduce agency costs by giving managers and employees an ownership share in the company.

Question 44

Shares are traded _______ rights when a party who buys a share is also able to participate in the forthcoming rights issue.

Question 45

Limited liability share issues are restricted to companies in the _____________ industry.

Question 46

Holders of ordinary shares have a residual interest in the net assets of the issuing company and are therefore exposed to greater risk than other classes of investors.

Question 47

A key advantage of equity financing is that the transaction costs are generally lower than those incurred in debt financing.

Question 48

__________________ is the process of share issuance that involves competitive bidding by market participants.

Question 49

Evidence from Australia is that IPO's are generally under priced.

Question 50

Following a one-for-one bonus share issue,the share price of the company should decrease by _________.

Question 51

Business angels only invest in mature companies with a long history of success.