Chapter 5 - Share Market - Equity Issues PDF

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1. 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 Dan 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 2. 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 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

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4. 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 5. 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. 6. 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.

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7. When a company's project results in a return and profits that 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 8. 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

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9. 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 10. 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 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 that 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. 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 12. Restrictions placed on borrowers by lenders in the loan agreement are called loan: ฀ A. covenants B. limits C. arrangements D. contracts

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13. 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 14. 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

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15. 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 16. 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

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17. 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

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18. 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 19. 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

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20. 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 only be issued on a fully paid basis. B. The public company is incorporated with an authorised share capital. C. Share price is determined with reference to a range of variable factors. D. Usually, not all shares authorised in the Memorandum of Association are issued. 21. 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. 22. Most companies raise funds by selling their securities in a: ฀ A. public float B. private placement C. stock exchange D. direct placement

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23. 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 24. 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

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25. 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 26. 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

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27. 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 28. 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 29. 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 30. 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 31. 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. 32. Which of the following is NOT a feature of ordinary shares? ฀ ฀ A. They are a major source of external equity financing for companies. B. They entail voting rights at annual general meetings. C. There is no fixed payment obligation. D. Dividends are always tax deductible. 33. The maximum number of shares that can be issued is the: ฀ A. issued capital B. authorised capital C. outstanding capital D. treasury capital

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34. 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

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35. The internal relationship between shareholders, the board of directors and the managers of a company is called: ฀ ฀ A. agency theory B. corporate governance C. commercial theory D. organisational governance 36. 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 37. 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

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38. 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 39. 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

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40. 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 41. 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 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 42. When shares are purchased cum-rights it means the purchaser of the share: ฀ ฀ A. cannot usually sell the right separately B. may take part in the rights offer C. cannot take part in the rights offer D. can take up the offer of the right without having to pay extra for the subscription price

43. For a share placement, ASIC requires: ฀ ฀ A. that a placement must consist of subscriptions of not less than $1000000 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 44. Share placements may, subject to compliance with certain regulations, be made to institutional investors. Which of the following conditions is NOT a requirement of 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 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. 45. 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 46. Compared with a pro-rata issue of shares, private 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

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47. Which of the following does NOT apply to a dividend reinvestment plan? ฀ ฀ A. It forms additional equity financing for the company. B. The number of issues of equity rights issues in early 2000 was lower than that of dividend reinvestment schemes. C. Companies steadily increased their use of dividend reinvestment plans throughout the 1990s. D. Shareholders have the chance of purchasing additional shares through it. 48. _______ 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 49. 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 50. A company is likely to issue _____ if it has reached its optimal gearing level. ฀ A. options B. rights C. ordinary shares D. preference shares

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51. Holders of _________ preference shares are entitled to dividend payments beyond the stated dividend rate. ฀ ฀ A. participating B. cumulative C. non-cumulative D. secured 52. A preference share issue offers all 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 53. Which of the following is NOT a feature of preferred shares? ฀ A. Convertible B. Redeemable C. Cumulative D. An important source of company funding

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54. 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. 55. Convertible preference shares are normally converted into: ฀ A. debentures B. bonds C. shares D. warrants

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56. 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 57. 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 58. Which of the following is NOT a feature of convertible notes? ฀ ฀ A. They offer a lower interest rate than straight debt instruments. B. They are usually made available to ordinary shareholders. C. Maturity of the note is usually shorter than straight debt instruments. D. Note holders can generally participate in new issues of equity.

59. 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 60. 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

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61. 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 62. 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.

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63. 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. 64. 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

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65. 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 66. When warrants are converted by a holder: ฀ ฀ A. debt is decreased B. debt is decreased but equity also increases C. only the number of shares increases D. there is no impact on the company's capital structure 67. Which of the following about equity warrants is FALSE? ฀ ฀ A. Adding equity warrants to a bond issue increases its marketability. B. Warrants are similar to conversion features on some bonds. C. Warrants can be detached from the bond issue and sold separately. D. Dividends for warrants are usually lower than for ordinary shares.

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68. Which financial instrument gives the holder an option to purchase a specified number of shares at a predetermined price over a given period? ฀ ฀ A. An equity warrant B. A put option C. An ordinary preference share D. A debenture 69. ALL BUT ONE of the following conditions for an equity warrant that is generally attached to a bond issue are correct. Pick the exception. ฀ ฀ A. The holder has a conditional option to convert into ordinary shares of a company. B. A warrant holder receives dividend payments over the life of the warrant. C. Warrants may be detachable and traded separately from the bond issue. D. The cost of borrowing through a bond issue may be lower with a warrant attached. 70. Which of the following about equity warrants is FALSE? ฀ ฀ A. They are often detachable. B. They add to the marketability of an issue. C. They may offer an investor an opportunity of buying stock at a discount. D. Their exercise period is usually shorter than three months. 71. Which of the following is NOT a similarity between a right and a warrant? ฀ ฀ A.They both provide the right, wi...