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Chapter 05 Test Bank - jiefmỪMkfm f
International Finance (Western Sydney University)
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5.
Which of the following statements is correct for an investment proposal with a positive NPV?
Chapter 05 - Test Bank
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.
Multiple Choice Questions
1.
An investment decision differs from a financing decision in that:
6.
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.
2.
3.
7.
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.
The finance required by a company to fund its day-to-day operations is called:
9.
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.
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.
8.
A. daily financing.
B. operational financing.
C. operational capital.
D. working capital.
4.
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.
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.
Problems associated with calculating an internal rate of return include:
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. 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.
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11. Which of the following statements about financial risk is incorrect?
16. Compared with retail sector companies, banks have a:
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.
12. A company's business risk depends on:
A. high equity-to-debt ratio.
B. low gearing ratio.
C. high debt-to-equity ratio.
D. conservative gearing ratio.
17. The claims of the equity holders on the assets of the firm have priority over those of:
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.
A. the debt holders.
B. the preferred shareholders.
C. the unsecured debt holders.
D. no other holder.
13. 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
18. 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
19. What is the function of a proxy statement for a shareholder?
A. i, iii, v, vi
B. ii, iii, v, vi
C. ii, iii, iv, v
D. iii, iv, v, vi
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.
14. Restrictions placed on borrowers by lenders in the loan agreement are called loan:
20. Which of the following statements is NOT a feature of ordinary shares?
A. covenants.
B. limits.
C. arrangements.
D. contracts.
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.
15. An increase in a firm's level of debt will:
21. Generally, an initial public offering is:
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.
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.
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22. Holders of equity capital:
28. Compared with raising debt through a bank, the raising of equity through an IPO is generally:
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.
A. cheaper.
B. dearer.
C. roughly the same.
D. much cheaper.
23. Common shareholders are:
29. 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. 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.
24. Which of the following statements best describes the role or function of the promoter of a flotation?
A. investment agent.
B. investment broker.
C. investment dealer.
D. investment banker.
30. Which of the following is NOT a role of an underwriter in a public offering of shares?
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
25. 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
27. 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.
31. 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.
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.
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
32. 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.
33. 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.
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34. Companies can raise equity capital through:
40. 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 money markets.
B. the inter-bank market.
C. retained earnings and the share market.
D. a major bank.
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.
35. 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.
41. Some of the main principles that form the basis of a stock exchange's listing rules are:
36. 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.
37. Financing for high-risk companies is often in the form of:
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.
42. 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.
43. A company may raise additional equity capital through:
A. limited liability shares.
B. no-liability shares.
C. limited instalment receipts.
D. contributing shares.
38. Which of the following requirements does NOT apply to a company seeking a public listing on the
Australian Securities Exchange (ASX)?
A. a rights issue.
B. a placement.
C. a dividend reinvestment scheme.
D. all of the given answers.
44. A right that can only be exercised by the shareholder and not sold is called a:
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.
39. Most companies raise funds by selling their securities in a:
A. non-saleable right.
B. renounceable right.
C. non-renounceable right.
D. pro-rata right.
A. public float.
B. private placement.
C. stock exchange.
D. direct placement.
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45. 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. 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.
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
46. The subscription price in a rights offering is generally:
52. 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. 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.
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.
47. 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
53. If a company raises equity funds by issuing shares to a selected number of institutional investors, this is
known as:
48. 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.
49. 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.
50. 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.
51. For a share placement, the Australian authority ASIC or ASX listing rules require:
A. a share appointment.
B. a placement.
C. a share rights issue.
D. share transfer.
54. 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.
55. 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.
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56. 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.
A. participating
B. cumulative
C. non-cumulative
D. secured
57. Which of the following does NOT apply to a dividend reinvestment plan?
63. A company is likely to issue _____ if it has reached its optimal gearing level.
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.
58. 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.
A. options
B. rights
C. ordinary shares
D. preference shares
64. Holders of _________ preference shares are entitled to dividend payments beyond the stated dividend rate.
A. participating
B. cumulative
C. non-cumulative
D. secured
59. A dividend reinvestment plan generally _______ on the security.
65. A preference share issue offers all of the following advantages to a company except:
A. decreases the return
B. increases the return
C. has no effect on the return
D. has an uncertain effect
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.
60. 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.
61. _______ 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
62. Any unpaid dividends that must be paid before payment of dividends to ordinary shareholders are called
_________ preference shares.
66. Which of the following is NOT a feature of preference shares?
A. Convertible
B. Redeemable
C. Cumulative
D. An important source of company funding
67. 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.
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68. 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
73. 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.
74. 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. i, ii, iii, iv
B. i, ii, iv, v
C. ii, iii, iv, v
D. All of the given answers
A. higher than
B. equal to
C. lower than
D. unrelated to
69. Convertible preference shares are normally converted into:
A. debentures.
B. bonds.
C. shares.
D. warrants.
75. 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.
70. 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.
76. When a convertible security is issued, the issue price is usually _______ the current market price of the
company's share.
71. 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.
72. 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.
A. well below
B. close to
C. well above
D. not related to
77. 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.
78. 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.
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79. Compared with straight debt, convertible notes may offer a company:
85. Which one of the following conditions for an equity warrant that is generally attached to a bond issue is
NOT correct?
A. lower borrowing costs.
B. higher borrowing costs.
C. a chance to issue more shares at maturity.
D. the opportunity to reduce debt.
80. When a company wants to increase the marketability of a rights issue, it may offer:
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.
86. Which of the following factors of company-issued equity warrants is NOT correct?
A. preference shares attached.
B. options attached.
C. convertible notes attached.
D. dividends attached.
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.
81. When warrants are converted by a holder:
87. Which of the following about equity warrants is NOT correct?
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.
82. Which of the following is NOT an advantage for a company that sells a company-issued option with a
rights issue?
A. It may add to the marketability of the associated rights issue.
B. It reduces the necessity for the company to increase dividend payments immediately.
C. If the holder of the option exercises the right to buy the shares offered then the company raises
additional equity funds.
D. There is no certainty that the future funds from the exercise of the option will eventuate.
A. If the warrant is non-detachable it can only be sold with the associated bond.
B. Equity warrants add to the marketability of a corporate bond issue.
C. Equity warrants give an investor the right to convert the warrant into shares at a specified price.
D. A warrant holder receives a dividend, unlike a rights holder.
88. Which of the following statements about company-issued equity warrants is incorrect?
A. The terms of a warrant may allow the warrant to be detachable from the bond issue.
B. A company-issued equity warrant generally attaches to a bond issue.
C. Because company-issued equity warrants are attached to a bond they have no value.
D. Warrants may lower the costs of borrowing associated with the issue of the underlying corporate bond.
89. Which of the following is NOT a similarity between a right and a warrant?
83. Which of the following about equity warrants is NOT correct?
A. They both provide the right, without the obligation, to purchase a specified number of shares at a
predetermined price.
B. A right and a warrant both result in the company raising additional equity capital.
C. A right and a warrant can both be detached from the debt issue and traded separately.
D. A right and a warrant both have similar maturities.
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.
84. 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
90. Which of the following requirements does NOT apply to a company seeking a public listing on the ASX?
A. The entity must satisfy either the profit test or the net tangible assets test.
B. The company must have at least 500 holders of a parcel of main class securities valued at least $2000.
C. The company must lodge a prospectus with the ASX on an annual basis.
D. The company must have a structure and operation appropriate for a listed entity.
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91. The internal relationship between shareholders, the board of directors and the managers of a company is
called:
100. Limited liability shares are generally sold to investors on a fully paid basis.
True False
101. A pro-rata offer of rights to existing shareholders must be accompanied by a prospectus.
A. agency theory.
B. corporate governance.
C. commercial theory.
D. organisational governance.
True False
Short Answer Questions
True / False Questions
102. What is capital budgeting and explain its importance for a company.
92. A principal objective of a business organisation is the maximisation of its profits.
True False
93. The investment decision for a corporation involves the types of securities it is going to issue or invest in.
True False
94. If the calculated IRR on an investment proposal is greater than the required rate of return, the company
should proceed with the project.
103. Discuss relevant issues for a company that needs to decide on how to finance its investment decisions.
True False
95. Business risk is determined in part by a corporation's choice of business activity and the manner in which it
has financed those activities.
True False
96. A low debt-to-equity ratio for a company means that a rise in interest rates will not affect the variable-rate
debt issued by the company.
True False
97. Financial risk refers to risks arising from the different types of debt securities issued by a company.
104. A stock exchange seeks to maintain the integrity and efficiency of its markets. Discuss some ways it may
achieve this.
True False
98. A company's debt-to-equity ratio is determined in practice with reference to four main criteria and not by
finance theory.
True False
99. In consultation with a company, the promoter (an investment bank) will seek flotation of the company
shares.
True False
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105. Discuss the attractions of a private placement for a company.
Chapter 05 - Test Bank Key
Multiple Choice Questions
1.
106. What is an equity-funded takeover?
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.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
2.
When a company decides to issue an unsecured note to pay for a new machine, it has made a/an:
A.
B.
C.
D.
capital market decision.
money market decision.
financing decision.
investment decision.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
3.
The finance required by a company to fund its day-to-day operations is called:
A.
B.
C.
D.
daily financing.
operational financing.
operational capital.
working capital.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: Introduction
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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.
B.
C.
D.
Financial risk refers to the:
A.
B.
C.
D.
capital market decision.
money market decision.
financing decision.
investment decision.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
5.
8.
risk of owning financial assets.
overall risk of a financial services firm.
risk faced by the shareholders when debt is used.
risk of not finding finance for a firm's investment.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
Which of the following statements is correct for an investment proposal with a positive NPV?
9.
Increasing the financial leverage of a company will _______ shareholders' expected returns and ______
their risk.
A.
B.
C.
D.
A.
B.
C.
D.
The discount rate exceeds the required rate of return.
The IRR is greater than the required rate of return.
Accepting the investment proposal has an uncertain effect on shareholders.
The present value of the cash flow equals the cost of the investment.
increase; not affect
increase; decrease
increase; increase
decrease; increase
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
6.
Problems associated with calculating an internal rate of return include:
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
10.
negative cash flows during the project's lifetime.
choosing one project from two or more projects.
timing of cash flows.
All of the given answers.
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.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
7.
Which of the following statements about financial risk is incorrect?
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
When a company's project results in a return and profits which exceed the cost of its debt borrowing:
A.
B.
C.
D.
both the debt holders and shareholders can share in the profits.
only the shareholders may share in the profits.
the interest payments to the debt holders may increase.
its cost of capital increases.
11.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
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.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
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12.
A company's business risk depends on:
A.
B.
C.
D.
16.
its use of debt in financing the business.
the risk of the company's operations and assets.
how much debt a company has used.
the amount of shareholder equity in the company.
Compared with retail sector companies, banks have a:
A.
B.
C.
D.
high equity-to-debt ratio.
low gearing ratio.
high debt-to-equity ratio.
conservative gearing ratio.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
13.
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.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
17.
A.
B.
C.
D.
i, iii, v, vi
ii, iii, v, vi
ii, iii, iv, v
iii, iv, v, vi
18.
19.
An increase in a firm's level of debt will:
A.
B.
C.
D.
The secured creditors
The unsecured creditors
The common shareholders
The preferred shareholders
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
covenants.
limits.
arrangements.
contracts.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
15.
Who are sometimes referred to as the residual owners of the corporation?
A.
B.
C.
D.
Restrictions placed on borrowers by lenders in the loan agreement are called loan:
A.
B.
C.
D.
the debt holders.
the preferred shareholders.
the unsecured debt holders.
no other holder.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
14.
The claims of the equity holders on the assets of the firm have priority over those of:
What is the function of a proxy statement for a shareholder?
A.
B.
C.
D.
It gives them the right of a vote for each share they own.
It gives them the right to transfer their share to another party.
It gives them the entitlement to new shares when issued.
It gives them the right to sell their shares at a premium.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
reduce the business risk of the firm.
increase the variability in earnings per share.
lower the expected return on shareholders' funds.
increase the return to the debt holders.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
Section: 5.2 The financing decision: equity, debt and risk
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20.
Which of the following statements is NOT a feature of ordinary shares?
A.
B.
C.
D.
24.
Ordinary shares are a major source of external equity financing for companies.
Ordinary shares entail voting rights at annual general meetings.
Ordinary shares have no fixed payment obligation.
Dividends of ordinary shares are always tax deductible.
Which of the following statements best describes the role or function of the promoter of a flotation?
A.
B.
C.
D.
The manager of the sub-underwriting panel or group
The broker responsible for the initial sale of shares to investors
The party seeking the flotation of the company
The agency responsible for marketing the issue to the public
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
21.
25.
Generally, an initial public offering is:
A.
B.
C.
D.
an offer to potential investors of ordinary shares to newly list a company on a stock exchange.
an offer to potential investors of preference shares to newly list a company on a stock exchange.
an offer to potential investors of company debentures to newly list a company on a stock exchange.
an offer to potential investors of unsecured notes to newly list a company on a stock exchange.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
22.
Holders of equity capital:
A.
B.
C.
D.
receive interest payments.
own the company.
have lent money to the company.
have a guaranteed right to income from the company.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
23.
Common shareholders are:
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
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.
B.
C.
D.
flotation statement.
prospectus.
promotion report.
memorandum offering.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
27.
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.
registration statement
prospectus
letter of commitment
memorandum offering
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
26.
A.
B.
C.
D.
Potential investors learn of the information concerning the company and its new issue by being sent a
_____ by the broker.
When a company undertakes an initial public offering (IPO) it may:
A.
B.
C.
D.
issue and list debentures in the capital markets.
offer shares to a few public institutional investors.
issue and list shares in the primary share market.
directly list corporate bonds in the capital markets.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
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28.
Compared with raising debt through a bank, the raising of equity through an IPO is generally:
A.
B.
C.
D.
cheaper.
dearer.
roughly the same.
much cheaper.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
29.
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.
B.
C.
D.
Which of the following is NOT a role of an underwriter in a public offering of shares?
33.
31.
If, for an IPO, circumstances change and the issue becomes unattractive, the underwriters:
charge the company more for raising the funds.
charge the company less for the IPO.
may purchase unsubscribed shares.
offer the shares at a lower price.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
Shares may be issued on a fully paid or partly paid basis.
A holder of instalment receipts only has to pay the remaining amount when due or called.
Share price is determined with reference to a range of variable factors.
No liability company can issue shares only on a fully paid basis because of the risk.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
Companies can raise equity capital through:
A.
B.
C.
D.
the money markets.
the inter-bank market.
retained earnings and the share market.
a major bank.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
35.
A.
B.
C.
D.
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.
B.
C.
D.
To provide pricing of the issue
To provide advice on the structure of the issue
To invest the funds raised in the offering
To provide guidance on the timing of the issue
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
the underwriters have the right to charge the company more for raising the funds.
the underwriters need to only purchase a specified number of shares and not the total unsold.
the underwriters may be released from their obligations.
the underwriters may offer the shares at a lower price.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
34.
A.
B.
C.
D.
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.
B.
C.
D.
investment agent.
investment broker.
investment dealer.
investment banker.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
30.
32.
A person who is authorised to vote on a shareholder's behalf is called:
A.
B.
C.
D.
an underwriter.
a proxy.
an authorised shareholder.
a substitute.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
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36.
Which of the following statements about a no liability company is incorrect?
40.
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.
A.
B.
C.
D.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
37.
41.
limited liability shares.
no-liability shares.
limited instalment receipts.
contributing shares.
sufficient investor interest must be shown to warrant an entity's participation in the markets.
information must be produced according to the highest standards.
minimum standards of quality size, operations and disclosure must be satisfied.
security holders must be consulted on matters of significance except for agreements between the
entity and related parties.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-04 Consider important issues associated with listing a business on a stock exchange.
Section: 5.4 Listing a business on a stock exchange
Which of the following requirements does NOT apply to a company seeking a public listing on the
Australian Securities Exchange (ASX)?
42.
A.
B.
C.
D.
The entity must adhere to minimum standards of quality.
The entity must adhere to minimum standards of disclosure.
The company must issue a prospectus that is to be lodged with the ASX.
The company must have a structure and operation appropriate for a listed entity.
43.
public float.
private placement.
stock exchange.
direct placement.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-04 Consider important issues associated with listing a business on a stock exchange.
Section: 5.4 Listing a business on a stock exchange
proxies to the shareholders to use their voting rights at the annual general meeting.
options on shares to the general public.
an option to purchase shares directly to the shareholders.
special options to the management.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Most companies raise funds by selling their securities in a:
A.
B.
C.
D.
A rights offering is the issue of:
A.
B.
C.
D.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-04 Consider important issues associated with listing a business on a stock exchange.
Section: 5.4 Listing a business on a stock exchange
39.
Some of the main principles that form the basis of a stock exchange's listing rules are:
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
38.
The discount to current market price that can be offered to shareholders.
The company's cash requirements.
The projected earnings flow from the new investments.
The cost of alternative funding sources.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Financing for high-risk companies is often in the form of:
A.
B.
C.
D.
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 company may raise additional equity capital through:
A.
B.
C.
D.
a rights issue.
a placement.
a dividend reinvestment scheme.
all of the given answers.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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lOMoARcPSD|22544509
44.
A right that can only be exercised by the shareholder and not sold is called a:
A.
B.
C.
D.
48.
A.
B.
C.
D.
non-saleable right.
renounceable right.
non-renounceable right.
pro-rata right.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
45.
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.
B.
C.
D.
49.
A.
B.
C.
D.
50.
A.
B.
C.
D.
For a share placement, the Australian authority ASIC requires:
A.
B.
C.
D.
below the current share price.
equal to the current share price.
above the current share price.
not related to the share price.
For a share placement, the Australian authority ASIC or ASX listing rules require:
A.
B.
C.
D.
No expiration date
If exercised, results in the dilution of earnings for existing shareholders
Saleability
Potential listing on a stock exchange
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
that a placement must consist of subscriptions of not less than $1 000 000.
that any discount from the current market price not be more than 10%.
a memorandum of information to be sent to all participating institutions.
a prospectus, which can be filed with them after the event.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
51.
Which of the following is generally NOT a characteristic of rights?
the right to purchase one new share for every five shares held.
the right to purchase five new shares for every one share held.
the right to purchase one share for every 1/5 shares held.
the right to purchase 10 shares for every five shares held.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
47.
A pro-rata share rights offer of 1:5 gives existing shareholders:
A.
B.
C.
D.
The ability of the company to service the increased equity on issue
The costs of alternative funding sources
Whether there will be a sufficient take-up rate of the issue
The effect on the firm's profits
The subscription price in a rights offering is generally:
must be made to all the stakeholders of a company.
must be made to bond holders and shareholders who get their offer in before a cut-off date.
must be made to shareholders on the basis of the number of shares already held.
is made only to the shareholders with the largest number of shares on the share register at a cut-off
date.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
46.
A pro-rata share rights offer means that the offer:
that a placement must consist of subscriptions of not less than $1 000 000.
there must be no more than 20 participants.
the discount from market price must not be above 50 per cent.
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.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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52.
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?
Section: 5.5 Equity-funding alternatives for listed companies
56.
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.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
53.
A.
B.
C.
D.
the discount to current market price may be less.
it can be carried out much more quickly.
a selective placement can sell shares to friendly institutional investors.
it reduces the proportion of ownership by existing shareholders.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
A dividend reinvestment plan forms additional equity financing for the company.
For a dividend reinvestment scheme the company typically bears the associated transaction costs.
Companies have encouraged shareholders to use dividend reinvestment plans.
Shareholders have the chance of purchasing additional shares through a dividend reinvestment plan.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
58.
take a longer time to organise.
can be carried out much more quickly.
involve a far greater discount to the current market price.
involve no more than 50 participants.
The main advantage of placements to raise additional equity funds compared to a rights issue is:
A.
B.
C.
D.
Which of the following does NOT apply to a dividend reinvestment plan?
Which of the following is NOT a feature of a dividend reinvestment scheme for a company?
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
55.
57.
Compared with a pro-rata issue of shares, placements usually:
A.
B.
C.
D.
a seasoned share offering.
an equity-funded takeover.
an initial share takeover.
a rights offering.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
a share appointment.
a placement.
a share rights issue.
share transfer.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
54.
A.
B.
C.
D.
If a company raises equity funds by issuing shares to a selected number of institutional investors, this is
known as:
A.
B.
C.
D.
When a takeover company issues additional shares to fund the acquisition of the shares in a target
company this is called:
Shareholders can acquire company shares at little or no transaction cost.
Shareholders can increase their return on the company share concerned.
The company can obtain additional equity funding.
The shareholders can redeem shares for dividends.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
59.
A dividend reinvestment plan generally _______ on the security.
A.
B.
C.
D.
decreases the return
increases the return
has no effect on the return
has an uncertain effect
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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60.
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.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
65.
A preference share issue offers all of the following advantages to a company except:
A.
B.
C.
D.
Common shareholders
Preferred shareholders
Stakeholders
Creditors
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
66.
A company is likely to issue _____ if it has reached its optimal gearing level.
A.
B.
C.
D.
options
rights
ordinary shares
preference shares
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Which of the following is NOT a feature of preference shares?
A.
B.
C.
D.
participating
cumulative
non-cumulative
secured
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
a flexible dividend policy.
fixed interest borrowings that can count as equity.
extension of the equity base of the company.
an indefinite maturity.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Any unpaid dividends that must be paid before payment of dividends to ordinary shareholders are called
_________ preference shares.
A.
B.
C.
D.
63.
participating
cumulative
non-cumulative
secured
_______ are promised a fixed periodic dividend, the payment of which must be paid before that of
ordinary shares.
A.
B.
C.
D.
62.
Holders of _________ preference shares are entitled to dividend payments beyond the stated dividend
rate.
A.
B.
C.
D.
The shareholder avoids transaction costs on the share issue.
The share issue price is usually at a discount to the average market price.
Such schemes allow dividends to be paid while retaining cash for future growth.
The company is able to pass on franking credit to its shareholders.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
61.
64.
Convertible
Redeemable
Cumulative
An important source of company funding
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
67.
Preference shares:
A.
B.
C.
D.
have their dividend fixed at the issue date.
rank behind ordinary shares in the payment of dividends.
rank behind ordinary shareholders in their claim on company assets in the event of liquidation.
rank ahead of the company creditors.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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68.
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.
B.
C.
D.
73.
Convertible notes are usually issued at a price close to the market price of the share.
The expectation of the note holder is that the share price will increase over the term of the note.
Convertible notes offer a higher interest rate than straight debt instruments.
A convertible note may be made by direct placement to shareholders.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
74.
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.
B.
C.
D.
Compared with ordinary shares, preference shares usually:
rank ahead of a company's creditors in the case of a wind-up.
have dividends set at issue.
are viewed as debt financing.
pay their dividends after ordinary shares.
A convertible note is a/an:
A.
B.
C.
D.
Which of the following is NOT a feature of convertible notes?
A.
B.
C.
D.
debentures.
bonds.
shares.
warrants.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
71.
Convertible notes offer a lower interest rate than straight debt instruments.
Convertible notes are usually made available to ordinary shareholders.
Maturity of convertible notes is usually shorter than straight debt instruments.
Note holders can generally participate in new issues of equity.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
A.
B.
C.
D.
Which of the following statements is NOT a feature of convertible notes?
A.
B.
C.
D.
Convertible preference shares are normally converted into:
A.
B.
C.
D.
70.
72.
i, ii, iii, iv
i, ii, iv, v
ii, iii, iv, v
All of the given answers
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
69.
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
equity instrument that converts into debt at maturity.
equity instrument that converts into a specified number of shares at maturity.
debt instrument that the holder has the option to convert into an initially specified number of shares.
warrant that the holder has the option to convert into an initially agreed-upon number of shares.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
higher than
equal to
lower than
unrelated to
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
75.
The buyer of a convertible security accepts a lower rate of interest because of:
A.
B.
C.
D.
a lower default risk.
the possibility that the company may recall the security.
the accessibility of funds.
the possibility of becoming a shareholder in the future.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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76.
When a convertible security is issued, the issue price is usually _______ the current market price of the
company's share.
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
81.
When warrants are converted by a holder:
A.
B.
C.
D.
A lower interest rate can be offered, compared with straight debt.
It offers a method of raising cheap funds for the time being.
A longer maturity can often be offered.
There is an increase in financial leverage upon conversion.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
82.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
83.
lower borrowing costs.
higher borrowing costs.
a chance to issue more shares at maturity.
the opportunity to reduce debt.
Which of the following is NOT an advantage for a company that sells a company-issued option with a
rights issue?
A. It may add to the marketability of the associated rights issue.
B. It reduces the necessity for the company to increase dividend payments immediately.
C. If the holder of the option exercises the right to buy the shares offered then the company raises
additional equity funds.
D. There is no certainty that the future funds from the exercise of the option will eventuate.
The holder of the note has the right to convert the note into preference shares.
Notes are generally available on a pro-rata entitlement to shareholders.
Entitlements to convertible notes are generally not renounceable.
Notes are usually issued at a price close to the current share price at the time of issue.
Compared with straight debt, convertible notes may offer a company:
Which of the following about equity warrants is NOT correct?
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
debt is decreased.
debt is decreased but equity also increases.
only the number of shares increases.
there is no impact on the company's capital structure.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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.
B.
C.
D.
79.
preference shares attached.
options attached.
convertible notes attached.
dividends attached.
Which of the following is NOT an advantage for a company that issues a convertible note?
A.
B.
C.
D.
78.
When a company wants to increase the marketability of a rights issue, it may offer:
A.
B.
C.
D.
well below
close to
well above
not related to
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
77.
80.
Adding equity warrants to a bond issue increases its marketability.
Warrants are similar to conversion features on some bonds.
Warrants can be detached from the bond issue and sold separately.
Dividends for warrants are usually lower than for ordinary shares.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
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lOMoARcPSD|22544509
84.
Which financial instrument gives the holder an option to purchase a specified number of shares at a
predetermined price over a given period?
A.
B.
C.
D.
88.
A.
B.
C.
D.
An equity warrant
A put option
An ordinary preference share
A debenture
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
85.
Which one of the following conditions for an equity warrant that is generally attached to a bond issue is
NOT correct?
A.
B.
C.
D.
89.
A.
B.
C.
D.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
90.
They are often detachable.
They add to the marketability of an issue.
They may offer an investor an opportunity of buying stock at a discount.
Their exercise period is usually shorter than three months.
Which of the following requirements does NOT apply to a company seeking a public listing on the
ASX?
A. The entity must satisfy either the profit test or the net tangible assets test.
B. The company must have at least 500 holders of a parcel of main class securities valued at least
$2000.
C. The company must lodge a prospectus with the ASX on an annual basis.
D. The company must have a structure and operation appropriate for a listed entity.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
87.
Which of the following is NOT a similarity between a right and a warrant?
A. They both provide the right, without the obligation, to purchase a specified number of shares at a
predetermined price.
B. A right and a warrant both result in the company raising additional equity capital.
C. A right and a warrant can both be detached from the debt issue and traded separately.
D. A right and a warrant both have similar maturities.
The holder has a conditional option to convert into ordinary shares of a company.
A warrant holder receives dividend payments over the life of the warrant.
Warrants may be detachable and traded separately from the bond issue.
The cost of borrowing through a bond issue may be lower with a warrant attached.
Which of the following factors of company-issued equity warrants is NOT correct?
The terms of a warrant may allow the warrant to be detachable from the bond issue.
A company-issued equity warrant generally attaches to a bond issue.
Because company-issued equity warrants are attached to a bond they have no value.
Warrants may lower the costs of borrowing associated with the issue of the underlying corporate
bond.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
86.
Which of the following statements about company-issued equity warrants is incorrect?
Difficulty: Hard
Est time: <1 minute
Learning Objective: 05-06 Explain the listing requirements of the Australian Securities Exchange.
Section: Extended learning LO 5.6
Which of the following about equity warrants is NOT correct?
91.
A.
B.
C.
D.
If the warrant is non-detachable it can only be sold with the associated bond.
Equity warrants add to the marketability of a corporate bond issue.
Equity warrants give an investor the right to convert the warrant into shares at a specified price.
A warrant holder receives a dividend, unlike a rights holder.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
The internal relationship between shareholders, the board of directors and the managers of a company is
called:
A.
B.
C.
D.
agency theory.
corporate governance.
commercial theory.
organisational governance.
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Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-06 Explain the listing requirements of the Australian Securities Exchange.
Section: Extended learning LO 5.6
lOMoARcPSD|22544509
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
96.
True / False Questions
92.
A low debt-to-equity ratio for a company means that a rise in interest rates will not affect the variablerate debt issued by the company.
A principal objective of a business organisation is the maximisation of its profits.
FALSE
FALSE
As the debt has a variable interest rate it will be affected by an increase in interest rates.
A principal objective is the maximisation of shareholder value within the context of the company's
objectives and policies.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
93.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
97.
Financial risk refers to risks arising from the different types of debt securities issued by a company.
FALSE
The investment decision for a corporation involves the types of securities it is going to issue or invest
in.
Financial risk attaches to both equity and debt issued by a company.
FALSE
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
The investment decision is the capital budgeting decision that determines the strategic activities of the
firm and what assets it needs to acquire so it can carry out its business.
98.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
94.
A company's debt-to-equity ratio is determined in practice with reference to four main criteria and not
by finance theory.
TRUE
Four main criteria are norms in the industry, history of the gearing ratio, limits imposed by lenders and
management decisions.
If the calculated IRR on an investment proposal is greater than the required rate of return, the company
should proceed with the project.
TRUE
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
The IRR provides an actual rate of return that can be measured against a company's required rate of
return.
99.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
95.
Business risk is determined in part by a corporation's choice of business activity and the manner in
which it has financed those activities.
FALSE
Business risk represents a company's exposure to factors that have an impact on the firm's activities and
operations but it does not include the manner in which it finances its activities.
In consultation with a company, the promoter (an investment bank) will seek flotation of the company
shares.
FALSE
The promoter is the company seeking to issue new shares.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
Difficulty: Easy
Est time: <1 minute
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lOMoARcPSD|22544509
100.
Limited liability shares are generally sold to investors on a fully paid basis.
104.
A stock exchange seeks to maintain the integrity and efficiency of its markets. Discuss some ways it
may achieve this.
TRUE
Ordinary shares issued on a limited liability basis are the principal form of funding.
A stock exchange needs to establish listing rule principles that include the interests of listed companies,
combined with investor protection. With regard to the stock exchange, some main principles are
minimum standards of quality and size, securities issued in a fair manner, timely release of information,
high standards of integrity and accountability of entities and officers, and practices adopted and pursued
that protect the interests of security holders.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-03 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equity-funding alternatives that
are available to a newly listed corporation.
Section: 5.3 Initial public offering
101.
A pro-rata offer of rights to existing shareholders must be accompanied by a prospectus.
Est time: 1-3 minutes
Learning Objective: 05-06 Explain the listing requirements of the Australian Securities Exchange.
Section: Extended learning
TRUE
105.
Generally, regulations require a prospectus to be attached.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
Short Answer Questions
102.
There are a number of advantages—a placement can be arranged more quickly than a rights issue; it
may also involve less of a discount to current market value than a rights issue and so be less expensive.
A placement may also be made directly with institutions without the need to lodge a prospectus but
rather a less comprehensive and less costly memorandum of information.
Est time: 1-3 minutes
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
What is capital budgeting and explain its importance for a company.
106.
Capital budgeting is the process of evaluating and selecting long-term investments consistent with the
firms' goal of owner-wealth maximisation. A company needs to determine what assets it needs to invest
in so it may carry out its planned business operations. Two important quantitative measures it may use
are net present value and internal rate of return.
Est time: 1-3 minutes
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
103.
Discuss the attractions of a private placement for a company.
Discuss relevant issues for a company that needs to decide on how to finance its investment decisions.
What is an equity-funded takeover?
In the case of a merger or acquisition, a company may decide to issue additional shares to fund a fullequity takeover rather than using other sources of funding such as debt. A company (A) may offer these
shares on a pro-rata basis to existing shareholders in the takeover target, company (B). The target
shareholders may be offered two shares in company A for every five shares they hold in company B.
The pro-rata basis of the offer will be based on the value of company A shares compared to that of
company B.
Est time: 1-3 minutes
Learning Objective: 05-05 Explore equity-funding alternatives that are available to an established listed corporation, including right issues, share purchase plans,
placements, takeover issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
Section: 5.5 Equity-funding alternatives for listed companies
The financing decision relates to the question of how a business investment is to be funded. There is the
choice of debt or equity and what kind of risk this exposes the firm to. These generally entail business
risk and financial risk.
Est time: 1-3 minutes
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
Section: 5.1 The investment decision: capital budgeting
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lOMoARcPSD|22544509
Chapter 05 - Test Bank Summary
Category
# of Que
stions
Difficulty: Easy
46
Difficulty: Hard
9
Difficulty: Medium
46
Est time: <1 minute
101
Est time: 1-3 minutes
5
Learning Objective: 05-01 Understand issues related to the capital budgeting investment decision.
16
Learning Objective: 05-02 Identify issues relevant to a corporation’s funding choice between debt and equity.
10
Learning Objective: 0503 Examine the listing and flotation or initial public offering (IPO) of a business on a stock exchange, including equityfunding alternatives that are available to a newly listed corporation.
22
Learning Objective: 05-04 Consider important issues associated with listing a business on a stock exchange.
3
Learning Objective: 05-05 Explore equityfunding alternatives that are available to an established listed corporation, including right issues, share purchase plans, placements, takeover
issues, dividend reinvestment schemes, preference shares, convertible notes and other quasi-equity securities.
52
Learning Objective: 05-06 Explain the listing requirements of the Australian Securities Exchange.
3
Section: 5.1 The investment decision: capital budgeting
15
Section: 5.2 The financing decision: equity, debt and risk
10
Section: 5.3 Initial public offering
22
Section: 5.4 Listing a business on a stock exchange
3
Section: 5.5 Equity-funding alternatives for listed companies
52
Section: Extended learning
1
Section: Extended learning LO 5.6
2
Section: Introduction
1
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