Fins1612 Chapter 5

Which of the following statements best describes the role or function of the promoter of a flotation?

The party seeking the flotation of the company

When a convertible security is issued, the issue price is usually _______ the current market price of the company's share.

close to

The internal relationship between shareholders, the board of directors and the managers of a company is called:

corporate governance

Restrictions placed on borrowers by lenders in the loan agreement are called loan:

covenants

Any unpaid dividends that must be paid before payment of dividends to ordinary shareholders are called _________ preference shares.

cumulative

Compared with raising debt through a bank, the raising of equity through an IPO is generally:

dearer

When a company decides to pay for an investment project using a short-term bank loan, this is best described as a/an:

financing decision

Compared with ordinary shares, preference shares usually:

have dividends set at issue

Compared with retail sector companies, banks have a:

high debt-to-equity ratio

An increase in a firm's level of debt will:

increase the variability in earnings per share

Increasing the financial leverage of a company will _______ shareholders' expected returns and ______ their risk.

increase; increase

A dividend reinvestment plan generally _______ on the security.

increases the return

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:

investment banker

When a company undertakes an initial public offering (IPO)it may:

issue and list shares in the primary share market

Compared with straight debt, convertible notes may offer a company:

lower borrowing costs

An advantage of a convertible security for a company is that it can generally be sold with interest rates _______ other non-convertible debt securities.

lower than

If, for an IPO, circumstances change and the issue becomes unattractive, the underwriters:

may purchase unsubscribed shares

When shares are purchased cum-rights it means the purchaser of the share:

may take part in the rights offer

A pro-rata share rights offer means that the offer:

must be made to shareholders on the basis of number of shares already held

The claims of the equity holders on the assets of the firm have priority over those of:

no other holder

Financing for high-risk companies is often in the form of:

no-liability shares

A right that can only be exercised by the shareholder and not sold is called a:

non-renounceable right

Common shareholders are:

not guaranteed a periodic distribution or a distribution in the wind-up of the company

When warrants are converted by a holder:

only the number of shares increases

When a company's project results in a return and profits that exceed the cost of its debt borrowing:

only the shareholders may share in the profits

When a company wants to increase the marketability of a rights issue, it may offer:

options attached

The maximum number of shares that can be issued is the:

outstanding capital

Holders of equity capital:

own the company

Holders of _________ preference shares are entitled to dividend payments beyond the stated dividend rate.

participating

A company is likely to issue _____ if it has reached its optimal gearing level.

preference shares

Potential investors learn of the information concerning the company and its new issue by being sent a _____ by the broker.

prospectus

Underwriter in a public offering of shares

provides guidance

Most companies raise funds by selling their securities in a:

public float

Companies can raise equity capital through:

retained earnings and the share market

FInancial risk refers to the:

risk faced by the shareholders when debt is used

Convertible preference shares are normally converted into:

shares

The buyer of a convertible security accepts a lower rate of interest because of:

the possibility of becoming a shareholder in the future

A company's business risk depends on:

the risk of the company's operations and assets

The finance required by a company to fund its day-to-day operations is called:

working capital

If a company raises equity funds by issuing shares to a selected number of institutional investors, this is known as:

a placement

For a share placement, ASIC requires a memorandum of information to be sent to:

all participating institutions

An investment decision differs from a financing decision in that:

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

A rights offering is the issue of:

an option to purchase shares directly to the shareholders

ALL BUT ONE of the following conditions for an equity warrant that is generally attached to a bond issue are correct. Pick the exception. A. The holder has a conditional option to convert into ordinary shares of a company. B. A warrant holder receives dividend payments over the life of the warrant. C. Warrants may be detachable and traded separately from the bond issue. D. The cost of borrowing through a bond issue may be lower with a warrant attached.

B

Which of the following statements is correct for an investment proposal with a positive NPV? A. The discount rate exceeds the required rate of return. B. The IRR is greater than the required rate of return. C. Accepting the investment proposal has an uncertain effect on shareholders. D. The present value of the cash flow equals the cost of the investment.

B The IRR is greater than the required rate of return

Preference shares have a number of features similar to debt that distinguish them from ordinary shares. Which of the following features may be incorporated in a preference share issue? I. Cumulative or non-cumulative II. Convertible or non-convertible III. Redeemable or non-redeemable IV. Issued at different rankings V. Participating or non-participating A. I, II, III, IV B. I, II, IV, V C. II, III, IV, V D. All of the given answers.

D

Problems associated with calculating an internal rate of return include: A. negative cash flows during the project's lifetime B. choosing one project from two or more projects C. timing of cash flows D All of the above

D

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.

D

A preference share issue offers all the following advantages to a company EXCEPT: A. a flexible dividend policy B. fixed interest borrowings that can count as equity C. extension of the equity base of the company D. an indefinite maturity

D An indefinite maturity

Which of the following about equity warrants is FALSE? A. Adding equity warrants to a bond issue increases its marketability. B. Warrants are similar to conversion features on some bonds. C. Warrants can be detached from the bond issue and sold separately. D. Dividends for warrants are usually lower than for ordinary shares.

D Dividends for warrants are usually lower than for ordinary shares

Which of the following is NOT a feature of ordinary shares? A. They are a major source of external equity financing for companies. B. They entail voting rights at annual general meetings. C. There is no fixed payment obligation. D. Dividends are always tax deductible.

D Dividents are always tax deductible

Before making a rights issue, a company's management must consider several important variables. Which of the following is NOT one of these variables? A. The ability of the company to service the increased equity on issue B. The costs of alternative funding sources C. Whether there will be a sufficient take-up rate of the issue D. The effect on the firm's profits

D The effect on the firm's profit

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.

D The shareholders can redeem shares for dividends

Which of the following about equity warrants is FALSE? A. They are often detachable. B. They add to the marketability of an issue. C. They may offer an investor an opportunity of buying stock at a discount. D. Their exercise period is usually shorter than three months.

D Their excersize period is usually shorter than 3 months

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. They both result in the company raising additional equity capital. C. They can both be detached from the debt issue and traded separately. D. They both have similar maturities.

D They both have similar maturities

A convertible note is a/an:

DEBT instrument that the holder has the option to convert into an initially specified number of shares

When a company decides to issue an unsecured note to pay for a new machine, it has made a/an:

Financing deicision

Which of the following criteria would be determinants of the appropriate ratio of debt to equity if a company should not take on more debt that can be serviced under conservative economic forecasts? I. Maximisation of shareholder wealth II. Industry norms III. History of the ratio for the firm IV. The stage of the current economic cycle V. Limit imposed by lenders VI. Company's capacity to service debt

II, III, V, VI

_______ are promised a fixed periodic dividend, the payment of which must be paid before that of ordinary shares.

Preferred shareholders

Who are sometimes referred to as the residual owners of the corporation?

The common shareholders

The subscription price in a rights offering is generally:

below the current share price (discount)

Ordinary shares in limited liability companies are the major source of external equity funding for Australian companies. Which of the following statements regarding the issuance of ordinary shares by a newly listed limited liability company is INCORRECT? A. Shares may only be issued on a fully paid basis. B. The public company is incorporated with an authorised share capital. C. Share price is determined with reference to a range of variable factors. D. Usually, not all shares authorised in the Memorandum of Association are issued.

A

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

A Rights= a 2 month process

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.

A The holder of the note has the right to convert the note into preference shares

Which financial instrument gives the holder an option to purchase a specified number of shares at a predetermined price over a given period?

An equity warrant

Which of the following requirements does NOT apply to a company seeking a public listing on the Australian Securities Exchange (ASX)? A. The entity must adhere to minimum standards of quality. B. The entity must adhere to minimum standards of disclosure. C. The company must issue a prospectus that is to be lodged with the ASX. D. The company must have a structure and operation appropriate for a listed entity.

C

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

C Maturity of the note is usualy shorter

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 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.

C The company must lodge a prospectus with the ASX on an annual basis

Share placements may, subject to compliance with certain regulations, be made to institutional investors. Which of the following conditions is NOT a requirement of ASIC for share placements? A.The placement should consist of minimum subscriptions of $500 000, or be made up of not more than 20 participants. B. The discount from current market price should not be excessive. C. Under no circumstances should placements be in excess of 10% of issued shares permitted. D There is no need to register a prospectus, but a memorandum of information detailing the company's activities should be sent to all participants.

C Under no circumstances should placements be in excess of 10% of issued shares permitted.

Which of the following does NOT apply to a dividend reinvestment plan? A. It forms additional equity financing for the company. B. The number of issues of equity rights issues in early 2000 was lower than that of dividend reinvestment schemes. C. Companies steadily increased their use of dividend reinvestment plans throughout the 1990s. D. Shareholders have the chance of purchasing additional shares through it.

C Companies steadily increased their use of dividend reinvestment plans throughout the 1990s

Compared with a pro-rata issue of shares, private placements usually:

Can be carried out much more quickly

What is the function of a proxy statement for a shareholder?

It gives them the right of a vote for each share they own.

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?

Such schemes allow dividends to be paid while retaining cash for future growth.