Chapter 9 Questions

Chapter 9 Questions - J QUESTIONS"5E The interest held by...

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Unformatted text preview: J QUESTIONS "5E The interest held by ordinary shareholders is a residual claim. Explain the meaning and significance Iis statement. ii What are the most important rights of shareholders in a company? ii What are the main similarities between contributing shares and instalment receipts? How do they er? 5} What are the main advantages of raising equity rather than borrowing? 2E Distinguish between limited liability and no liability companies. Why are no liability companies lined to exploration and mining companies? 3; Define private equity. What are the main features that distinguish private equity from other forms of ty finance? 3} Private equity funding for new ventures is typically provided in stages. What are the main reasons for approach? 52 What type of information is generally required in the offer documents issued prior to capital raising? ,1 do you think regulators might have avoided providing a simple 'checklist' of items for inclusion and ad taken a broader approach to regulation? .5? Listed public companies have the advantage of greater access to the capital market than private or Ited companies. However, this advantage also involves significant costs. What are the main costs? 5E A company is floated by making a public issue of ordinary shares. Outline the procedures involved Dating a company. .53 A company usual/y seeks the assistance of a financial institution before undertaking any large capital ’ng. Explain why this is so. Describe fully the relevant services that a financial institution provides. 5 Outline the main advantages of using book- building for an initial public offering of shares rather than ing a fixed- -price offer What are the disadvantages of book— building? if? M ’ What are the advantages and disadvantages of having a share Issue underwritten? Why are underwriting fees higher for company floats than for rights issues? r M ab; (Awe Initial public offerings of shares are typically underpriced but vendors are rarely upset about leaving e amounts of money on the table. How is ’money left on the table' usually measured? How can the zling attitude of vendors be explained? g3». 52E In discussing their research on IPOs, Camp et al. (2006) conclude that ’the choices issuers make at affering reflect the trade-off between the costs and benefits of the IPO’. For issuers, the main cost of an is represented by underpricing. What are the main benefits? 73 Outline the 'new issues puzzle’. Why is the evidence for its existence controversial? 55 Although most companies permit rights to be traded on the stock exchange, a number of companies a made non-renounceable rights issues. Why would companies wish to make their rights issues renounceable? 5: There has been resistance to companies raising funds by a private placement of shares. Describe the antages and disadvantages to existing shareholders of a private placement. 5E MWB Ltd is a profitable company whose ordinary shares are listed on the ASX. The company has l regular dividends to shareholders and has generally financed its growth by retaining about 50 per cent rofits. Its current 5-year plan includes investment in fixed assets on a scale that will require the raising of rnaI equity finance during the planning period. Advise the directors on the main factors that they should Iider in deciding how to raise equity. The directors are considering: 1 rights issue 1 series of share placements astablishing a dividend reinvestment plan. 55 Combining a share purchase plan with a placement to institutions should satisfy shareholders who Ie that as far as possible, companies should raise equity through rights issues. Do you agree with this :ment? Explain your answer. 22 23 24 25 26 27 28 29 30 3t [L9 8} Now that rights issues can be made without a prospectus, they will become much more popular and placements may become rare. Do you agree with this statement? Explain your answer. iLQ 8] Outline the main Features of an accelerated renounceable entitlement offer. What are the main differences between such an offer and a traditional renounceable rights issue? [LG Bi A listed company may make a public offer of shares, possibly in conjunction with 0 rights issue. ldentify Factors that may favour the use oF a Further public oFFer of shares rather than a placement or a rights issue alone. {L0 8} Options are often used as an incentive to various groups or individuals. Describe how options can be used to the advantage of a company and its shareholders. [LO 9} What is the incentive For a company to provide compensation For managers in the Form of shares rather than salary? What is the advantage of share compensation over and above compensation using share options? iLQ lGi What are internal funds? What are their advantages as a source of equity? iLQ iGl Outline the impact of the global Financial crisis on Australian companies in terms of their mix of internal versus external Funding over the 2—year period from mid~2007. iLQ iii What is a share split? Why might the directors of a company wish to split its shares? {LC iii What is a share consolidation? Evaluate the reasons that may be given to justify a share consolidation. {LCD ii} Explain briefly why the share price of a company may increase when the company announces a bonus issue or share split. PROBLEMS Economic Factors and Financing policy iLQ 23 Choose a company and trace the major changes in its capital structure during the past 10 years. Outline the economic factors that you consider have contributed to the major changes in its financing policy during this period. Public share issue lLQ 5i Katz Pty Ltd is a well-established company whose directors have decided to convert to public company status, make a public share issue and list on the stock exchange. The company needs to raise $792000O to expand its operations. Its prospectus forecasts a dividend of 20 cents per share in its first year as a public company and dividends are expected to grow at 6 per cent per annum indefinitely. Shareholders require a return of 14 per cent per annum and the cost of listing amounts to 12 per cent of the gross proceeds from the issue. How many shares must Katz issue? fights issue [LG Si Company A has 4 million shares on issue and wishes to raise $4 million by a 1-for-4 rights issue. a) What is the theoretical value of i right if the market price of l share (cum rights) is $5? b) What is the theoretical share price (ex-rights)? c) Does an investor gain through 0 rights issue? Rights issue LLO 8i Crosling Ltd shares are trading at $i2 each. lts directors have announced a l—For-é rights issue with a subscription price of $l0.60 per share. What is: a) the theoretical value oF a right to one new share b) the theoretical ex~rights share price? Rights issue [LO 8] Maxwell Ltd is a listed biotechnology company. On 5 May 2014 it announced a 1-for-3 renounceable rights issue at a subscription price of $6.20 per share with an ex—rights date of 25 May. The company also announced that funds raised by the issue would be used to establish production Facilities For its new anti- malaria drug that recently passed its Final clinical trials. The share price rose from $6.90 to $7.05 after those announcements. The closing price of Maxwell shares on 24 May was $7 per share. ...
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