MaxMark_Ch05_edited - MenuItem 5: (Topic 5)Corporations...

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Unformatted text preview: MenuItem 5: (Topic 5)Corporations issuing equity in the share market Question 1: There are many differences between private companies and publicly listed corporations. Which of the following is not a valid statement? A: listed corporations are generally larger than private companies B: listed corporations are able to raise equity from the public while private companies cannot C: listed corporations have many more shareholders than private companies D*: only listed corporations are able to raise equity from the public Feedback: A, B and C are all true but D is not a valid statement in that all public companies, whether listed or unlisted, are allowed to legally raise funds from the public. MORE: Financial Institutions, Instruments and Markets 5/e , Section 5.3, pp. 216-217. In this text the focus is on the publicly listed corporation . However, it should be noted that businesses often evolve from small beginnings: from a sole proprietorship to a private company and eventually to a size where listing on a stock exchange is a possibility. A sole proprietor is both the owner of the business and the manager of the business; he or she is personally liable for the liabilities of the business, but is also entitled to all the profits generated. As a business grows, a sole proprietor may seek additional equity funds and therefore form a small private company with a limited number of shareholders. Should the company grow to a point where it wishes to expand its equity and shareholder base further, then becoming a publicly listed company is an attractive proposition. Question 2: One aspect of financial management is the management of working capital. Which of the following most accurately describes the management of working capital? A: decisions on acquisition of real assets B: management of cash C*: managing the cash flows associated with the day-to-day operations of a business D: decisions on acquisition of real and financial assets Feedback: Management of working capital involves management of short-term assets and liabilities, so A and D are incorrect. It includes, but is not restricted to, management of cash, so B is also incorrect. MORE: Financial Institutions, Instruments and Markets 5/e , p. 207 Having acquired its assets, the firm needs to manage its day-to-day operations, and therefore its working capital. The corporation needs access to short-term funding to finance the purchase of inventory, to meet expenses as they fall due and to pay creditors. Question 3: A truck can be purchased for $150 000 and is expected to have a resale value of $40 000 at the end of 5 years. The truck is expected to generate cash inflows of $80 000 per annum over the 5 years and its operating costs are expected to be $30 000 per annum. If the required rate of return is 15 per cent, what is the NPV of the truck?...
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MaxMark_Ch05_edited - MenuItem 5: (Topic 5)Corporations...

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