Chapter5_PractiseQs - 1 There are many differences between...

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Unformatted text preview: 1 There are many differences between private companies and publicly listed corporations. Which of the f ollowing isListed corporations are generally larger than private companies. A) not a valid statement? 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. Feedback: This is D) Only listed corporationsthat all public companies, whether listed or unlisted, are not a valid statement in are able to raise equity from the public. allowed to legally raise funds from the public.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3, pp. 183-184. 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 . It includes, but is not restricted to, management of cash, so B is also .MORE: Financial Institutions, Instruments and Markets 6/e, p. 175 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. $138truck is expected to generate cash inflows of $80 000 per annum over the 5 years and A) The 059 its operating costs are expected to be $30 000 per annum. If the required rate of return is 15 per cent, B) $37 495 what is the NPV of the truck? C) $17 608 The annual net cash flow from operating the truck is $80 000 - $30 000 = $50 000. The present value of D) $118 172 this five-year series of cash flows is $167 608. The cash inflow expected from selling the truck after five years has a present value of $19 887. The overall NPV of the truck is:NPV = &#8211;$150 000 + $167 608 + Feedback:$37 495 as in B.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.1, p. $19 887 = 176-177. 4 Corporate investment decisions should be based on the fundamental objective of: A) achieving at least a satisfactory profit. B) maximising shareholder value. Feedback: Different shareholders in a company will have preferences that differ in terms of factors, such C) implementing only those projects that can be financed from the company's operating cash as the timing of returns and the level of risk they are prepared to undertake. Management, when making f low. investment decisions, does not need to have information about these preferences. However, all D) increasing profits every increase the price of a company's shares. Therefore, shareholders will agree with decisions thatyear. maximising shareholder value is an unambiguous objective that is generally accepted in finance, making B the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1, p 175 5 Net present value (NPV) can be accurately described as: A) a method for evaluating financing decisions. B) a way of allowing for the time value of money. C) the discounted value of an asset's future cash flows. Feedback: The netD) the differenceof an asset is defined as worth and what discounted value of the asset's present value between what an asset is the present or it costs. future cash flows (an estimate of what the asset is worth), less the outlay needed to acquire the asset (its cost), so D is .MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.1, p. 177. 6 An investment proposal with a positive net present value: A) will definitely increase shareholder value if it is implemented. B) will maintain shareholder value if it is implemented. Feedback: An investment with a positive Net Present Value (NPV) should be accepted and the total value C) is expected to increase shareholder value. of all of a company's shares should increase by the amount of the NPV. If the NPV is known with D) should value should definitely increase, as in of return is adequate. certainty, then shareholder be accepted, provided that its internal rateA. In practice, NPV is estimated based on forecasts that are uncertain to some extent, so C is .MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.1, p. 178. 7 Which of the following statements about the NPV and IRR methods is correct? A) When comparing mutually exclusive projects, the NPV and IRR methods always give the same decision. B) If a project's IRR is equal to the required rate of return, then its NPV will be zero. C) Projects with non-conventional cash flows cause problems for both methods. Feedback: For mutually exclusive projects, the NPV and IRR methods can give different decisions and, D) when this occurs, the decision should be based on NPV, so A and D are both . Non-conventional cash If for two but not for conflicting signals, Essentially, B outlines the definition method. flows cause problems the IRR,methods giveNPV, so C is also .the decision should be based on the IRR of IRR, so it is the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.2, pp. 178 and 179 8 Which of the following is not a factor that influences a company's business risk? A) The risk that an ore body will turn out to be smaller than current estimates indicate. B) The risk that equipment relying on new technology will fail to work as intended. C) The risk that interest rates on a company's borrowings will increase. D) The risk that to a company's assets and operations, whereas financial risk arises Feedback: Business risk relates new competitors will take part of a company's market share. from use of debt finance. So C is not the answer as it refers to financial risk instead of business risk.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.2, pp. 180-181. 9 UNANSWERED Which of the following is most accurate? From the viewpoint of shareholders, increasing a company's f inancialA) does not matter. risk: B) is disadvantageous because it increases the risk faced by shareholders. C) is beneficial because it increases the shareholders' expected rate of return. D) increases both the expected rate of return to shareholders and the risk that they face. 10 A company should not take on more debt than it is able to service under adverse economic conditions without jeopardising the company's existence. Therefore, a proportion of a company's total funding A) I, III, V, VI Feedback: should be providedVI shareholders. Which ofbe the overall objective forwould be the main Maximisation of shareholder value should the following sets of criteria all corporate financial B) II, III, V, by determinants of the appropriate debt-to-equity ratio?I - maximisation of shareholder valueII therenorm decisions but this C) objective cannot be regarded as a determinant of the debt-equity ratio, since - the is II, III, - V in the industryIII IV, between of ratio and the companyIV - the stage of the current economic cycleV no well-defined relationshipthe history thethe ratio forshare value. Future economic conditions are very - limits D) III, IV, V, VI difficult to identify so IV is unlikely to debt difficult to predictimposed by lendersVI - the company's capacity to service be a major factor but II, III, V and and cycles are VI are likely to be important, making B the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.2.2, pp. 181-182 11 Which of the following is not part of the usual contents of a prospectus for a company seeking listing on the ASX? A) Detailed information on the past performance of the company Feedback: A prospectus is intended to contain information that will helpASIC B) A statement that the prospectus has been approved by prospective investors to decide whether to purchase the securities on offer. The items in A, C and D would all be included in a C) Recent financial statements for the company prospectus. A prospectus is lodged with ASIC at the same time that it is released to investors. Therefore, D) Reports by relevant experts there is no opportunity for ASIC to examine these documents in advance so a prospectus will never state that it has been approved by the regulator, making B the answer. MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3, pp. 183-184. 1 Encom Ltd is about to list on the Australian Stock Exchange (ASX) and its promoters have been advised A) provide advice on Offering ofof the share issue. underwritten. The essential role of an that its Initial Public the terms shares should be underwriter is to: that the company complies with ASX listing rules. B) ensure C) establish an active secondary market in the shares once they are listed. Feedback: If a security issue is underwritten and institutions and the public do not subscribe for all the D) sale, the underwriter, often in bought by other investors. securities offered forpurchase any shares that are notconjunction with sub-underwriters, is obliged to purchase the unsold securities.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3, p. 184. 2 Issuing ordinary shares is the major source of external equity funding for Australian companies. Which of the following statements sharesordinary shares is not correct? A) The holders of ordinary about have voting rights B) Shares may only be issued on a fully paid basis C) Ordinary shares represent a residual ownership claim D) Shares may be issued on a fully paid or partly paid basis Feedback: Ordinary shares may be issued as fully paid or partly paid, so B is not true, making it the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3.1, p. 185 3 Which of the following statements about no liability companies is not correct? A) Shares in no liability companies are usually issued on a partly paid basis. B) No liability companies typically need to progressively raise additional capital over time. C) Only companies that are involved in high-risk activities such as biotechnology are permitted to incorporate as no liability companies. Feedback: In Australia there are restrictions on the types of companies that may incorporate as no D) Holders of partly paid shares can choose not to mining industry may do so. Therefore, liability companies. Specifically, only companies engaged in the pay calls. the statement in C is too broad, making it the answerMORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3.2, p. 185-186. 4 The promoters of an IPO may decide to have the issue underwritten. Which of the following descriptions of the rolethean underwriter is most accurate? A) Advising on of terms of the issue including its structure, pricing and timing. B) Purchasing all of the shares issued and then selling them to other investors. C) Advising on the terms of the issue including its structure, pricing and timing, and purchasing all of the shares issued and then selling them to other investors. D) Advising on the terms of the Feedback: The primary role of an underwriter isissue (as in A) that agreeing to purchase any shares not taken to guarantee and all the funds sought will be raised. In the case of stand-by up by investors. used in Australia, this guarantee is provided by agreeing to underwriting as purchase any shares not taken up by investors. The underwriter will also advise on the terms of the issue so D is .MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.2, p. 184. 5 An entity applying to the Australian Stock Exchange for public listing must satisfy either the profit test or the assets test. Which of the concern or successor of a goingunder the profit test? A) The entity is a going following are not requirements concern. B) The entity has provided audited financial statements for the last three financial years. C) The entity has working capital of at least $1.5 million. D) The entity has been engaged in the same principal business activity for at least three years. Feedback: A, B and D are requirements under the profit test, but C is a condition of the assets test.MORE: Financial Institutions, Instruments and Markets 6/e, Extended Learning, p. 199.Profit test 6 Every company with securities listed on the Australian Stock Exchange (ASX) must prepare an annual report security holders. the Corporations Act. A copy of the annual report must be provided A) all that complies with t o: B) the ASX only. C) security holders (except any who have asked the company not to send them a copy) and t he ASX. Feedback: A listedD) the ASX and any security holders who write to ASX and to all security a copy. except company must send its annual report to the the company requesting holders, any holders who have asked the company not to send them a copy, so A, B and D are .MORE: Financial Institutions, Instruments and Markets 6/e, Extended Learning, p. 201. 7 A company may seek to raise further funds by making a rights issue. Which of the following is not c orrect?A) The rights to take up new shares are usually valuable. B) A rights issue is a pro-rata offer to existing shareholders. C) A renounceable rights issue may be taken up only by the original shareholders. D) If a rights issue is renounceable, existing shareholders can sell their rights to other investors. Feedback: A and B are both valid. If a rights issue is renounceable, the rights will be quoted on a stock exchange and can be sold to other investors so D is valid but C is not, making it the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.1, p. 188-189 8 Listed companies may, subject to compliance with certain regulatory requirements, raise funds by making a placement of shares,subscribe at least $500 investors. Which of the following is not one of A) Each investor must usually to institutional 000. t he regulatory requirements in relation to share placements? B) Any discount from the current market price must be less than 10 per cent. C) Under no circumstances can a placement exceed 15 per cent of a company's issued shares. D) There is Feedback: The requirements no need to issue a prospectus, to placements. Theof information detailing the listed in A, B and D all apply but a memorandum ASX listing rules also limit ompany's activities must be sent to all participants. placements to 15 perccent of a company's issued shares in any 12-month period but this limit can be exceeded if shareholders vote to approve the issue.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.2, p. 189-190. 9 Many Australian companies have introduced dividend reinvestment schemes. Which of the following advantages of these schemes may, at times, also be regarded as a disadvantage? A) The shareholder acquires additional shares without paying brokerage or stamp duty. B) Franking credits can be passed on to shareholders. C) Dividends can be paid while retaining cash within the company. Feedback: Retaining cash within a company is advantageous only if the company has profitable uses for D) The shares may be issued at a discount to the current market price. the additional cash. Since companies do not always have enough profitable investments available, there can be times when shareholders would benefit from cash being paid out rather than retained. So Cis the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.4, pp. 190-191. 10 A preference share issue may be desirable for a company. Which of the following may be valid reasonsA) a preference share issue? for Preference shares are legally equity but may, in effect, be fixed interest borrowings. B) Issuing preference shares may allow additional debt finance to be raised in the future. C) Non-cumulative preference shares do not commit the firm to dividend payments. D) All of the given options. Feedback: All of the factors listed may favour the use of preference shares, so D is the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.5, p. 191-192. 11 Submarine Services Limited needs to raise additional funds to purchase new equipment. Management has been advisedhas the right to convert it into preference shares. A) The holder of a note that an issue of convertible notes would be appropriate. The advisers note that several conditions may apply to a convertible note issue. Which of the following suggested B) Notes are generally available on a pro-rata entitlement to shareholders. c onditions is not correct? C) Entitlements to convertible notes are generally not renounceable. D) The issue price of notes is generally close to the current market price of the company's shares. Feedback: The conditions outlined in B, C and D are generally applicable to convertible notes. Such notes are convertible into ordinary shares, not preference shares, making A the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.6, pp. 192-193. E-mail Your Results 1 Chapter 05no 0 1 4070140898 5256405 qu 1 There are many differences between private companies and publicly listed corporations. Which of the f ollowing isListed corporations are generally larger than private companies. A) not a valid statement? 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. Feedback: This is D) Only listed corporationsthat all public companies, whether listed or unlisted, are not a valid statement in are able to raise equity from the public. allowed to legally raise funds from the public.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3, pp. 183-184. 2 4 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 . It includes, but is not restricted to, management of cash, so B is also .MORE: Financial Institutions, Instruments and Markets 6/e, p. 175 3 4 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. $138truck is expected to generate cash inflows of $80 000 per annum over the 5 years and A) The 059 its operating costs are expected to be $30 000 per annum. If the required rate of return is 15 per cent, B) $37 495 what is the NPV of the truck? C) $17 608 The annual net cash flow from operating the truck is $80 000 - $30 000 = $50 000. The present value of D) $118 172 this five-year series of cash flows is $167 608. The cash inflow expected from selling the truck after five years has a present value of $19 887. The overall NPV of the truck is:NPV = &#8211;$150 000 + $167 608 + Feedback:$37 495 as in B.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.1, p. $19 887 = 176-177. 4 4 4 Corporate investment decisions should be based on the fundamental objective of: A) achieving at least a satisfactory profit. B) maximising shareholder value. Feedback: Different shareholders in a company will have preferences that differ in terms of factors, such C) implementing only those projects that can be financed from the company's operating cash as the timing of returns and the level of risk they are prepared to undertake. Management, when making f low. investment decisions, does not need to have information about these preferences. However, all D) increasing profits every increase the price of a company's shares. Therefore, shareholders will agree with decisions thatyear. maximising shareholder value is an unambiguous objective that is generally accepted in finance, making B the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1, p 175 5 4 5 Net present value (NPV) can be accurately described as: A) a method for evaluating financing decisions. B) a way of allowing for the time value of money. C) the discounted value of an asset's future cash flows. Feedback: The netD) the differenceof an asset is defined as worth and what discounted value of the asset's present value between what an asset is the present or it costs. future cash flows (an estimate of what the asset is worth), less the outlay needed to acquire the asset (its cost), so D is .MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.1, p. 177. 6 4 6 An investment proposal with a positive net present value: A) will definitely increase shareholder value if it is implemented. B) will maintain shareholder value if it is implemented. Feedback: An investment with a positive Net Present Value (NPV) should be accepted and the total value C) is expected to increase shareholder value. of all of a company's shares should increase by the amount of the NPV. If the NPV is known with D) should value should definitely increase, as in of return is adequate. certainty, then shareholder be accepted, provided that its internal rateA. In practice, NPV is estimated based on forecasts that are uncertain to some extent, so C is .MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.1, p. 178. 7 4 7 Which of the following statements about the NPV and IRR methods is correct? A) When comparing mutually exclusive projects, the NPV and IRR methods always give the same decision. B) If a project's IRR is equal to the required rate of return, then its NPV will be zero. C) Projects with non-conventional cash flows cause problems for both methods. Feedback: For mutually exclusive projects, the NPV and IRR methods can give different decisions and, D) when this occurs, the decision should be based on NPV, so A and D are both . Non-conventional cash If for two but not for conflicting signals, Essentially, B outlines the definition method. flows cause problems the IRR,methods giveNPV, so C is also .the decision should be based on the IRR of IRR, so it is the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.1.2, pp. 178 and 179 8 4 8 Which of the following is not a factor that influences a company's business risk? A) The risk that an ore body will turn out to be smaller than current estimates indicate. B) The risk that equipment relying on new technology will fail to work as intended. C) The risk that interest rates on a company's borrowings will increase. D) The risk that to a company's assets and operations, whereas financial risk arises Feedback: Business risk relates new competitors will take part of a company's market share. from use of debt finance. So C is not the answer as it refers to financial risk instead of business risk.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.2, pp. 180-181. 9 4 9 UNANSWERED Which of the following is most accurate? From the viewpoint of shareholders, increasing a company's f inancialA) does not matter. risk: B) is disadvantageous because it increases the risk faced by shareholders. C) is beneficial because it increases the shareholders' expected rate of return. D) increases both the expected rate of return to shareholders and the risk that they face. 10 10 4 A company should not take on more debt than it is able to service under adverse economic conditions without jeopardising the company's existence. Therefore, a proportion of a company's total funding A) I, III, V, VI Feedback: should be providedVI shareholders. Which ofbe the overall objective forwould be the main Maximisation of shareholder value should the following sets of criteria all corporate financial B) II, III, V, by determinants of the appropriate debt-to-equity ratio?I - maximisation of shareholder valueII therenorm decisions but this C) objective cannot be regarded as a determinant of the debt-equity ratio, since - the is II, III, - V in the industryIII IV, between of ratio and the companyIV - the stage of the current economic cycleV no well-defined relationshipthe history thethe ratio forshare value. Future economic conditions are very - limits D) III, IV, V, VI difficult to identify so IV is unlikely to debt difficult to predictimposed by lendersVI - the company's capacity to service be a major factor but II, III, V and and cycles are VI are likely to be important, making B the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.2.2, pp. 181-182 11 11 4 Which of the following is not part of the usual contents of a prospectus for a company seeking listing on the ASX? A) Detailed information on the past performance of the company Feedback: A prospectus is intended to contain information that will helpASIC B) A statement that the prospectus has been approved by prospective investors to decide whether to purchase the securities on offer. The items in A, C and D would all be included in a C) Recent financial statements for the company prospectus. A prospectus is lodged with ASIC at the same time that it is released to investors. Therefore, D) Reports by relevant experts there is no opportunity for ASIC to examine these documents in advance so a prospectus will never state that it has been approved by the regulator, making B the answer. MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3, pp. 183-184. C no hapt er 054256405R 0 4070140898 5392536 no R <esults epor 1t able ¶ style= qu 1 4 1 Encom Ltd is about to list on the Australian Stock Exchange (ASX) and its promoters have been advised A) provide advice on Offering ofof the share issue. underwritten. The essential role of an that its Initial Public the terms shares should be underwriter is to: that the company complies with ASX listing rules. B) ensure C) establish an active secondary market in the shares once they are listed. Feedback: If a security issue is underwritten and institutions and the public do not subscribe for all the D) sale, the underwriter, often in bought by other investors. securities offered forpurchase any shares that are notconjunction with sub-underwriters, is obliged to purchase the unsold securities.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3, p. 184. 2 2 4 Issuing ordinary shares is the major source of external equity funding for Australian companies. Which of the following statements sharesordinary shares is not correct? A) The holders of ordinary about have voting rights B) Shares may only be issued on a fully paid basis C) Ordinary shares represent a residual ownership claim D) Shares may be issued on a fully paid or partly paid basis Feedback: Ordinary shares may be issued as fully paid or partly paid, so B is not true, making it the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3.1, p. 185 3 3 4 Which of the following statements about no liability companies is not correct? A) Shares in no liability companies are usually issued on a partly paid basis. B) No liability companies typically need to progressively raise additional capital over time. C) Only companies that are involved in high-risk activities such as biotechnology are permitted to incorporate as no liability companies. Feedback: In Australia there are restrictions on the types of companies that may incorporate as no D) Holders of partly paid shares can choose not to mining industry may do so. Therefore, liability companies. Specifically, only companies engaged in the pay calls. the statement in C is too broad, making it the answerMORE: Financial Institutions, Instruments and Markets 6/e, Section 5.3.2, p. 185-186. 4 4 4 The promoters of an IPO may decide to have the issue underwritten. Which of the following descriptions of the rolethean underwriter is most accurate? A) Advising on of terms of the issue including its structure, pricing and timing. B) Purchasing all of the shares issued and then selling them to other investors. C) Advising on the terms of the issue including its structure, pricing and timing, and purchasing all of the shares issued and then selling them to other investors. D) Advising on the terms of the Feedback: The primary role of an underwriter isissue (as in A) that agreeing to purchase any shares not taken to guarantee and all the funds sought will be raised. In the case of stand-by up by investors. used in Australia, this guarantee is provided by agreeing to underwriting as purchase any shares not taken up by investors. The underwriter will also advise on the terms of the issue so D is .MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.2, p. 184. 5 5 4 An entity applying to the Australian Stock Exchange for public listing must satisfy either the profit test or the assets test. Which of the concern or successor of a goingunder the profit test? A) The entity is a going following are not requirements concern. B) The entity has provided audited financial statements for the last three financial years. C) The entity has working capital of at least $1.5 million. D) The entity has been engaged in the same principal business activity for at least three years. Feedback: A, B and D are requirements under the profit test, but C is a condition of the assets test.MORE: Financial Institutions, Instruments and Markets 6/e, Extended Learning, p. 199.Profit test 6 6 4 Every company with securities listed on the Australian Stock Exchange (ASX) must prepare an annual report security holders. the Corporations Act. A copy of the annual report must be provided A) all that complies with t o: B) the ASX only. C) security holders (except any who have asked the company not to send them a copy) and t he ASX. Feedback: A listedD) the ASX and any security holders who write to ASX and to all security a copy. except company must send its annual report to the the company requesting holders, any holders who have asked the company not to send them a copy, so A, B and D are .MORE: Financial Institutions, Instruments and Markets 6/e, Extended Learning, p. 201. 7 7 4 A company may seek to raise further funds by making a rights issue. Which of the following is not c orrect?A) The rights to take up new shares are usually valuable. B) A rights issue is a pro-rata offer to existing shareholders. C) A renounceable rights issue may be taken up only by the original shareholders. D) If a rights issue is renounceable, existing shareholders can sell their rights to other investors. Feedback: A and B are both valid. If a rights issue is renounceable, the rights will be quoted on a stock exchange and can be sold to other investors so D is valid but C is not, making it the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.1, p. 188-189 8 8 4 Listed companies may, subject to compliance with certain regulatory requirements, raise funds by making a placement of shares,subscribe at least $500 investors. Which of the following is not one of A) Each investor must usually to institutional 000. t he regulatory requirements in relation to share placements? B) Any discount from the current market price must be less than 10 per cent. C) Under no circumstances can a placement exceed 15 per cent of a company's issued shares. D) There is Feedback: The requirements no need to issue a prospectus, to placements. Theof information detailing the listed in A, B and D all apply but a memorandum ASX listing rules also limit ompany's activities must be sent to all participants. placements to 15 perccent of a company's issued shares in any 12-month period but this limit can be exceeded if shareholders vote to approve the issue.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.2, p. 189-190. 9 9 4 Many Australian companies have introduced dividend reinvestment schemes. Which of the following advantages of these schemes may, at times, also be regarded as a disadvantage? A) The shareholder acquires additional shares without paying brokerage or stamp duty. B) Franking credits can be passed on to shareholders. C) Dividends can be paid while retaining cash within the company. Feedback: Retaining cash within a company is advantageous only if the company has profitable uses for D) The shares may be issued at a discount to the current market price. the additional cash. Since companies do not always have enough profitable investments available, there can be times when shareholders would benefit from cash being paid out rather than retained. So Cis the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.4, pp. 190-191. 10 10 4 A preference share issue may be desirable for a company. Which of the following may be valid reasonsA) a preference share issue? for Preference shares are legally equity but may, in effect, be fixed interest borrowings. B) Issuing preference shares may allow additional debt finance to be raised in the future. C) Non-cumulative preference shares do not commit the firm to dividend payments. D) All of the given options. Feedback: All of the factors listed may favour the use of preference shares, so D is the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.5, p. 191-192. 11 11 4 Submarine Services Limited needs to raise additional funds to purchase new equipment. Management has been advisedhas the right to convert it into preference shares. A) The holder of a note that an issue of convertible notes would be appropriate. The advisers note that several conditions may apply to a convertible note issue. Which of the following suggested B) Notes are generally available on a pro-rata entitlement to shareholders. c onditions is not correct? C) Entitlements to convertible notes are generally not renounceable. D) The issue price of notes is generally close to the current market price of the company's shares. Feedback: The conditions outlined in B, C and D are generally applicable to convertible notes. Such notes are convertible into ordinary shares, not preference shares, making A the answer.MORE: Financial Institutions, Instruments and Markets 6/e, Section 5.5.6, pp. 192-193. no R <esults epor 1table ¶style= 4392536R E-mail Your Results ...
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