Question 1

What is the name of the entity with which a prospectus must be lodged?
A)The Australian Competition and Consumer Commission
B)The Australian Prudential Regulatory Authority
C)The Australian Securities and Investments Commission
D)The Australian Securities Exchange

Accepted Answer

The entity with which a prospectus must be lodged is the Australian Securities and Investments Commission (ASIC). This is a regulatory body in Australia that is responsible for overseeing the country's financial markets and ensuring that investors are protected. The other choices, such as the Australian Competition and Consumer Commission (ACCC) and the Australian Prudential Regulatory Authority (APRA), have different areas of focus and are not involved in the regulation of prospectuses. The Australian Securities Exchange (ASX) is a stock exchange and is not involved in regulating prospectuses either.

Question 2

Management has just discovered an excellent investment opportunity and needs additional funding for it.According to the pecking order theory,the company should:
A)Use debt financing if management believes the shares are undervalued
B)Use equity financing if management believes the shares are undervalued
C)Use debt financing if management believes the shares are overvalued
D)Forego the investment opportunity

Accepted Answer

According to the pecking order theory, companies prefer to finance new investments first with internal funds, then with debt, and finally with equity. If management believes the shares are undervalued, they would prefer to use debt financing rather than issuing new equity, which would be sold at a lower price than its true value.

Question 3

An initial public offering in which the offer price is determined by value of bids placed by institutional investors is known as what?
A)A book build offer
B)An underwritten offer
C)A fixed price offer
D)None of the above

Accepted Answer

A book build offer, also known as a book building or price discovery process, involves the collection of bids from institutional investors to determine the offer price instead of setting a fixed price beforehand. This allows for a more accurate valuation of the company and potentially higher demand for the shares.

Question 4

The securitisation of a pool of underlying financial assets into a tranched debt structure is known as:
A)Collateralised Debt Obligations
B)Collateralised Loan Obligations
C)Both A and B
D)Some other term

Accepted Answer

Both Collateralised Debt Obligations (CDOs) and Collateralised Loan Obligations (CLOs) involve the securitisation of a pool of underlying financial assets into a tranched debt structure.

Question 5

Which of the following is not a characteristic of debt?
A)Debtholders are paid before shareholders are paid the value of their shares
B)Debt has an infinite life
C)Debtholders do not have voting rights at general meetings
D)None of the above

Accepted Answer

Debt has a finite life and is typically repaid at a predetermined date or through a series of payments over time.

Question 6

A debenture differs from an unsecured note for what primary reason?
A)The issuing company normally does not offer security.
B)Some form of security is normally offered by the issuing company.
C)The lending company does not require security over any assets of the issuer.
D)None of the above

Accepted Answer

A debenture is a type of bond that is backed by the creditworthiness and reputation of the issuer, but does not have any specific collateral backing it. However, the issuing company typically offers some form of security, such as a lien on its assets or a pledge of future revenues, in order to secure the bond and provide additional protection to investors. In contrast, an unsecured note does not have any collateral or security backing it, and is therefore considered to be riskier for investors.

Question 7

What is a rights issue?
A)An offer to existing shareholders giving them the right to purchase new shares in the company in proportion to the number of shares held
B)An offer to existing shareholders giving them the right to purchase an unlimited number of new shares in the company at a discount to the current market price
C)An offer to existing shareholders giving them the right to purchase an unlimited number of new shares in the company at a premium to the current market price
D)An offer to existing shareholders giving them the right to sell their existing shares back to the company at a premium to the current market price

Accepted Answer

A rights issue is an offer made by a company to its existing shareholders, giving them the right to buy new shares in the company in proportion to the number of shares they already hold. This means that shareholders have the option but not the obligation to purchase the new shares, and their ownership percentage in the company will remain the same if they choose not to participate.

Question 8

Which of the following is not a characteristic of the majority of the equity issued by companies listed on the ASX?
A)The liability of shareholders is limited to the amount of capital they have invested.
B)They have an infinite life.
C)Shareholders cannot vote on resolutions put forward at annual general meetings.
D)They pay dividends,which are set annually.

Accepted Answer

Shareholders have the right to vote on resolutions put forward at annual general meetings, so option C is not a characteristic of equity issued by companies listed on the ASX. Options A and B are correct characteristics, as the liability of shareholders is limited to their invested capital and equity has an infinite life. While not all companies pay dividends annually, paying dividends is a common characteristic of equity issued by companies listed on the ASX. Therefore, option D is also a correct characteristic.

Question 9

The price of a share following a rights issue is known as what?
A)The issue ratio
B)The issue price
C)The rights issue cleansing price
D)The theoretical ex- rights price

Accepted Answer

The theoretical ex-rights price (TERP) is the price at which a share is expected to trade following a rights issue. It accounts for the dilution of shares due to the issuance of additional shares at a discount during the rights offering.

Question 10

Which of the following pieces of information is not usually included in a prospectus?
A)Historical and forecast financial information
B)The price at which the stock will be issued to the public in a fixed- price offer
C)The number of shares to be issued
D)All of the information above is usually included in a prospectus.

Accepted Answer

A prospectus typically includes historical and forecast financial information, the price at which the stock will be issued, and the number of shares to be issued. Therefore, all the information listed is usually included in a prospectus.

Question 11

In order to list upon the Australian Stock Exchange for the first time,a company must prepare what?
A)An ASX code
B)10 years of audited financial statements
C)A dividend reinvestment plan
D)A prospectus

Accepted Answer

In order to list upon the Australian Stock Exchange for the first time, a company must prepare a Prospectus. A Prospectus is a legal document that outlines the details of the company's operations, financial performance, and future plans. It is intended to provide potential investors with all of the information they need to make an informed decision about whether to invest in the company.

Question 12

The price of a share can change following a rights issue.Why?
A)The value of new cash raised through the rights issue is spread across a greater number of shares.
B)The value of new cash raised through the rights issue is spread across a fewer shares.
C)The increased value of the company following the rights issue is passed on to share holders.
D)The increased number of share holders after the rights issue increases the value per share.

Accepted Answer

The value of new cash raised through a rights issue is indeed spread across a greater number of shares, which can dilute the value of existing shares, potentially changing the share price.

Question 13

Which of the following is true about the pecking order theory?
A)Management will raise equity when the shares are overpriced on the market.
B)Management will raise debt finance before using excess retained earnings.
C)Management will raise equity when the shares are underpriced on the market.
D)None of the above

Accepted Answer

The pecking order theory suggests that companies prefer to finance themselves first through internal funds, then with debt, and finally by issuing new equity. When shares are overpriced, it becomes cheaper for the company to issue new shares since it can raise more capital for fewer shares, aligning with the theory's implication that issuing new equity is a less preferred option, typically considered when other sources are exhausted or seem less advantageous.

Question 14

What are rights that cannot be sold to third parties known as?
A)Non- renounceable rights
B)Non- exchangeable rights
C)Non- tradeable rights
D)Non- redeemable rights

Accepted Answer

Non-renounceable rights are rights that cannot be sold or transferred to third parties. This means that the owner of the rights must exercise them or they will be forfeited, but they cannot sell them to someone else to be exercised. Non-exchangeable and non-tradeable may also be used to describe these types of rights, but non-renounceable is the most common term. Non-redeemable refers to a different concept, and refers to a security or investment that cannot be redeemed or bought back by the issuer.

Question 15

Which of the following is a not a hybrid security?
A)A non- step- up preference share
B)A convertible bond
C)A bank accepted bill
D)A reset preference share

Accepted Answer

A bank accepted bill is not a hybrid security as it is a short-term promissory note issued by a company that is guaranteed by a bank. A non-step-up preference share, a convertible bond, and a reset preference share are all examples of hybrid securities as they have characteristics of both debt and equity securities.

Question 16

Which of the following Modigliani and Miller assumptions regarding dividend irrelevance is true?
A)There are no personal or corporate taxes.
B)Investors can borrow at the same rate as the company.
C)All market participants (e.g.management and shareholders)have the same information.
D)There are no costs of trading shares.
E)None of the above

Accepted Answer

The answer of Which of the following Modigliani and Miller...

Question 17

Firms that borrow excessively face which one of the following possibilities?
A)The impact of differing tax rates on corporate versus personal tax
B)The possibility of financial distress
C)The existence of information asymmetry
D)All of the above
E)None of the above

Accepted Answer

Firms that borrow excessively face the risk of financial distress, which can lead to bankruptcy or default on loan payments. Excessive borrowing increases the firm's leverage, making it more susceptible to external shocks and changes in interest rates. As a result, firms that borrow too much may find it difficult to repay their debts, which can negatively impact their credit ratings and investors' confidence. The other options, A and C, are not necessarily consequences of excessive borrowing.

Question 18

Which of the following occurs when a company issues new stock to a small number of,typically,institutional investors?
A)A dividend reinvestment plan
B)A share buy- back
C)A private placement
D)A rights issue

Accepted Answer

When a company issues new stock to a small group of investors, usually institutional investors, it is known as a private placement. This is different from a rights issue, which is when a company offers additional shares to its existing shareholders in proportion to their current holdings. A dividend reinvestment plan allows shareholders to reinvest their dividends back into the company by purchasing additional shares, while a share buyback is when a company buys back its own shares from the market.

Question 19

What is the role of an underwriter in an initial public offer?
A)Organise the initial public offering
B)Generate interest in the initial public offering amongst institutional investors
C)Purchase any shares not acquired by the public
D)All of the above

Accepted Answer

An underwriter plays a crucial role in an initial public offering (IPO). They organize the IPO by working closely with the company going public to determine the offering price, the number of shares to be issued, and the timing of the offering. They also generate interest in the IPO amongst institutional investors by marketing the offering and providing research and analysis on the company. Finally, the underwriter agrees to purchase any shares not acquired by the public, thereby assuming the risk of the IPO. Therefore, all of the above are correct.

Question 20

A contract in which one party pays another series of cash flows is known as what?
A)A financial lease
B)A debenture
C)An unsecured note
D)A commercial bill

Accepted Answer

A financial lease is a contract in which one party (the lessor) pays another party (the lessee) a series of cash flows in exchange for the use of an asset.

Quiz 12: Capital Structure Policy

What is the name of the entity with which a prospectus must be lodged?

Management has just discovered an excellent investment opportunity and needs additional funding for it.According to the pecking order theory,the company should:

An initial public offering in which the offer price is determined by value of bids placed by institutional investors is known as what?

The securitisation of a pool of underlying financial assets into a tranched debt structure is known as:

Which of the following is not a characteristic of debt?

A debenture differs from an unsecured note for what primary reason?

What is a rights issue?

Which of the following is not a characteristic of the majority of the equity issued by companies listed on the ASX?

The price of a share following a rights issue is known as what?

Which of the following pieces of information is not usually included in a prospectus?

In order to list upon the Australian Stock Exchange for the first time,a company must prepare what?

The price of a share can change following a rights issue.Why?

Which of the following is true about the pecking order theory?

What are rights that cannot be sold to third parties known as?

Which of the following is a not a hybrid security?

Which of the following Modigliani and Miller assumptions regarding dividend irrelevance is true?

Firms that borrow excessively face which one of the following possibilities?

Which of the following occurs when a company issues new stock to a small number of,typically,institutional investors?

What is the role of an underwriter in an initial public offer?

A contract in which one party pays another series of cash flows is known as what?