CHAPTER 5 - MULTIPLE CHOICE QUESTIONS

1. Prudent financial management would dictate that a company should not take on more debt than can be
serviced, under pessimistic conditions, without jeopardy to the companys existence. Therefore a proportion of
total funding should be provided by equity participants. Which of the following main criteria would be
determinants of the appropriate ratio of debt to equity?
I Maximisation of shareholder wealth
II Norm in the industry
III History of the ratio for the firm
IV The stage of the current economic cycle
V Limit imposed by lenders
VI Companys capacity to service debt
A I, III, V, VI
B II, III, V, VI
C II, III, IV, V
D III, IV, V, VI

2. One of the parties to the initial flotation of a company is often known as the promoter. Which of the following
statements best describes the role or function of the promoter?
A The manager of the sub-underwriting panel or group
B The broker responsible for the initial sale of shares to investors
C The party seeking the flotation of the company
D The agency responsible for marketing the issue to the public

3. 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 listing
limited liability company is not correct?
A The public company is incorporated with an authorised share capital
B Shares may only be issued on a fully paid basis
C Shares may be priced on issue at par, or at a premium above par
D Usually, not all shares authorised in the Memorandum of Association are issued

4. Which of the following requirements does not apply to a company seeking admission for public listing on the
Australian Stock Exchange:
A The entity must satisfy either the profit test or the net tangible assets test;
B Must have at least 500 holders of a parcel of main class securities valued at least $2000;
C Must issue a prospectus which is to be lodged with the Australian Stock Exchange;
D Have a structure and operation appropriate for a listed entity;

5. A company may seek to raise further funds by issuing additional ordinary shares. The terms of the new share
issue are determined by the board of directors, in consultation with its financial advisers and others, and
having regard to the preferences of existing shareholders and the needs of the company. Which of the following
is least likely to be a determinant of the price that is eventually struck?
A The discount to current market price that can be offered to shareholders
B The companys cash requirements
C The projected earnings flows from the new investments
D The cost of alternative funding sources

6. Share placements may, subject to compliance with certain regulations, be made to institutional investors.
Which of the following conditions is not a requirement of the Australian Securities Commission in relation to
share placements?
A The placement consist of minimum subscriptions of $500 000, or be made up of not more than 20
participants
B Discount from current market price must not be excessive
C In no circumstance are placements in excess of 10% of issued shares permitted
D No need to register a prospectus, but a memorandum of information detailing the companys activities must
be sent to all participants

7. Dividend reinvestment schemes are a significant source of equity for many Australian companies. These
schemes have a number of attractions for both the company and the shareholder. Which of the following
advantages of dividend reinvestment schemes may, at times, also be regarded as a disadvantage?
A The shareholder avoids stamp duty and brokerage costs on the share issue
B The share issue price is usually at a discount to the average market price
C Such schemes allow dividends to be paid while retaining cash for future growth
D The company is able to pass on franking credit to its shareholders

8. Preference shares are a form of equity funding, but have a number of features in common with debt that
serve to differentiate 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 above

9. Tools Limited wishes to raise additional funds to purchase new tool die casting machinery. The company is
advised that the issue of convertible notes would be an appropriate funding technique. The advisers note the
following conditions may apply to the convertible note issue. Which condition is not correct?
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 time of issue

10. While warrants may attach to a range of securities, an equity warrant generally attaches to a
bond issue. Which of the conditions attached to an equity warrant is not correct?
A A warrant 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