Corporate Financial Management 5th

Edition Glen Arnold Test Bank

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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) When calculating economic profit using the ‘performance spread’ method, the invested capital is 1) _______
subtracted from the performance spread to economic profit. Which of the following shows how
performance spread is calculated?
A) WACC - Return on capital B) Return on capital + WACC
C) Return on capital - WACC D) Entity value - WACC

2) Who owns a plc? 2) _______

A) The shareholders
B) Banks who have lent money to the organisation
C) The debt capital holders
D) Senior management

3) Which three of the following statements correctly relate to shares or shareholders? 3) _______
A) The shareholder will always receive back the original capital invested.
B) Shareholders have the right to exercise control over the company.
C) Ordinary shareholders are the last in the queue to have their claims met.
D) Ordinary shares represent the equity share capital of the firm.

4) Which two statements best describe a company's debt capital holders? 4) _______
A) They have an equity interest in the company.
B) They have no formal control.
C) They receive interest and may recover capital.
D) They will always receive back their original capital.

5) Which two statements best describe the costs of equity when compared with the cost of debt 5) _______
capital?
A) Investing via equity finance is less risky for investors.
B) Equity finance is less expensive for companies.
C) Investing via debt finance is less risky for investors.
D) Debt finance can be less expensive for companies.

6) Which two statements accurately describe the situation regarding extraordinary profits that a 6) _______
company may earn?
A) Lenders do not generally benefit from extraordinary profits.
B) Lenders generally contribute to extraordinary profits.
C) Shareholders may only be asked to re-invest extraordinary profits.
D) Shareholders may be recipients of any surplus.

7) Which two statements accurately describe the taxation of dividends and loans? 7) _______
A) Dividends can be used to reduce a firm's taxable profits.
B) The company will generally prefer equity finance since it is more tax efficient.
C) Interest payments on a loan are tax deductible.
D) Dividends are paid out of after-tax earnings.

8) From a shareholder's viewpoint, what is the key benefit of limited liability? 8) _______
A) Shareholders are only liable up to the amount that the company owes its creditors.
B) Shareholders are only liable up to the amount they have invested or promised to invest.
C) The company’s liabilities are limited, ensuring that shareholders can always recover their
investment.
D) The company’s liabilities are limited to the total authorised capital.
 9) A company has authorised capital of £9m. It has issued all the preference shares (value £4m) but 9) _______
only £3m of the ordinary shares. What term is used for the remaining £2m?
A) Unissued share capital B) Authorised but unissued share capital
C) Uninvestable share capital D) Share premium capital

10) The par value of shares in a particular company is 100p. The price received by the company for 10) ______
the shares is 400p. What is the difference in value (300p) called?
A) Authorised share capital value B) Share value
C) Ordinary share capital D) Shareholder premium

11) What type of investment offers a fixed rate of return, and is part of the shareholders’ funds but 11) ______
not part of the equity capital?
A) Authorised but unissued shares B) Ordinary shares
C) Debt capital D) Preference shares

12) Which three of the following statements correctly apply to preference shares? 12) ______
A) When compared with bonds, they offer a higher rate of return but at higher risk to the
investor.
B) Preference shares usually carry voting rights.
C) The dividend on them is paid before anything is paid out to ordinary shareholders.
D) They usually offer their owners a fixed rate of dividend each year.

13) Which two of the following statements are correct? 13) ______
A) It is more expensive to obtain a quotation on the Official List than the Alternative
Investment Market.
B) Companies with a price quote on PLUS (previously OFEX) are not regulated by the UK
Listing Authority.
C) Private equity is a term to describe the equity capital of family owned limited companies. It
does not cover public limited companies with shares held by institutional shareholders.
D) To join the Alternative Investment Market a company is required to have 3 years of
accounts available for inspection.

14) Which three of the following statements correctly describe the different types of company? 14) ______
A) Private companies are the most common form of company.
B) Public limited companies must display the suffix ‘plc’.
C) Private companies have the suffix ‘Limited’ or ‘Ltd’.
D) A private company must have a stated minimum amount of share capital.

15) Which three of the following are advantages to the firm of preference share capital? 15) ______
A) Preference shareholders receive all the extraordinary profits when the firm is doing well.
B) Preference dividends can be omitted for one or more years.
C) Preference shares are an alternative shock absorber to ordinary shares because of the
possibility of avoiding the annual cash outflow due on dividends.
D) Preference shares are an additional source of capital but do not dilute the influence of the
ordinary shareholders on the firm’s direction.

16) Which two of the following accurately describe the tax situation regarding preference shares? 16) ______
A) Tax on preference shares is applied on the basis of gross profits.
B) There is an overall tax disincentive to issue preference shares.
C) Tax is payable on the firm's profit before the deduction of the preference dividend.
D) The dividend is regarded as an appropriation of profits.
17) Which of the following is a major disadvantage to the firm of preference share capital? 17) ______
A) Tax is not payable on the firm’s profit before the deduction of the preference dividend.
B) The cost to the company is lower than is available through bond issues.
C) There are limits to safe levels of borrowing.
D) The higher risk causes preference shareholders to demand a higher level of return than
debt holders.

18) Which three of the following are types of preference share? 18) ______
A) Authorised B) Convertible C) Cumulative D) Participating

19) Which of the various UK exchanges is the least heavily regulated? 19) ______
A) OL B) techMARK C) AIM D) PLUS

20) Which of the various UK exchanges is the most heavily regulated? 20) ______
A) AIM B) OL C) techMARK D) PLUS

21) Which organisation regulates the trading of equities, gilts, and preference shares. 21) ______
A) The Official List B) The London Stock Exchange
C) The Exchequer D) The Bank of England

22) If a large company like BT wanted to raise further finance by selling shares to investors, where 22) ______
would they be most likely to offer the shares?
A) In the primary market of the London Stock Exchange
B) In the Alternative Investment Market
C) In the secondary market of the London Stock Exchange
D) In techMARK

23) The tasks below must be carried out in relation to a new equity issue. Which of them is 23) ______
performed by sub-underwriters?
A) Set out to purchase all the shares offered by the company to the market and then sell those
shares to institutional investors for a higher price
B) Insure the sponsor and broker in a new issue against a negligence claim
C) Examine the documentation presented to the investing public to confirm its veracity
D) Agree to purchase a parcel of those shares not taken up by the general investing public

24) Which three of the following are requirements for a company that wants to float on the Official 24) ______
List?
A) A prospectus
B) Predictions for the first five years’ accounts
C) 25 per cent of share capital in public hands
D) A sponsor; a corporate broker, and a registrar

25) Which of the following is a key outcome for directors of companies that have obtained full 25) ______
listing?
A) They have far greater freedom to borrow funds.
B) Their room for discretion regarding dividend payments is restricted.
C) Listing increases the company's cash flow.
D) They have far greater freedom to pay dividends.

26) Companies need expert guidance through the issuing process. What organisations provide this? 26) ______
A) Sponsors B) FSAs C) Accountants D) Brokers
27) Which three of the following are key roles of the broker during the issuing process? 27) ______
A) To offer knowledge about the stock market
B) To generate investor interest
C) To maintain an interest post-flotation
D) To promise to buy a parcel of unbought shares

28) Which three of the following are tasks that a firm must carry out after the issuing process (or 28) ______
explain the annual reports)?
A) To issue annual financial statements
B) To disclose dealing by Directors in company shares
C) To disclose price-sensitive information promptly
D) To ensure fair pricing of shares

29) What is the key factor that distinguishes an offer for sale from an offer for subscription? 29) ______
A) An offer for subscription is only made through intermediaries.
B) An offer for subscription is always at a lower price.
C) An offer for subscription is only made to existing shareholders.
D) An offer for subscription is only partially underwritten.

30) To decide a price for a future issue, and the allocation of shares, financial advisers may contact 30) ______
major investors and ask them to place bids over a period of a few days. What term is used for
this approach?
A) Book building B) Limit bidding
C) Reverse takeover D) Strike bidding

31) What is meant by the term ‘rights issue’? 31) ______

A) An invitation to new shareholders to purchase additional shares in the company
B) The issue of a document clarifying investor’s right
C) An invitation to existing shareholders to purchase additional shares in the company
D) An issue of shares specifically aimed at new investors

32) What is the theoretical ex-rights price? 32) ______

A) The mean price of the existing shares and their historic values
B) The weighted average of the price of the existing shares and the new shares
C) The weighted average of the price of the existing shares and their historic values
D) The mean price of the existing shares and the new shares

33) How is the value of a right on a new share calculated during a rights issue? 33) ______
A) Theoretical market value of share ex-rights - subscription price
B) Actual market value of share ex-rights - actual market value
C) Theoretical market value of share ex-rights - actual market value
D) Actual market value of share ex-rights - subscription price

34) Assuming that there is no change in the share price during a rights issue, how is shareholder 34) ______
value affected by the issue?
A) It does not change. B) It decreases.
C) It increases. D) The change is unpredictable.

35) What is meant by ‘vendor placing’? 35) ______

A) Issuing preference shares for sale to financial advisers
B) Giving shares in exchange for a business
 C) Giving shares to potential suppliers
D) Issuing shares for sale only through financial advisers

36) What are ‘placings’? 36) ______

A) Preference shares aimed at existing investors
B) Ordinary shares aimed at existing investors
C) New shares aimed at a new investors
D) New shares sold directly to a group of external investors

37) An investor wants a tax-efficient vehicle for investing in small unquoted firms . The investor also 37) ______
wants to reduce risk by pooling the investment with others. Which approach is most suitable?
A) Invest in a Venture Capital Trust
B) Invest in the Enterprising Investment Market
C) Become a Business Angel
D) Invest in the Alternative Investment Market

38) Which of the following is the most suitable source of finance for high-growth-potential unquoted 38) ______
firms, who require amounts of around £5m?
A) Alternative Investment Market B) A Business Angel
C) Enterprise Trust D) Venture Capital Trust

39) Which three statements link to explain the meaning of the term 'financing gap'? 39) ______
A) Rapidly growing medium sized companies can easily access stock market funds.
B) Small companies tend to rely on retained earnings and bank loans.
C) The stock market is able to adjust its operations to suit a wide range of companies seeking
funds.
D) Only mature companies can generally access debt or equity capital through capital
markets.

40) A firm's current share price is £4. It has 50m shares in issue and plans to sell a further 10m shares 40) ______
in a 1 for 5 rights issue at a price of £3 per share. What is the ex-rights price?
A) £3.50 B) £3.53 C) £3.83 D) £4.83

41) An investor does not have the cash to buy shares in a 5 for 1 rights issue. The theoretical value of 41) ______
the share ex-rights is £3.20, and the subscription price is £3. What is the value of a right on one
share?
A) 100p B) 15p C) 20p D) 4p

42) Which three of the following are arguments for joining a stock exchange? 42) ______
A) City is short-termist B) Access to new capital for growth
C) Liquidity for existing shareholders D) Discipline on management to perform

43) Which three of the following are arguments against joining a stock exchange. 43) ______
A) The City does not understand entrepreneurs.
B) There is increased customer recognition.
C) Dealing with 'City' folk is time consuming.
D) There is an excessive focus on return on capital.
 1) C
2) A
3) B, C, D
4) B, C
5) C, D
6) A, D
7) C, D
8) B
9) B
10) D
11) D
12) A, C, D
13) A, B
14) A, B, C
15) B, C, D
16) C, D
17) D
18) B, C, D
19) D
20) B
21) B
22) A
23) D
24) A, C, D
25) B
26) A
27) A, B, C
28) A, B, C
29) D
30) A
31) C
32) B
33) A
34) A
35) B
36) D
37) A
38) D
39) A, B, D
40) C
41) D
42) B, C, D
43) A, C, D