FIM Week 5 Tutorial

Issuing ordinary shares is the major source of external equity funding for Australian companies. Which of the following statements about ordinary shares is not correct? 

• The holders of ordinary shares have voting rights.
• Shares may only be issued on a fully paid basis.
• Ordinary shares represent a residual ownership claim.
• Shares may be issued on a fully paid or partly paid basis.

A company may seek to raise further funds by making a rights issue. Which of the following is not correct? 

• The rights to take up new shares are usually valuable.
• A rights issue is a pro-rata offer to existing shareholders.
• A renounceable rights issue may be taken up only by the original shareholders.
• If a rights issue is renounceable, existing shareholders can sell their rights to other investors.

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? 

• The shareholder acquires additional shares without paying brokerage or stamp duty.
• Franking credits can be passed on to shareholders.
• Dividends can be paid while retaining cash within the company.
• The shares may be issued at a discount to the current market price.

Entities seeking to become listed on the ASX through an initial public offering of ordinary shares must be aware that there are significant costs associated with the listing process. Which of the following is not one of those costs?

• underwriting and handling fees
• legal fees
• printing costs
• rating agency fees

Preference shares are hybrid securities with features of debt and equity. Which of the following is not a feature of preference shares? 

• Preference shares have a dividend rate that is set at the issue date.
• Preference shares rank ahead of ordinary shares for payment of dividends.
• Preference shares are always convertible into ordinary shares.
• Preference shareholders rank behind a company's creditors.

The risks faced by investors in shares can be divided into two categories: systematic risk and unsystematic risk. Which of the following is a source of systematic risk? 

• changes in the interest rate on 10-year bonds
• variations in productivity at a company's main factory
• changes in the cost of specialised labour
• changes in the effectiveness of a company's managers

Liquidity in a stock exchange is important to investors because if a market is liquid: 

• there are many listed securities to choose from.
• the securities listed are less risky than unlisted investments.
• investors can generally buy or sell shares at the current market price.
• brokerage costs are low.

Investments may be managed actively or passively. An active investment approach may be most accurately described as:

• trading frequently on an intra-day basis as prices change.
• investing in shares with high betas.
• using technical analysis to guide trading decisions.
• attempting to achieve superior returns through successful stock selection.

Which of the following statements about direct and indirect investment in shares is correct?

• A direct investment strategy means that an investor deals directly with other shareholders.
• Direct investment takes place through a broker whereas indirect investment occurs when the investor buys units in a managed fund.
• An indirect investment strategy means that the investor buys and sells shares through a stockbroker.
• Indirect investment fees are usually very similar to the fees incurred for direct investments.

Which of the following is not a factor that is likely to cause unsystematic risk?

• changes in the effectiveness of senior management
• changes in interest rates
• the risk that a company's computer system may fail
• changes in a company's ratio of debt to equity