IFE S8 Equity Markets

Which one of the following is false?

• Shareholders vote at meetings to determine important matters such as the composition of the board of directors.

• Shareholders share in both the rising prosperity and the lack of success of a company.

• Shareholders are promised a minimum annual return as a dividend to encourage them to maintain their investment in the company.

• Shares represent the equity share capital of a company and are a source of long-term finance.

Which one of the following is NOT an advantage for a firm that raises capital by selling preference shares?

• Preference shares provide an additional source of finance, but do not dilute the influence the ordinary shareholders.

• The limits placed on the returns to preference shareholders mean that usually ordinary shareholders receive all the extraordinary profits when the firm is doing well.

• Preference dividends are tax deductible.

• Preference dividends do not have to be paid every year.

Which one of the following statements is false?

• A cumulative preference share is one where the dividends due are only paid at the end of the share's life.

• A redeemable preference share has a finite life.

• A participating preference share is one where the dividend may be increased if the company has high profits.

• A convertible preference share is one which can be converted into ordinary shares at specific dates and on pre-set terms.

Which one of the following is false?

• Top tier companies trading on the London Stock Exchange are in the Main Market.

• Companies wishing to trade on the London Stock Exchange have to conform to a number of requirements.

• The Professional Securities Market is focused on trading in high-tech and bio-science companies.

• The London Stock Exchange primary market allows companies to sell and trade shares and other securities.

Which one of the following statements is true in a quote-driven stock market trading system?

• Market makers post bid and offer prices for shares into a computer system.

• The stock exchange quotes buy and sell prices in shares on the exchange; brokers then complete deals on behalf of clients by buying or selling from the exchange.

• Brokers quote bid and offer prices in shares; investors then purchase shares after considering all the brokers' prices.

• Buy and sell orders are entered on a central computer system and investors wishing to sell are matched with investors wishing to buy at their chosen prices.

A Short sale is best described as…

• selling shares that were bought a short time before and making a profit on them.

• selling shares at a lower price than the market price.

• buying shares before selling them in the hope that the share price will rise.

• selling borrowed shares before buying them back in the hope that the share price will fall.

Going public is best described as…

• announcing to the public a company's intention to sell its shares.

• making a company's financial statements available to the public.

• obtaining a listing on a regulated stock exchange and selling shares to the public.

• a private limited company arranging to sell shares to the investors.

Which one of the following statements is incorrect?

• Companies buy back their own shares primarily to prevent them being sold to foreign companies.

• In the UK, if existing shareholders do not exercise their pre-emption rights, the company will sell the shares on their behalf and send them the proceeds.

• Warrants give the right to buy a specified number of shares at a specified price and time.

• Placings sell newly issued shares to a small group of external investors.

An accurate description of pre-emption rights is…

• to prevent existing shareholders from purchasing shares which are newly issued.

• to require that existing shareholders buy a percentage in proportion to their existing shareholding of any new issue of shares.

• to offer existing shareholders a substantial discount on the price of a new issue of shares.

• to insist that companies issuing new shares offer them to existing shareholders first.

Which one of the following is NOT a disadvantage of raising capital by selling ordinary shares?

• Collateral must be offered to potential shareholders.

• The current shareholders may face a loss of control over the direction of firm.

• Dividends cannot be used to reduce taxable profit.

• The transaction costs are usually higher than raising other forms of finance.