Deck 9: Financing a Business 2: Raising Long-Term Funds

Question 1

What is a disadvantage to many small businesses in listing on the stock exchange?

A) Pressure to take on short term investments to yield shareholders immediate profits.
B) Increased income taxes and capital gains tax rates on earnings.
C) Increased public scrutiny of its business and financial processes.
D) Increased regulations around product quality, consistency and distribution.
E) Decreased flexibility in financing future projects through informal sources of capital.

Answer 1

C

Question 2

Bontempo Electronics Inc. has total assets of $81 million, financed by $36 million of debt and $45 million of equity where the contributed common shares account for $12 million. There are 2.4 million shares outstanding. The directors of Bontempo Electronics have declared a stock dividend of one share for every three shares held. If the market value of the shares is $27.50 before the stock dividend, which of the following is the best conclusion to make?

A) Shareholders will experience an increase in their wealth of $4 million.
B) The company has effectively reduced its debt to equity ratio.
C) Shareholders will suffer a dilution of their future earnings by 33%.
D) Shareholders will experience an increase in their wealth of $22 million.
E) There has been no change in shareholders' wealth.

Answer 2

E

Question 3

The day Michael liquidated his old portfolio and rolled the cash into a new portfolio, he calculated the market capitalization of his former holdings and set that as a baseline equal to 1000. On the day of sale it represented ownership in five companies: 1,500 shares of A selling at $23.50, 1,000 shares of B at $32.00, 6,500 shares of C at $7.29, 200 shares of D at $128.45 and 1,200 shares at $56.78 of E. A year later his old portfolio had an index value of 1102 and Michael's new portfolio was at 872. How much more money would Michael have had if he had kept his old portfolio?

A) $2,300
B) $23,000
C) $26,683
D) $43,508
E) $47,946

Answer 3

E

Question 4

Why does the secondary market reduce the risk of investing in debt and equity instruments?

A) Offers a secure electronic forum for exchanging these securities.
B) Has regulations against insider trading of these securities.
C) Has minimum income requirements for its members.
D) Provides a wide range of potential investment opportunities.
E) Improves the liquidity of these securities.

Question 5

Terri-Tech Inc. is a small company made up of two twenty-something software developers. Terri-Tech requires financing to market an innovative application. The dealer with whom the developers have worked has suggested that the developers offer a new issue of shares by means of a direct invitation to the public, through an advertisement in the Globe and Mail Report on Business. The dealer will not assume the risk of the issue being bought. What is the name of this method of equity financing?

A) Private placement.
B) A bought deal.
C) A best efforts deal.
D) A tender issue.
E) A reserve deal.

Question 6

On June 3, CapiCal who had 2,500,000 common shares outstanding executed a two-for-one stock split. The company's shares that had been trading for $96.50 a share at the close of yesterday's trading, closed June 3rd at $48.50. What is the increase/decrease in market capitalization that CapiCal experienced?

A) No increase or decrease
B) An increase of $1,250,000
C) An increase of $122,500,000
D) A decrease of $1,121,250
E) A decrease of $121,250,000

Question 7

The S&P/TSX Venture Composite index went from a close August 31, 2007 of 2647.81 to a close December 31, 2007 of 2839.66. What can be concluded from these statistics?

A) Market capitalization increased by $191.85 million from August 31 to December 31.
B) The market made a gain of 7.2% from August 31 to December 31.
C) The number of trades was higher by 7.2% on August 31 compared to December 31.
D) The value of the assets being traded on the TSX/Venture exchanges grew by 7.2% from August 31 and to December 31.
E) The value of assets being traded on the TSX/Venture exchanges grew by $191.85 million from August 31 to December 31.

Question 8

For a market to exhibit semi-strong form of efficiency, which of the following situations must exist?

A) New information is available to all investors who immediately act upon it establishing the best estimate of the worth of the stocks.
B) The cost of capital is the same for each investor in the market.
C) A large numbers of investors are immediately motivated by new information to trade shares establishing the best estimate of the worth of the stocks.
D) A single investor is motivated by new information to trade shares resulting in the best estimate of the worth of the stocks.
E) The risk premium demanded is the same for each investor in the market.

Question 9

Which of the following stock patterns would a technical analyst view as most bearish?

A) Cup and handle.
B) Channel.
C) Triangle.
D) Reverse head and shoulders.
E) Head and shoulders top.

Question 10

Which of the following is a significant implication of stock market efficiency?

A) The market offers managers an informed and objective critique of their performance.
B) Timing of a new share issue is critical to its success.
C) A search for undervalued businesses will provide lucrative take-over targets.
D) Businesses must take seriously the setting of the level of risk and appropriate return on an investment.
E) Altering the type of security may make the initial offering more appealing to investors.

Question 11

RAJ Inc. would like to issue one million common shares and has an unpublished reserve price of $4.75. The company's investment dealer received the following response to its tender offer. 200,000 shares could be sold at $5.45, 350,000 at $5.25, 350,000 at $5.05, 600,000 at $4.90, 525,000 at $4.75, 725,000 at $4.50 and 700,000 at $4.25. What is the resulting striking price and the distribution of shares to each shareholder?

A) $5.45 with the one investor taking all that are available.
B) $5.05 with each investor allotted 4 for each 5 tendered.
C) $4.88 with each investor allotted 2 shares for each 5 tendered.
D) $4.75 with each investor receiving 4 for every 5 tendered.
E) $4.90 with each investor allotted 2 for each 3 tendered.

Question 12

Silverman Ltd. has five million common shares outstanding at $24.00 a share. The Board of Directors has authorized a one-for-three rights issue at $20 per share. What is the ex-rights price?

A) $11
B) $21
C) $23
D) $28
E) $31

Question 13

What is an advantage to a small business in listing on the stock exchange?

A) Increasing the competitive information that will be made available to it.
B) Being taken over by a larger business during a period of low sales and profits.
C) The guarantee of an immediate increase in earnings to initial owners through the inflow of cash from the initial share offering.
D) The opportunity to raise its profile and thus improving its chances in attracting better strategic partnerships and financing opportunities.
E) The significant cost reductions available for future debt and equity financing.

Question 14

Mercury Metals Inc. has 10 million common shares outstanding at price of $72.00 a share. The company is offering a one-for-five rights issue at $60.00 a share. What is the value of the rights offer?

A) $2
B) $6
C) $9
D) $10
E) $24

Question 15

Which of the following is an example of a primary capital market?

A) The government issues new securities to raise short term funds.
B) Forward contracts and derivatives are bought and sold.
C) Shares that have been previously purchased are offered for sale to others.
D) Equity shares held in another company are sold.
E) Dealers trade in shares not listed on the stock exchanges.

Question 16

Which of the following is a consistent pattern observed in a number of studies of the market that suggests there is an element of market inefficiency?

A) Heavy industry experiencing far greater returns from projects whose capital was raised with equity than with debt.
B) Higher returns being achieved from investing in companies having a higher dividend payout ratio.
C) Companies employing woman as Presidents achieving significantly higher earnings than those with men as Presidents.
D) Purchases or sales of shares providing greater returns when traded on certain days of the week and certain months of the year.
E) Markets showing a significantly greater decline on days of severe weather such as snow, thunderstorms or unusually high winds.

Question 17

Cannery Technologies' IPO was sold out immediately at its opening of $10 a share and closed the first day of trading at $18.25. It continued to rise for two weeks, hitting a high of $22.45, before dropping for four weeks to a low of $13.35. Two weeks later it was continuing to climb steadily surpassing $14.80. Which of the following best describes the market action in this stock?

A) Had a market correction.
B) Been a poor investment.
C) Described a cup and handle pattern.
D) Had a predictable price adjustment.
E) Just offered a clear buy signal.

Question 18

Which of the following best describes an efficient capital market?

A) All information is freely available and accessible. There is no assumption that it is accurately reflected in share price.
B) Not all information is freely accessible. However, that which is available, is quickly and accurately reflected in share prices.
C) All information is freely available and accessible. It is also assumed that the short term profit taking perspective of most investors may lead to inaccurate share prices.
D) All information is freely available, accessible and accurately reflected in share price.
E) Available information is assumed not always to be accessible and what is accessible is not always reflected accurately in share price.

Question 19

Details of a government bailout of a large Canadian auto parts company signed late on Friday were released to the press on Monday. If the market reflects a strong form of efficiency, when would a change in share price reflecting the news of the bailout have happened?

A) At the time when agreement was reached on the details of the plan.
B) At the time when the government was first approached for a bailout.
C) On the Friday that the deal was signed.
D) On the Monday that the deal was officially announced.
E) At the time the government and the auto parts company sat down to talk.

Question 20

Assuming the market takes on the characteristics of a weak form of efficiency, which of the following would be the worst investment strategy to practice?

A) Technical Analysis.
B) Fundamental Analysis.
C) A comparison of price/earnings ratios.
D) A comparison of the EPS.
E) Diversification.

Question 21

Dirkin and Trente Inc. (DTI) has decided to lease its electronic switching system for four years. The useful lifetime of the asset is seven years, the present value of the lease payments account for less than 60% of the fair value of the switching system and the outsourcing company which is leasing the equipment to DTI will hold title to the assets and reclaim the equipment at termination of the contract. What are the accounting implications of the leasing charges?

A) Ignored as a capital lease is treated as asset ownership. Both the asset and the long-term liability side of the balance sheet increase and capital cost allowance is taken.
B) Treated as an operating expense and appearing on the income statement. There is no impact on the balance sheet and no capital cost allowance is taken.
C) An operating expense is recorded on the income statement and the book value of the asset increases both the asset and the long-term liability sides of the balance sheet. No capital cost allowance is taken.
D) Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the principle portion increasing total assets and long-term liabilities on the balance sheet. Capital cost allowance is taken.
E) Decomposed into interest and principle with the interest portion appearing on the income statement as interest expense and the present value of the principle portion increasing total assets and long-term liabilities on the balance sheet. No capital cost allowance is taken.

Question 22

Digby Drilling Ltd. (DDL) has hired an investment banker to advise it about a forthcoming convertible bond issue. After surveying institutions the advisor had informed DDL that it can sell $1,000,000 worth of convertible bonds at 10% interest and the same amount of non-convertible bonds at 12% interest. Which of the following lesson about stock market efficiency does this information illustrate?

A) Timing DDL financing doesn't matter.
B) DD is an undervalued business.
C) DDL cannot fool the market.
D) DDL does not decide the level of risk.
E) DDL is championing shareholder interests.

Question 23

Barrie Mountains Resort did a one-for-two rights offering at $25.00 per share. The value of the rights offer is $3.33. What is the original price of a share before doing the rights issue.

A) $25.00
B) $28.33
C) $30.00
D) $60.00
E) $85.00

Question 24

Whole Plumbing Supplies Ltd. (WPS) graduated from the TSX Venture exchange to the TSX when its share price rose above $7.00. Which of the following minimum listing requirements did WPS finally meet?

A) Pre-tax income greater than $300,000.
B) Pre-tax cash flow greeter than $700,000.
C) Net tangible assets greater than $7,000,000.
D) Public float greater than 1,000,000.
E) Market value of float greater than $10,000,000.

Question 25

Marcos Mill Equipment sales and rental is bringing in a new type of 3-roller feeder. Its price from the manufacturer is $761. The company is expecting to lease equipment for four years with the payments starting immediately and then bring the feeder into its used equipment inventory at a cost of goods of $180. If the company requires a 12% return, what should the annual lease payment be?

A) $63
B) $124
C) $190
D) $201
E) $240

Question 26

M Dana's Dressmakers and Alterations Ltd. is looking at the purchase of several serging machines for their new third location. The company can buy the equipment for $6,000 and finance it with a three-year operating loan at 6% where interest is paid at the end of each year and the principal is paid at the end of the term. The capital cost allowance rate (CCA) is 25% and the income tax rate is 30%. What is the present value of the tax shield from the equipment purchase over the first three years if the cost of capital is 6%?

A) $1,099
B) $1,165
C) $2,336
D) $3,664
E) $3,884

Question 27

During the Great Recession of 2008-2009, stock markets fell about 40%. Which of the following best indicates the short-term thinking by investors during this period of widespread financial turmoil?

A) The share price of high earnings companies generally held up the best.
B) The share price of high price/earnings companies generally held up the best.
C) The share price of high yielding companies generally held up the best.
D) The share price of high long term investing companies generally held up the best.
E) The share price of high growth companies generally held up the best.

Question 28

What is the interest rate that a plant manager is being charged if she decides to lease the robotic welders with no salvage value at $12,000 per year for ten years, starting with an immediate payment, instead of paying a negotiated cash price for them of $74,593.20?

A) 22%
B) 20%
C) 18%
D) 13%
E) 10%

Question 29

Kiera Jones bought 100 shares of XLNX at $4.00 per share. One year later the share price of XLNX was $10.00 per share. During this period the S&P/TSX went from 8,000 to 12,000, the NASDAQ went from 1,600 to 2,400, the Dow-Jones Industrial average went from 6,000 to 11,000 and the S&P 500 went from 750 to 1,300. Which of the following statements best describes this market action?

A) A weak form of efficiency mispriced XLNX a year ago.
B) A semi-strong form of efficiency mispriced XLNX a year ago.
C) A strong form of efficiency mispriced XLNX a year ago.
D) An inefficient market a year ago had mispriced the stock of XLNX.
E) The market is creating a bubble in the price of XLNX stock.

Question 30

What is the purpose of investment analysts dividing the universe of listed companies into small cap, medium cap and large cap companies?

A) It is required to meet various government regulations.
B) It measures whether certain sectors are outperforming others.
C) It is done in order to calculate the stock market indexes.
D) It determines which companies qualify for the small business deduction.
E) It is used by the TSX to try to get more listings.

Question 31

Pioneer Logging owns a tug boat to manage floating booms of felled trees off the Queen Charlotte Islands. The boat was purchased in February of 2006 for $128,000. If the rate for the asset class is 15%, what is the amount of CCA (capital cost allowance) that the company can claim on their 2008 income tax return?

A) $12,832
B) $13,872
C) $14,076
D) $15,096
E) $16,320

Question 32

The ratio of the amount of shares in publicly traded companies being owned by individuals compared to professionally managed funds has changed in the past fifty years. Which of the following best describes what has been observed in the stock market?

A) Most share ownership is by professionally managed companies and individual traders are always out positioned in the stock market.
B) Most share ownership is by individuals who have more limited access to information than investment professionals so the market cannot be efficient.
C) Most share ownership is by professionally managed funds and there has been a concurrent rise in the activity of shareholders in corporate governance.
D) Most share ownership is by professionally managed funds so individuals no longer impact corporate governance.
E) Most share ownership is by individuals and corporate governance is now fragmented and weak.

Question 33

The share price of Royal Software Inc. bottomed out at $15.00 and over the next two months gradually rose through $16.00 to where it currently stands at $17.50. Which of the following stock patterns is a technical analyst investor following if he buys the stock at $17.50?

A) Channel.
B) Head and shoulders.
C) Line trend.
D) Triangle.
E) Cup with handle.

Question 34

The Islands Tanning Spa acquired its tanning beds from the franchisor for $125,000. The equipment will last for six years. If the CCA is 30% for tanning beds, the company's tax rate is 35% and the company's discount rate is 9%, what is the present value of The Islands tax shield?

A) $7,175
B) $20,500
C) $27,314
D) $29,398
E) $43,750

Question 35

What is the main role of a stock exchange?

A) To act as a primary and secondary capital market for businesses.
B) To act as a primary capital market for businesses.
C) To act as a secondary capital market for businesses.
D) To act as a primary capital market for businesses and government.
E) To act as a secondary capital market for businesses and government.

Question 36

A company has won a four- year contract to produce extraction equipment for the Athabasca Oil Sands project. It is buying $79.5 million worth of machinery for its Lachine, Quebec plant to be able to fulfill the order. The machinery is financed by a four-year loan at 8% per year, with the current portion of the principal and the interest, equaling $24 million, due at the end of each year. Salvage value is expected to be $29.3 million. If the company's tax rate is 32%, the capital cost allowance (CCA) rate is 25% and the discount rate is 8%, what is the net present value of the company's tax shield over the life of the contract?

A) $6.5 million
B) $17.9 million
C) $19.3 million
D) $21.3 million
E) $27.5 million

Question 37

Kawartha Lakes Scenic Tours Inc. has 4 years left on their 20-year lease, at $10,667 per year, for one of their double-decker tour boats. It will return the boat to the leasing company. The fair value of the boat is $285,000 and expected useful life of the boat is 35 years. What is this is an example of?

A) Standard Lease
B) Open Lease
C) Enterprise Lease
D) Capital Lease
E) Operating Lease

Question 38

From which of the following does a venture capital company usually achieve its greatest return?

A) The dividends distributed by the company it has bought into.
B) Capital gains upon the sale of the company it has invested in.
C) Through the acquisition of buy-in capital (MBI).
D) From the spread it achieves by borrowing at a lower interest rate than it lends to the company it has invested in.
E) By hedging its investment risk in the company it has acquired through the use of derivatives.

Question 39

Star Biotech Ltd. has been purchased by a venture capital company, JLM Inc. for $50 million. With JLM's help, Star has been able to negotiate a $30 million loan at 12% per year that immediately improved its liquidity position and allows Star to support the marketing of its innovative product line. Star projects its cash flow before depreciation, interest and taxes in the first two years will be: $5 million and $9.6 million, respectively, and after that will increase each year by 25% over the previous year. JLM Inc. wants to wait until end of the year in which the loan is paid off before selling Star. Ignoring income taxes and assuming all earnings go into paying off the debt, if JLM Inc. expects a 30% return on its capital employed, how much will JLM have to sell Star Biotech Ltd. for?

A) $121.8 million
B) $142.8 million
C) $108.3 million
D) $185.6 million
E) $241.3 million

Question 40

The response that Fandango Co. Ltd. received to its tender offer was the following: 95,000 shares would be purchased at $35.00; 90,000 shares at $45.50; 80,000 at $50.50; 70,000 at $55.00; and 60,000 at $60.50. If Fandango would like to maximize the amount raised from the share issue, what should the the striking price be?

A) $35.00
B) $45.50
C) $50.50
D) $55.00
E) $60.50

Question 41

Labrador Gold Inc. (LG) made a tender offer of shares to the investing public and found the following information. At $1.00 per share, LG could sell 1 million shares. At $2.00, LG could sell eight hundred thousand shares. At $3.00, LG could sell half a million shares. At $4.00, LG could sell four hundred thousand shares. At $5.00, LG could sell three hundred thousand shares. What striking price should LG set?

A) $1.00 or $2.00.
B) $2.00 or $3.00.
C) $3.00 or $4.00.
D) $4.00 or $5.00.
E) $2.00 or $4.00.

Question 42

Assuming the share price did not change much, when would an investor be worse off?

A) An investor buys the rights shares.
B) An investor ignores the rights shares.
C) An investor sells the rights shares.
D) An investor receives a stock dividend.
E) An investor's stock has a stock split.