Question 1

There is ________ change in the capital structure of a company after a share split.

Accepted Answer

A share split is a process that does not change the overall capital structure of a company. It merely divides the existing shares into multiple smaller shares. Therefore, there is no measurable or adverse change in the capital structure of the company after a share split.

Question 2

Efficient price discovery means that share information is disclosed at the lowest possible transactions cost.

Accepted Answer

Efficiency here means how quickly the relevant information is incorporated into the share price.

Question 3

When a share price of a company has increased hugely compared to the prices of most other shares on the exchange and its liquidity has decreased,the directors may decide to:

Accepted Answer

When a share price has increased significantly, but the liquidity has decreased, it may become difficult for the company to find buyers for its shares. By splitting the number of shares on issue, the company can lower the share price and make it more affordable for investors, which can increase liquidity and attract more buyers. A bonus issue, declaring increased dividend or lowering the dividend may not directly address the issue of share price and liquidity.

Question 4

If two assets are negatively correlated this means their prices move in opposite directions.

Accepted Answer

Positive correlation means the two prices move together in the same direction.

Question 5

Share market participants can regard a bonus issue favourably because:

Accepted Answer

A bonus issue is often seen as a positive signal by the company indicating confidence in future profitability, as it distributes additional shares to existing shareholders without changing the total value of their holdings.

Question 6

Passive investment involves building an investment portfolio based on shares that are less risky than the overall share market.

Accepted Answer

Passive investment means a portfolio formed by replicating a specific share-market index.

Question 7

An investor holds 100 shares of a company that is about to make a bonus issue of five shares for every two held.If the shares are currently trading for $2.50,what will be the value of the holding after the bonus issue?

Accepted Answer

The investor initially holds 100 shares. With a bonus issue of five shares for every two held, the investor will receive an additional $ \frac{5}{2} \times 100 = 250 $ shares, making a total of 350 shares. Since the value per share doesn't change with a bonus issue, the total value of the holding after the bonus issue is $ 350 \times $2.50 = $875 $. However, none of the provided options match this calculation, suggesting there might have been a misunderstanding in the question or options provided. Based on the options given, none directly correspond to the correct calculation, indicating a possible error in the question setup or my interpretation.

Question 8

A company's ability to meet short-term financial obligations is an important financial performance indicator for an investor.

Accepted Answer

A company will have a mixture of debt and equity and the company must have enough funds on hand to meet its debt payments and other commitments.

Question 9

A share that has a beta of 0.5 is half as risky as the average share listed on the share market.

Accepted Answer

The beta for the overall share market is 1.0.

Question 10

Continuous disclosure rules of a stock exchange mean that listed companies must disclose any material information continuously every hour.

Accepted Answer

Material information must be disclosed to the stock exchange immediately.

Question 11

Consider the following five statements:
i.The expected return of a portfolio of shares is the weighted average of the expected returns for each share.
ii.All other things being equal,a cum-dividend share price should fall be the amount of a dividend that is paid.
iii.One of the effects of dividend imputation is the removal of 'double taxation' of company profits that are distributed as dividends.
iv.For a shareholder with a marginal tax rate that is lower than the company tax rate,no tax will be payable on the fully franked dividend received,and the excess credit can be applied against other assessable income.
v.In a one-for-nine bonus issue,if the cum-bonus price was $10,then the theoretical ex-bonus price would be $9.
Which of the following is correct?

Accepted Answer

i. This statement is true. The expected return of a portfolio of shares is the weighted average of the expected returns for each share.
ii. This statement is true. All other things being equal, a cum-dividend share price should fall be the amount of a dividend that is paid.
iii. This statement is true. One of the effects of dividend imputation is the removal of 'double taxation' of company profits that are distributed as dividends.
iv. This statement is true. For a shareholder with a marginal tax rate that is lower than the company tax rate, no tax will be payable on the fully franked dividend received, and the excess credit can be applied against other assessable income.
v. This statement is false. In a one-for-nine bonus issue, if the cum-bonus price was $10, then the theoretical ex-bonus price would be $9.09, not $9. Therefore, option C is the correct answer.

Question 12

Consider the following five statements:
i.The expected return of a portfolio of shares is the weighted average of the expected returns for each share.
ii.All other things being equal,a cum-dividend share price should fall by the amount of a dividend that is paid.
iii.One of the effects of dividend imputation is the removal of 'double taxation' of company profits that are distributed as dividends.
iv.For a shareholder with a marginal tax rate that is lower than the company tax rate,no tax will be payable on the fully franked dividend received,and the excess credit can be applied against other assessable income.
v.In a one-for-nine bonus issue,if the cum-bonus price was $10,then the theoretical ex-bonus price would be $9.
How many of the above statements are true and how many are false?

Accepted Answer

i. True - The expected return of portfolio is the weighted average of returns of individual stocks.
ii. True - All other things being equal, the price should fall by the amount of the dividend that is paid.
iii. True - One of the effects of dividend imputation is the removal of double taxation of company profits that are distributed as dividends.
iv. True - A shareholder with a lower marginal tax rate than the company tax rate, can apply the excess credit against other income while paying no tax in fully franked dividend income.
v. False - The theoretical ex-bonus price would be $9.09 (not $9) in a one-for-nine bonus issue.

Question 13

The S&P/ASX All Ordinaries share price index represents:

Accepted Answer

The S&P/ASX All Ordinaries share price index represents changes in aggregate share market values of the largest 500 companies in the Australian Stock Exchange. It is a capitalization-weighted index, which means that larger companies have a greater influence on the index's performance.

Choice B is incorrect because the index only represents movements in the Australian share market and not how it performs relative to international markets.

Choice C is incorrect because the index does not represent the historical capitalisation of the 100 largest corporations but rather the largest 500 companies.

Choice D is partially correct in that the index represents changes in share market value, but it does not include dividend reinvestment as it only considers share prices.

Question 14

A change in foreign exchange rates is a systematic risk that affects the bulk of shares listed on a stock exchange.

Accepted Answer

Systematic risk involves exposures that affect the majority of shares listed on a stock exchange.

Question 15

A company whose shares are currently trading at $3.60 proposes to have a 25% split; that is,four new shares for one existing share.At the commencement of the next business day,a dividend of 25 cents is paid on existing shares,followed immediately by the share split.What is the theoretical price of the new shares?

Accepted Answer

The answer of A company whose shares are currently trading...

Question 16

According to the text,a tradable benchmark:

Accepted Answer

The text states that a tradable benchmark may be a performance benchmark index but with a narrower focus upon which some derivative contracts are priced. This aligns with choice B. Choice A and C mention specific percentages of market capitalization which are not mentioned in the text. Choice D refers to a different type of index that includes reinvestment of dividends, which is not necessarily relevant to the definition of a tradable benchmark.

Question 17

If investors alter the mix of shares in their portfolios as the share market suddenly falls they are using a strategic asset allocation approach to investing.

Accepted Answer

Strategic asset allocation means a distribution of assets based on an investor's preference for physical and financial assets.

Question 18

The current market price of a stock is $3.00.The rights issue is one-for-ten,priced at $2.80.Calculate the theoretical ex-rights price.

Accepted Answer

When a rights issue is priced at $2.80 for each new share, it means that existing shareholders can purchase one new share for every ten shares they already own at a price of $2.80 per share. To calculate the theoretical ex-rights price, we use the formula:

[(Number of existing shares x current market price) + (Number of new shares x rights issue price)] / (Number of existing shares + Number of new shares)

[(10 x $3.00) + (1 x $2.80)] / (10 + 1) = $2.98

Therefore, the theoretical ex-rights price is $2.98, which is closest to choice C.

Question 19

Which of the following is an aim of a stock split?

Accepted Answer

A stock split aims to improve the liquidity of shares by increasing the number of shares available, making them more affordable and accessible to a broader range of investors.

Question 20

Share market participants can regard a rights issue favourably because:

Accepted Answer

A rights issue increases the number of shares outstanding, which increases the equity portion of the company's capital structure and reduces financial risk for the company. However, it does not necessarily affect the capital structure for shareholders. Therefore, choice A is incorrect. While shareholders can participate in the rights issue without having to pay the subscription price, this does not necessarily mean it is a favourable aspect for them. Therefore, choice C is incorrect. Rights issues can lead to dilution of existing shares, so it may not necessarily lead to an increase in the value of shares in an investor's portfolio. Therefore, choice D is incorrect.

Quiz 6: Investors in the Share Market