Question 1

If a company has a share capital of $150,000, revenue reserves of $25,000 and retained profits of $50,000, what is the maximum amount it can legally distribute as cash dividends?

Accepted Answer

The maximum amount a company can legally distribute as cash dividends is the amount available from their profits, which would be the sum of revenue reserves and retained profits. Therefore, the maximum amount the company can distribute as cash dividend is $75,000 ($25,000 revenue reserves + $50,000 retained profits).

Question 2

What are bonus shares?

Accepted Answer

Bonus shares are additional shares issued to existing shareholders at no cost, in proportion to their current shareholding. They are also known as "scrip dividends" or "capitalization issues". Bonus shares are issued instead of cash dividends as a way to reward shareholders and conserve cash for the company.

Question 3

A share issue where the company gives existing shareholders the first right of refusal of the issue is:

Accepted Answer

A rights issue is when a company gives existing shareholders the first right of refusal of new shares being issued. This means that shareholders can choose to purchase more shares in the company at a set price before the shares are made available to the public.

Question 4

The largest source of new finance for Australian companies is:

Accepted Answer

Retained profits are the profits that a company retains after paying dividends to its shareholders. These profits can be reinvested in the company and used as a source of new finance for future expansion or investment opportunities. Retained profits are the largest source of new finance for Australian companies as they do not have to rely on external sources of funding such as share issues, bank loans or revaluations. This allows companies to maintain control over their operations and avoid the costs and risks associated with raising capital from external sources.

Question 5

The offer of new shares to existing shareholders at no cost, in proportion to the amount of their current holding, is known as:

Accepted Answer

A bonus issue, also known as a scrip issue or capitalization issue, is when a company offers new shares to its existing shareholders without them having to pay anything for them. These new shares are issued in proportion to the amount of shares already held by the shareholder. This is a way for the company to reward its shareholders, increase liquidity in the market, and dilute the value of the shares without affecting the interests of existing shareholders.

Question 6

In a company statement of financial position, the balance of retained profit at the end of the period is equal to:

Accepted Answer

The balance of retained profit at the end of the period is the sum of retained profit at the beginning of the period plus profit earned during the period minus dividends declared during the period. Therefore, choice B is the correct answer.

Question 7

A public issue of shares where the investor must state in advance the amount they are willing to pay for the shares is called a:

Accepted Answer

A tender issue is a way of issuing shares to the public where investors state in advance the amount they are willing to pay for the shares. The company then sets the price according to the bids received and issues the shares at the determined price. Therefore, option A is the correct answer. Private issue refers to the sale of securities to a limited number of investors, share purchase plan is a way of offering shares to existing shareholders, and venture share issue refers to the issuance of shares by a start-up or a high-risk company to raise capital.

Question 8

A company needs $3,000,000 for expansion. They decide to raise the capital by issuing new shares. How many shares does the company need to sell to raise the amount, if the last share issue was at a price of $1 each and the current market price for the company's shares is $1.50 per share?

Accepted Answer

To raise $3,000,000 at a share price of $1.50, the company needs to sell $3,000,000 / $1.50 = 2,000,000 shares.

Question 9

A bonus issue of shares by a company will:

Accepted Answer

A bonus issue of shares involves converting the company's retained earnings into share capital. It does not involve any cash flow or change in the overall value of the company; it merely reallocates parts of shareholders' equity from retained earnings to share capital, leaving the total shareholders' equity unchanged.

Question 10

An investor invests in Canta Ltd by purchasing 2,000 shares for $2.50 each. In the following year, the company distributes a 1 for 1 share dividend (bonus issue). After the issue, the number of shares held by the investor:

Accepted Answer

A 1 for 1 share dividend means the investor receives an additional share for each share they own, doubling their shares from 2,000 to 4,000. Typically, the market price adjusts downward to reflect the increased share count, maintaining the company's overall market value.

Question 11

If the retained profit figure in a company statement of financial position increases from the beginning of the year to the end of the year, it is most probable that:

Accepted Answer

If retained profit increases from the beginning of the year to the end of the year, it means that the company has made a profit that exceeds the dividends declared during that period. Therefore, option D is the correct answer.

Question 12

Which statement relating to preference shares is not correct?

Accepted Answer

Preference shares are generally less risky for shareholders to own than ordinary shares as they have a fixed rate of dividend and are entitled to receive a dividend before ordinary shareholders. Therefore, statement B is incorrect.

Question 13

Which is the main government regulator of companies in Australia?

Accepted Answer

The main government regulator of companies in Australia is the Australian Securities and Investments Commission (ASIC). The Auditors Board is responsible for regulating auditors in Australia, the Australian Securities Exchange ensures that companies listed on its exchange comply with its listing rules, and the Australian Accounting Standards Board sets accounting standards for companies in Australia. However, none of these organizations have the same regulatory oversight as ASIC.

Question 14

A bonus issue of shares will result in:

Accepted Answer

A bonus issue of shares results in an increase in the number of issued shares without changing the shareholders' equity or the company's cash position. It's essentially a reclassification of reserves into issued share capital.

Question 15

Which of the following is not a reason for a company making a bonus issue of shares?

Accepted Answer

Bonus issues are made by utilizing a company's reserves, not by using cash. They are a way to reward shareholders without distributing cash, by converting reserves into issued share capital.

Question 16

Which item(s)can be a component of shareholders' equity?

Accepted Answer

All of the given items, retained profits, share capital, and reserves, can be components of shareholders' equity. Retained profits represent the accumulated earnings of the company that have not been distributed as dividends, share capital represents the capital invested by shareholders in exchange for ownership of the company's shares, and reserves represent the accumulated profits earned by the company that have been set aside for specific purposes, such as contingencies or future investments.

Question 17

A shareholder in Company C owns 2,000 shares bought for $1 each. The company decides to make a bonus issue of one new share for every two existing shares held. How many shares does the shareholder now have in Company C?

Accepted Answer

For every two existing shares held, the company is issuing one new share as a bonus. The shareholder initially owned 2,000 shares, so for every two shares, one new share is received. Therefore, the shareholder will receive 1,000 new shares, bringing the total number of shares owned to 3,000.

Question 18

Which statement concerning a rights issue is true?

Accepted Answer

Rights issues are typically offered to existing shareholders at a discount to the current market price, not above it, and are aimed at raising capital more efficiently and at a lower cost than public offerings. This is because rights issues bypass many of the fees and expenses associated with public offerings.

Question 19

Shareholders who exercise their entitlement to a bonus issue of shares, in theory, will:

Accepted Answer

Bonus issues of shares distribute additional shares to shareholders without any extra cost, maintaining their proportional ownership and not directly affecting their wealth, as the share price adjusts to reflect the increased share count.

Question 20

If a company issues 25,000 ordinary shares which are sold at $4 per share, the effect on the accounting equation is:

Accepted Answer

When a company issues 25,000 ordinary shares at $4 per share, the total amount received will be $100,000. This increases the cash balance by $100,000. Since these are ordinary shares, they represent equity and their issuance leads to an increase in shareholders' equity by the same amount, i.e. $100,000. Therefore, the effect on the accounting equation is an increase in both assets (cash) and equity (shareholders' equity), with no impact on liabilities. Option A and B are not correct because the issuance of shares does not impact liabilities, and Option D is not correct because it does have an impact on the accounting equation.

Quiz 4: Introduction to Limited Companies