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Chapter 06 - Test Bank

Multiple Choice Questions

1. Passive investment means building a portfolio of shares based on the strategy of:

A. buy and hold.


B. replicating a market index.
C. following solely the advice of share brokers.
D. investing in low-risk shares.

2. Investors buy listed shares:

A. to obtain fixed dividend payments.


B. to obtain fixed capital growth.
C. for the chance of capital growth only.
D. for the chance of dividend payments and capital growth.

3. Typically, a large stock exchange has ________ listed on it.

A. preference shares
B. shares
C. exchange-traded funds
D. all of the given choices

4. Compared with fixed interest securities, shares offer:

A. capital gain for lower risk.


B. capital gain for higher risk.
C. fixed dividends and capital gains for lower risk.
D. periodic dividends and capital gains at higher risk.

5. A diversified portfolio generally includes:

A. 0-5 stocks.
B. 5-10 stocks.
C. 10-15 stocks.
D. 10-25 stocks.
6. According to the text, an investment portfolio that is well-diversified contains:

A. a large range of term deposits.


B. a large number of properties.
C. a large number of future contracts.
D. a large range of shares, fixed-interest securities and properties.

7. Systematic risk means:

A. risks that have an impact on all technology shares.


B. risks that have an impact on all energy shares.
C. risks that have an impact on all financial shares.
D. risks that have an impact on the majority of shares in the market.

8. The risk that impacts specifically on the share price of a particular company is called:

A. economic risk.
B. business risk.
C. systematic risk.
D. unsystematic risk.

9. Which of the following is an example of systematic risk exposures for a company?

A. Resignation of chief executive


B. Change in future performance forecasts
C. Rumour of financial difficulty in the company
D. Introduction of new company legislation

10. Which of the following is an example of an unsystematic risk exposure for a company?

A. A change in interest rates


B. A change in foreign exchange rates
C. Political instability in a country
D. Change in future performance forecast for a
company

11. When investors buy and sell shares based on receiving new information on shares and markets, this is
known as:

A. active investment.
B. a diversified strategy.
C. a market replication strategy.
D. passive investment.
12. To track the S&P500, a fund manager can buy:

A. all the stocks in the S&P500.


B. an S&P500 index fund.
C. a percentage of stocks that essentially tracks the index.
D. all of the given answers.

13. Which of the following about share market indices is NOT correct?

A. The FTSE 100 index tracks 100 shares in the UK.


B. The Nikkei 225 index tracks 225 shares in Japan.
C. The Hang Seng index tracks shares in Hong Kong.
D. The Dow Jones tracks 50 shares in the USA.

14. The correlation of pairs of securities within a portfolio is called:

A. co-association.
B. correspondence.
C. covariance.
D. variance.

15. The correlation between two shares:

A. can take on positive values.


B. can take on negative values.
C. is related to the covariance of a share.
D. includes all of the given answers.

16. For a portfolio of stocks, portfolio risk is heavily based on:

A. a simple average of the variance of the stocks in the portfolio.


B. a weighted average of the variance of the stocks in the portfolio.
C. a weighted average of the covariance of the stocks in the portfolio.
D. the standard deviation of the stocks.

17. When an investor alters the mix of their portfolio to reflect market changes or their circumstances, this is
called _____ asset allocation.

A. market timing
B. passive
C. non-fixed
D. tactical
18. For an investor, the mix of shares that satisfies their known cash-flow requirements, risk tolerance and
future life cycle positions is called:

A. tactical asset allocation.


B. strategic asset allocation.
C. systematic asset allocation.
D. diversified asset allocation.

19. Stockbrokers act as _____ for an exchange.

A. agents
B. dealers
C. negotiators
D. intermediaries

20. Major differences between a discount stockbroker and a full-advisory stockbroker lie in:

A. the level of fees.


B. the amount of advice given.
C. the quantity of share recommendations.
D. all of the given answers.

21. Which of the following does NOT apply to full-advisory stockbrokers?

A. Full-advisory stockbrokers provide investment advice on listed securities.


B. Full-advisory stockbrokers monitor investors' financial plans.
C. Full-advisory stockbrokers accept buy and sell orders from clients.
D. Full-advisory stockbrokers' fees are competitive with discount brokers.

22. When an investor purchases units in a unit trust, this is known as ________ investing.

A. absolute
B. direct
C. indirect
D. value

23. When a share investor puts an order to buy shares through their stock broker via their internet share
account, this is called:

A. indirect investment.
B. direct investment.
C. index investment.
D. passive investment.
24. Which of the following statements regarding dividends is incorrect?

A. Dividends are usually received twice yearly from a company.


B. The payments of dividends are at the company board of directors' discretion.
C. An investor is generally required to pay taxation on the final dividend payment.
D. The taxation of dividends varies from country to country.

25. Which of the following statements is NOT correct?

A. In Australia taxation of individuals is based on a progressive tax system.


B. The dividend imputation system effectively removes the double taxation of dividends in Australia.
C. In relation to dividend imputation, a shareholder whose marginal tax is lower than the company tax rate
will pay their marginal tax on the dividend received.
D. In Australia dividends on which the company has already paid company tax are called franked
dividends.

26. The capital structure of a company is one of the important indicators of performance. Which of the
following statements regarding capital structure is incorrect?

A. Debt to equity or shareholders' interest ratios are both measures of capital structure.
B. Capital structure ratios are an indicator of longer term viability and stability.
C. A company with a higher equity ratio is less dependent on external funding.
D. The capital ratios of companies, and industry groupings, are generally similar.

27. When using indicators for a company's performance:

A. ratios for a company should be compared with others in the same industry.
B. a single ratio should not be used to judge the company's overall performance.
C. the dates of the financial statements being compared should be the same.
D. all of the given answers are correct.

28. Compared with a company's current ratio, the shareholders' interest ratio gives information about a
company's:

A. interest expense.
B. level of liquidity.
C. long-term viability.
D. future earnings.

29. Which of the following are current assets?

A. Accounts payable
B. Bank overdraft facility
C. Commercial paper
D. Inventories
30. Which of the following are current liabilities of a company?

A. Accounts receivable
B. Inventories
C. Bank overdraft facility
D. Cash

31. The greater the proportion of debt financing compared with equity financing for a company the:

A. lower the future earnings prospects for the company.


B. greater the ability of the company to meet its interest payments.
C. greater the degree of financial risk for the company.
D. lower the expected earnings per share.

32. A company with a _____ ratio of equity to debt is _________ dependent on external financing.

A. lower; less
B. lower; not
C. higher; less
D. higher; more

33. The _______ ratio measures the proportion of total assets provided by the company's owners.

A. shareholders' interest
B. total asset turnover
C. equity turnover
D. debt

34. The indicator ratio that should be used to assess a company's ability to meet its short-term obligations is
its:

A. liquidity.
B. debt.
C. profitability.
D. capital structure.

35. Which ratio is a measure of liquidity that excludes inventories?

A. Current
B. Liquid
C. Debt to gross cash flow
D. Interest cover
36. An example of a liquidity ratio for a company is:

A. a fixed asset turnover.


B. current ratio.
C. earnings per share.
D. share price to net tangible assets.

37. A company has a higher current ratio than the industry average. This implies that the company:

A. has a higher P/E than other companies in the industry.


B. is more likely to avoid insolvency in the short term than other companies in the industry.
C. may be more profitable than other companies in the industry.
D. operates with a much lower level of inventory than others in the industry.

38. If a company has a current ratio of 2, which of the following measures will increase the current ratio?

A. Buying more inventory on short-term credit


B. Buying more inventory with cash
C. A customer paying an overdue account
D. Paying off a short-term bank advance with long-term debt

39. If a company has a current ratio of 0.9, in order to improve its current ratio it might:

A. increase its current assets by decreasing its inventory.


B. use more long-term debt to decrease current liabilities.
C. decrease its large amounts of accounts receivable.
D. decrease its large amount of accounts to pay to increase its current liabilities.

40. If a company has a liquid ratio of 0.9, in order to improve its liquid ratio it might:

A. increase its current assets by increasing its inventory.


B. use more short-term debt to decrease current liabilities.
C. increase its large amounts of accounts receivable to improve its cash position.
D. increase its large amount of accounts to pay to decrease its current liabilities.

41. The ________ ratio is an indicator of the longer term viability and stability of a company.

A. shareholders' interest
B. P/E
C. EBIT/total funds
D. liquidity
42. For a company, a rule of thumb for the interest cover financial ratio is in the range:

A. 0 to 1.
B. 1 to 2.
C. 2 to 3.
D. 3 to 4.

43. Which financial ratio provides information essential for assessing the long-run operation of the company?

A. Debt
B. Liquidity
C. Profitability
D. Share price

44. The financial ratio that indicates the number of years required for a company to repay its total debt is:

A. debt to equity.
B. debt to depreciation.
C. debt to gross cash flow.
D. debt to net cash flow.

45. The financial ratio that measures operating profit after tax to shareholders funds is:

A. EBIT to long-term funds.


B. Return on equity.
C. EBIT to total funds.
D. interest cover.

46. Compared with a company's interest cover ratio, earnings before interest and tax measures its:

A. amount of earnings for dividend payments.


B. expected earnings.
C. profitability.
D. return on equity.

47. Which of the following groups of financial ratios provide information on the short-run operation of the
company?

A. Capital structure and debt servicing


B. Capital structure and profitability
C. Debt servicing and profitability
D. Liquidity and profitability
48. Which financial ratio links long-term funds provided by the company's owners and those of the creditors?

A. Debt
B. Debt to equity
C. Times interest cover
D. Earnings to price

49. Which financial ratio is used to measure a company's ability to meet its short-term financing?

A. Debt
B. Liquidity
C. Capital structure
D. Profitability

50. Which financial ratio measures a company's ability to service its interest commitments?

A. Debt
B. Equity to debt
C. Profitability
D. Interest cover

51. The higher the value of the _______ ratio, the better able the firm is to meet its short-term financial
obligations.

A. debt to equity
B. liquidity
C. earnings per share
D. EBIT to long-term funds

52. The _______ is an indicator of investors' evaluation of a company's future earnings potential.

A. debt to equity ratio


B. price/earnings ratio
C. interest cover ratio
D. return on shareholders' funds
53. The following is a simplified financial position statement for a company:

Assets $ Liabilities $
Cash 250 000 Accounts payable 1 480 000
Trading securities 350 000 Accrued expenses payable 420 000
Accounts receivable 1 360 000 Taxes payable 140 000
Inventory 2 470 000 Long-term debt 3 850 000
Property 3 350 000 Shareholders' funds 2 340 000
Equipment 450 000

Calculate the liquidity ratio.

A. 0.85
B. 0.96
C. 1.51
D. 1.32

54. Which of the following statements regarding the debt servicing capacity of a company is incorrect?

A. The debt to gross cash flow ratio is an indicator of debt servicing capacity.
B. The debt to gross cash flow ratio indicates years required for cash flows to repay total debt.
C. The interest cover ratio is an indicator of a company's capacity to service debt.
D. The lower the interest cover ratio, the greater the company's ability to cover interest commitments.

55. If a share currently sells for $20 and has annual earnings per share of 8.0, the price/earnings ratio is:

A. 0.4
B. 2.5
C. 4.0
D. 160

56. The _______ ratio is an indicator of the share market's evaluation of a company.

A. debt/equity
B. price/earnings
C. debt to gross cash flow
D. shareholders' interest

57. Systematic risk is also referred to as:

A. economic risk.
B. diversifiable risk.
C. market risk.
D. financial risk.
58. The risk that affects the whole market is called:

A. total risk.
B. systematic risk.
C. diversifiable risk.
D. financial risk.

59. In modern portfolio theory, investment risk is divided into two components: systematic risk and
unsystematic risk. Which of the following risks is an example of systematic risk?

A. Increase in the corporate tax rate


B. Productivity and cost of labour
C. The effectiveness of the management of the company
D. Gearing and the impact of interest rate changes

60. Increased competition, increased costs of labour, lawsuits, and unfavourable exchange rates are all
examples of:

A. diversifiable risk.
B. systematic risk.
C. total risk.
D. economic risk.

61. Which of the following is NOT an example of unsystematic risk for a company?

A. The company announces a merger with a competitor.


B. The chief financial officer resigns.
C. The company loses competitiveness relative to other companies.
D. Changes occur in the level of company tax rates.

62. Estimating systematic risk involves comparing the price history of a particular share relative to movements
on_____ stock listed on an exchange.

A. an average
B. the median weighted
C. the most volatile
D. the least volatile

63. The higher the beta of a share the:

A. greater the systematic risk.


B. lower the systematic risk.
C. lower the expected return.
D. less responsive it is to changing share market movements.
64. In modern portfolio theory, an investor should not be concerned with unsystematic risk when calculating
expected rates of return because:

A. there is no way to measure unsystematic risk.


B. unsystematic risks are assumed to be removed by diversification.
C. unsystematic risks are generally insignificant.
D. beta includes a portion to compensate for unsystematic risk.

65. Which of the following about beta coefficient is incorrect?

A. A stock of beta 1.25 indicates the share price will perform 25% better than the overall market when
prices are rising.
B. A stock of beta 1.25 indicates the share price will perform 25% worse than the overall market when
prices are falling.
C. A stock with a beta of 1.25 will move more than a stock with a beta of 1.25.
D. A stock with a beta of 0.50 will rise at only half the rate at which the overall market index will rise.

66. What should be the price of a share that constantly pays $2.50 annually in dividends, if the growth rate is
zero and the required rate of return is 8% per annum?

A. $22.86
B. $28.00
C. $31.25
D. $33.75

67. What should be the price of a share if it paid $1.75 in dividends in the last financial year, its dividend
growth rate is 4%, and the required rate of return is 11%?

A. $25.00
B. $26.00
C. $30.28
D. $43.75

68. The majority of companies pay dividends twice a year to their:

A. bond holders.
B. secured bond holders.
C. shareholders.
D. board of directors.
69. When a share goes ex-rights, assuming everything else remains the same, its price should:

A. increase, as the company no longer has the right to make the shareholder convert.
B. decrease, as the shareholder is losing an option.
C. remain the same, as the market knows about it in advance.
D. increase, as a successful rights issue will raise a large amount of cash.

70. After a company has made an announcement about a forthcoming dividend, then at a specified date when
the share begins to trade ex-dividend:

A. the buyer of the share will now receive the due dividend.
B. the share price will adjust upwards by the amount of the forthcoming dividend.
C. the seller of the share will receive the next dividend payment.
D. the ex-dividend share price will be unaffected by the forthcoming dividend.

71. When a share is trading for a period with a cash dividend entitlement, then the share is said to trade:

A. bonus dividend.
B. pro dividend.
C. cum-dividend.
D. ex-dividend.

72. If a dividend is declared on 1 November, has a cum-dividend date of 19 November and a record date of 26
November, which of the following shareholders will NOT receive the dividend?

A. A buyer of the share on 31 October


B. A buyer of the share on 11 November
C. A buyer of the share on 26 November
D. A buyer of the share on 29 November

73. On the day that a share goes ex-dividend, the price should theoretically:

A. increase by the extent of the dividend.


B. decrease by the extent of the dividend.
C. decrease by a small fraction of the dividend.
D. remain constant.

74. The decision to pay cash dividends to shareholders is made by the:

A. company management.
B. shareholders at the annual meeting.
C. board of directors.
D. bond holders.
75. A company declares a dividend of 35 cents per share, which was payable on 14 September. Immediately
prior to the declaration of the dividend, the share price was $4.79. At the close of trading on the stock
exchange on 13 September, the share price was $5.44. What is the theoretical ex-dividend price of the
share?

A. $4.44
B. $4.79
C. $5.09
D. $5.79

76. A rights issue differs from a bonus issue of shares in that:

A. after a bonus issue there is a greater number of shares in existence, unlike rights.
B. shares that are cum-bonus are renounceable.
C. the purpose of a bonus issue for a company is not to raise more funding.
D. only listed companies have rights issues.

77. Which of the following statement about bonus shares is NOT correct?

A. Bonus shares are generally issued at no cost to the shareholders.


B. If a company offers a 1 for 4 bonus issue this means for every 1 share a shareholder owns they get four
extra shares.
C. When shares go ex-bonus there should be a downward adjustment in the share price.
D. If a company declares a bonus share issue this can be viewed by the market as a positive signal about the
company's future profitability.

78. When shares are purchased cum-rights it means the purchaser of the share:

A. cannot usually sell the right separately.


B. may take part in the rights offer.
C. cannot take part in the rights offer.
D. can take up the offer of the right without having to pay extra for the subscription price.

79. If a company offers a one-for-five bonus issue and the current share price cum-bonus is $7.50, the
theoretical value of each share ex-bonus is:

A. $7.50
B. $6.25
C. $6.00
D. $5.00
80. A company whose share is selling for $24 announces a stock split of four-for-three. Which of the following
statements is correct?

A. There will be four times as many shares on issue and they will sell for $96.
B. There will be three times as many shares on issue, and they will sell for $8.
C. There will be one-third more shares on issue and they will sell for $18.
D. There will be three-quarters more shares on issue and they will sell for $32.

81. 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?

A. $0.72
B. $0.90
C. $2.70
D. $3.35

82. Share market participants can regard a bonus issue favourably because:

A. bonus issues represent a change in the total assets of a company.


B. bonus issues increase the equity/debt ratio of a company, and so reduce financial risk.
C. they take it as a signal from the company of increased future profitability.
D. bonus issues increase the number of shares in an investor's portfolio and hence their total value.

83. 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?

A. $200
B. $250
C. $400
D. $500

84. 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.

A. $1.96
B. $2.85
C. $2.98
D. $3.05
85. Which of the following is an aim of a stock split?

A. To increase the number of shares on issue and so affect the capital structure
B. To reduce the dividend payments
C. To increase the share price
D. To try to improve the liquidity of shares

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

A. a measurable
B. a small
C. no
D. an adverse

87. Share market participants can regard a rights issue favourably because:

A. a rights issue does not affect the capital structure of a company.


B. a rights issue increases the equity/debt ratio, and so reduces financial risk.
C. they can participate in the rights issue without having to pay the subscription price.
D. rights issues increase the value of shares in an investor's portfolio.

88. 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:

A. split the number of shares on issue.


B. have a bonus issue.
C. declare an increased dividend.
D. lower the dividend.

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

A. changes in aggregate share market values of the largest 500 companies.


B. movements in the Australian share market relative to international markets.
C. the historical capitalisation of the 100 largest corporations.
D. changes in share market value, including dividend reinvestment.

90. According to the text, a tradable benchmark:

A. is a broad market index that represents 90% of the share market capitalisation.
B. may be a performance benchmark index but with a narrower focus upon which some derivative contracts
are priced.
C. is a broad market index that represents 99% of the share market capitalisation.
D. is an index that measures changes in share prices plus reinvestment of dividends.
91. 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?

A. 3 statements are true and 2 are false


B. 2 statements are true and 3 are false
C. 4 statements are true and 1 is false
D. 1 statement is true and 4 are false

92. 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?

A. i, ii, iii are true and iv and v are false


B. i, and iii are true and ii, iv and v are false
C. i, ii, iii and iv are true and v is false
D. i and ii are true and iii, iv and v are false

True / False Questions

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

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

True False

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

True False

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

True False

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

True False

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

True False

99. 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.

True False

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

True False

101.Historically, Australian banks have had low EPS ratios compared with the retail sector because of the
amount of lending they do.

True False

102.When a share is trading cum-dividend, this means the seller of the share will receive the dividend payment.

True False

Short Answer Questions


103.What are some factors that influence investors to buy listed rather than unlisted shares?

104.Explain the concept of a diversified portfolio.

105.Explain how an index fund might benefit an investor.

106.Define and explain what a share split involves.


107.What is a stock-market index? Discuss three main types.
Chapter 06 - Test Bank Key

Multiple Choice Questions

1. Passive investment means building a portfolio of shares based on the strategy of:

A. buy and hold.


B. replicating a market index.
C. following solely the advice of share brokers.
D. investing in low-risk shares.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

2. Investors buy listed shares:

A. to obtain fixed dividend payments.


B. to obtain fixed capital growth.
C. for the chance of capital growth only.
D. for the chance of dividend payments and capital growth.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: Introduction

3. Typically, a large stock exchange has ________ listed on it.

A. preference shares
B. shares
C. exchange-traded funds
D. all of the given choices
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment
4. Compared with fixed interest securities, shares offer:

A. capital gain for lower risk.


B. capital gain for higher risk.
C. fixed dividends and capital gains for lower risk.
D. periodic dividends and capital gains at higher risk.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

5. A diversified portfolio generally includes:

A. 0-5 stocks.
B. 5-10 stocks.
C. 10-15 stocks.
D. 10-25 stocks.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

6. According to the text, an investment portfolio that is well-diversified contains:

A. a large range of term deposits.


B. a large number of properties.
C. a large number of future contracts.
D. a large range of shares, fixed-interest securities and properties.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

7. Systematic risk means:

A. risks that have an impact on all technology shares.


B. risks that have an impact on all energy shares.
C. risks that have an impact on all financial shares.
D. risks that have an impact on the majority of shares in the market.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment
8. The risk that impacts specifically on the share price of a particular company is called:

A. economic risk.
B. business risk.
C. systematic risk.
D. unsystematic risk.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

9. Which of the following is an example of systematic risk exposures for a company?

A. Resignation of chief executive


B. Change in future performance forecasts
C. Rumour of financial difficulty in the company
D. Introduction of new company legislation
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

10. Which of the following is an example of an unsystematic risk exposure for a company?

A. A change in interest rates


B. A change in foreign exchange rates
C. Political instability in a country
D. Change in future performance forecast for a company
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

11. When investors buy and sell shares based on receiving new information on shares and markets, this is
known as:

A. active investment.
B. a diversified strategy.
C. a market replication strategy.
D. passive investment.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment
12. To track the S&P500, a fund manager can buy:

A. all the stocks in the S&P500.


B. an S&P500 index fund.
C. a percentage of stocks that essentially tracks the index.
D. all of the given answers.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

13. Which of the following about share market indices is NOT correct?

A. The FTSE 100 index tracks 100 shares in the UK.


B. The Nikkei 225 index tracks 225 shares in Japan.
C. The Hang Seng index tracks shares in Hong Kong.
D. The Dow Jones tracks 50 shares in the USA.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

14. The correlation of pairs of securities within a portfolio is called:

A. co-association.
B. correspondence.
C. covariance.
D. variance.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

15. The correlation between two shares:

A. can take on positive values.


B. can take on negative values.
C. is related to the covariance of a share.
D. includes all of the given answers.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment
16. For a portfolio of stocks, portfolio risk is heavily based on:

A. a simple average of the variance of the stocks in the portfolio.


B. a weighted average of the variance of the stocks in the portfolio.
C. a weighted average of the covariance of the stocks in the portfolio.
D. the standard deviation of the stocks.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

17. When an investor alters the mix of their portfolio to reflect market changes or their circumstances, this
is called _____ asset allocation.

A. market timing
B. passive
C. non-fixed
D. tactical
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

18. For an investor, the mix of shares that satisfies their known cash-flow requirements, risk tolerance and
future life cycle positions is called:

A. tactical asset allocation.


B. strategic asset allocation.
C. systematic asset allocation.
D. diversified asset allocation.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

19. Stockbrokers act as _____ for an exchange.

A. agents
B. dealers
C. negotiators
D. intermediaries
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-02 Detail the process for buying and selling of shares.
Section: 6.2 Buying and selling shares
20. Major differences between a discount stockbroker and a full-advisory stockbroker lie in:

A. the level of fees.


B. the amount of advice given.
C. the quantity of share recommendations.
D. all of the given answers.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-02 Detail the process for buying and selling of shares.
Section: 6.2 Buying and selling shares

21. Which of the following does NOT apply to full-advisory stockbrokers?

A. Full-advisory stockbrokers provide investment advice on listed securities.


B. Full-advisory stockbrokers monitor investors' financial plans.
C. Full-advisory stockbrokers accept buy and sell orders from clients.
D. Full-advisory stockbrokers' fees are competitive with discount brokers.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-02 Detail the process for buying and selling of shares.
Section: 6.2 Buying and selling shares

22. When an investor purchases units in a unit trust, this is known as ________ investing.

A. absolute
B. direct
C. indirect
D. value
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-02 Detail the process for buying and selling of shares.
Section: 6.2 Buying and selling shares

23. When a share investor puts an order to buy shares through their stock broker via their internet share
account, this is called:

A. indirect investment.
B. direct investment.
C. index investment.
D. passive investment.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-02 Detail the process for buying and selling of shares.
Section: 6.2 Buying and selling shares
24. Which of the following statements regarding dividends is incorrect?

A. Dividends are usually received twice yearly from a company.


B. The payments of dividends are at the company board of directors' discretion.
C. An investor is generally required to pay taxation on the final dividend payment.
D. The taxation of dividends varies from country to country.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-03 Understand the importance of taxation in the investment decision process.
Section: 6.3 Taxation

25. Which of the following statements is NOT correct?

A. In Australia taxation of individuals is based on a progressive tax system.


B. The dividend imputation system effectively removes the double taxation of dividends in Australia.
C. In relation to dividend imputation, a shareholder whose marginal tax is lower than the company tax
rate will pay their marginal tax on the dividend received.
D. In Australia dividends on which the company has already paid company tax are called franked
dividends.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-03 Understand the importance of taxation in the investment decision process.
Section: 6.3 Taxation

26. The capital structure of a company is one of the important indicators of performance. Which of the
following statements regarding capital structure is incorrect?

A. Debt to equity or shareholders' interest ratios are both measures of capital structure.
B. Capital structure ratios are an indicator of longer term viability and stability.
C. A company with a higher equity ratio is less dependent on external funding.
D. The capital ratios of companies, and industry groupings, are generally similar.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

27. When using indicators for a company's performance:

A. ratios for a company should be compared with others in the same industry.
B. a single ratio should not be used to judge the company's overall performance.
C. the dates of the financial statements being compared should be the same.
D. all of the given answers are correct.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
28. Compared with a company's current ratio, the shareholders' interest ratio gives information about a
company's:

A. interest expense.
B. level of liquidity.
C. long-term viability.
D. future earnings.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

29. Which of the following are current assets?

A. Accounts payable
B. Bank overdraft facility
C. Commercial paper
D. Inventories
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

30. Which of the following are current liabilities of a company?

A. Accounts receivable
B. Inventories
C. Bank overdraft facility
D. Cash
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

31. The greater the proportion of debt financing compared with equity financing for a company the:

A. lower the future earnings prospects for the company.


B. greater the ability of the company to meet its interest payments.
C. greater the degree of financial risk for the company.
D. lower the expected earnings per share.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
32. A company with a _____ ratio of equity to debt is _________ dependent on external financing.

A. lower; less
B. lower; not
C. higher; less
D. higher; more
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

33. The _______ ratio measures the proportion of total assets provided by the company's owners.

A. shareholders' interest
B. total asset turnover
C. equity turnover
D. debt
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

34. The indicator ratio that should be used to assess a company's ability to meet its short-term obligations is
its:

A. liquidity.
B. debt.
C. profitability.
D. capital structure.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

35. Which ratio is a measure of liquidity that excludes inventories?

A. Current
B. Liquid
C. Debt to gross cash flow
D. Interest cover
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
36. An example of a liquidity ratio for a company is:

A. a fixed asset turnover.


B. current ratio.
C. earnings per share.
D. share price to net tangible assets.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

37. A company has a higher current ratio than the industry average. This implies that the company:

A. has a higher P/E than other companies in the industry.


B. is more likely to avoid insolvency in the short term than other companies in the industry.
C. may be more profitable than other companies in the industry.
D. operates with a much lower level of inventory than others in the industry.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

38. If a company has a current ratio of 2, which of the following measures will increase the current ratio?

A. Buying more inventory on short-term credit


B. Buying more inventory with cash
C. A customer paying an overdue account
D. Paying off a short-term bank advance with long-term debt
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

39. If a company has a current ratio of 0.9, in order to improve its current ratio it might:

A. increase its current assets by decreasing its inventory.


B. use more long-term debt to decrease current liabilities.
C. decrease its large amounts of accounts receivable.
D. decrease its large amount of accounts to pay to increase its current liabilities.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
40. If a company has a liquid ratio of 0.9, in order to improve its liquid ratio it might:

A. increase its current assets by increasing its inventory.


B. use more short-term debt to decrease current liabilities.
C. increase its large amounts of accounts receivable to improve its cash position.
D. increase its large amount of accounts to pay to decrease its current liabilities.
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

41. The ________ ratio is an indicator of the longer term viability and stability of a company.

A. shareholders' interest
B. P/E
C. EBIT/total funds
D. liquidit
y
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

42. For a company, a rule of thumb for the interest cover financial ratio is in the range:

A. 0 to 1.
B. 1 to 2.
C. 2 to 3.
D. 3 to 4.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

43. Which financial ratio provides information essential for assessing the long-run operation of the
company?

A. Debt
B. Liquidit
y
C. Profitability
D. Share price
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
44. The financial ratio that indicates the number of years required for a company to repay its total debt is:

A. debt to equity.
B. debt to depreciation.
C. debt to gross cash flow.
D. debt to net cash flow.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

45. The financial ratio that measures operating profit after tax to shareholders funds is:

A. EBIT to long-term funds.


B. Return on equity.
C. EBIT to total funds.
D. interest cover.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

46. Compared with a company's interest cover ratio, earnings before interest and tax measures its:

A. amount of earnings for dividend payments.


B. expected earnings.
C. profitability.
D. return on equity.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

47. Which of the following groups of financial ratios provide information on the short-run operation of the
company?

A. Capital structure and debt servicing


B. Capital structure and profitability
C. Debt servicing and profitability
D. Liquidity and profitability
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
48. Which financial ratio links long-term funds provided by the company's owners and those of the
creditors?

A. Debt
B. Debt to equity
C. Times interest cover
D. Earnings to price
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

49. Which financial ratio is used to measure a company's ability to meet its short-term financing?

A. Debt
B. Liquidit
y
C. Capital structure
D. Profitability
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

50. Which financial ratio measures a company's ability to service its interest commitments?

A. Debt
B. Equity to debt
C. Profitability
D. Interest cover
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

51. The higher the value of the _______ ratio, the better able the firm is to meet its short-term financial
obligations.

A. debt to equity
B. liquidit
y
C. earnings per share
D. EBIT to long-term funds
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
52. The _______ is an indicator of investors' evaluation of a company's future earnings potential.

A. debt to equity ratio


B. price/earnings ratio
C. interest cover ratio
D. return on shareholders' funds
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

53. The following is a simplified financial position statement for a company:

Assets $ Liabilities $
Cash 250 000 Accounts payable 1 480 000
Trading securities 350 000 Accrued expenses payable 420 000
Accounts receivable 1 360 000 Taxes payable 140 000
Inventory 2 470 000 Long-term debt 3 850 000
Property 3 350 000 Shareholders' funds 2 340 000
Equipment 450 000

Calculate the liquidity ratio.

A. 0.85
B. 0.96
C. 1.51
D. 1.32
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

54. Which of the following statements regarding the debt servicing capacity of a company is incorrect?

A. The debt to gross cash flow ratio is an indicator of debt servicing capacity.
B. The debt to gross cash flow ratio indicates years required for cash flows to repay total debt.
C. The interest cover ratio is an indicator of a company's capacity to service debt.
D. The lower the interest cover ratio, the greater the company's ability to cover interest commitments.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

55. If a share currently sells for $20 and has annual earnings per share of 8.0, the price/earnings ratio is:

A. 0.4
B. 2.5
C. 4.0
D. 160
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

56. The _______ ratio is an indicator of the share market's evaluation of a company.

A. debt/equity
B. price/earnings
C. debt to gross cash flow
D. shareholders' interest
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

57. Systematic risk is also referred to as:

A. economic risk.
B. diversifiable risk.
C. market risk.
D. financial risk.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

58. The risk that affects the whole market is called:

A. total risk.
B. systematic risk.
C. diversifiable risk.
D. financial risk.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

59. In modern portfolio theory, investment risk is divided into two components: systematic risk and
unsystematic risk. Which of the following risks is an example of systematic risk?

A. Increase in the corporate tax rate


B. Productivity and cost of labour
C. The effectiveness of the management of the company
D. Gearing and the impact of interest rate changes
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
60. Increased competition, increased costs of labour, lawsuits, and unfavourable exchange rates are all
examples of:

A. diversifiable risk.
B. systematic risk.
C. total risk.
D. economic risk.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

61. Which of the following is NOT an example of unsystematic risk for a company?

A. The company announces a merger with a competitor.


B. The chief financial officer resigns.
C. The company loses competitiveness relative to other companies.
D. Changes occur in the level of company tax rates.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

62. Estimating systematic risk involves comparing the price history of a particular share relative to
movements on_____ stock listed on an exchange.

A. an average
B. the median weighted
C. the most volatile
D. the least volatile
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

63. The higher the beta of a share the:

A. greater the systematic risk.


B. lower the systematic risk.
C. lower the expected return.
D. less responsive it is to changing share market movements.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
64. In modern portfolio theory, an investor should not be concerned with unsystematic risk when calculating
expected rates of return because:

A. there is no way to measure unsystematic risk.


B. unsystematic risks are assumed to be removed by diversification.
C. unsystematic risks are generally insignificant.
D. beta includes a portion to compensate for unsystematic risk.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

65. Which of the following about beta coefficient is incorrect?

A. A stock of beta 1.25 indicates the share price will perform 25% better than the overall market when
prices are rising.
B. A stock of beta 1.25 indicates the share price will perform 25% worse than the overall market when
prices are falling.
C. A stock with a beta of 1.25 will move more than a stock with a beta of 1.25.
D. A stock with a beta of 0.50 will rise at only half the rate at which the overall market index will rise.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

66. What should be the price of a share that constantly pays $2.50 annually in dividends, if the growth rate
is zero and the required rate of return is 8% per annum?

A. $22.86
B. $28.00
C. $31.25
D. $33.75
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

67. What should be the price of a share if it paid $1.75 in dividends in the last financial year, its dividend
growth rate is 4%, and the required rate of return is 11%?

A. $25.00
B. $26.00
C. $30.28
D. $43.75
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares
68. The majority of companies pay dividends twice a year to their:

A. bond holders.
B. secured bond holders.
C. shareholders.
D. board of directors.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

69. When a share goes ex-rights, assuming everything else remains the same, its price should:

A. increase, as the company no longer has the right to make the shareholder convert.
B. decrease, as the shareholder is losing an option.
C. remain the same, as the market knows about it in advance.
D. increase, as a successful rights issue will raise a large amount of cash.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

70. After a company has made an announcement about a forthcoming dividend, then at a specified date
when the share begins to trade ex-dividend:

A. the buyer of the share will now receive the due dividend.
B. the share price will adjust upwards by the amount of the forthcoming dividend.
C. the seller of the share will receive the next dividend payment.
D. the ex-dividend share price will be unaffected by the forthcoming dividend.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

71. When a share is trading for a period with a cash dividend entitlement, then the share is said to trade:

A. bonus dividend.
B. pro dividend.
C. cum-dividend.
D. ex-dividend.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares
72. If a dividend is declared on 1 November, has a cum-dividend date of 19 November and a record date of
26 November, which of the following shareholders will NOT receive the dividend?

A. A buyer of the share on 31 October


B. A buyer of the share on 11 November
C. A buyer of the share on 26 November
D. A buyer of the share on 29 November
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

73. On the day that a share goes ex-dividend, the price should theoretically:

A. increase by the extent of the dividend.


B. decrease by the extent of the dividend.
C. decrease by a small fraction of the dividend.
D. remain constant.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

74. The decision to pay cash dividends to shareholders is made by the:

A. company management.
B. shareholders at the annual meeting.
C. board of directors.
D. bond holders.
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

75. A company declares a dividend of 35 cents per share, which was payable on 14 September. Immediately
prior to the declaration of the dividend, the share price was $4.79. At the close of trading on the stock
exchange on 13 September, the share price was $5.44. What is the theoretical ex-dividend price of the
share?

A. $4.44
B. $4.79
C. $5.09
D. $5.79
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares
76. A rights issue differs from a bonus issue of shares in that:

A. after a bonus issue there is a greater number of shares in existence, unlike rights.
B. shares that are cum-bonus are renounceable.
C. the purpose of a bonus issue for a company is not to raise more funding.
D. only listed companies have rights issues.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

77. Which of the following statement about bonus shares is NOT correct?

A. Bonus shares are generally issued at no cost to the shareholders.


B. If a company offers a 1 for 4 bonus issue this means for every 1 share a shareholder owns they get
four extra shares.
C. When shares go ex-bonus there should be a downward adjustment in the share price.
D. If a company declares a bonus share issue this can be viewed by the market as a positive signal about
the company's future profitability.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

78. When shares are purchased cum-rights it means the purchaser of the share:

A. cannot usually sell the right separately.


B. may take part in the rights offer.
C. cannot take part in the rights offer.
D. can take up the offer of the right without having to pay extra for the subscription price.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

79. If a company offers a one-for-five bonus issue and the current share price cum-bonus is $7.50, the
theoretical value of each share ex-bonus is:

A. $7.50
B. $6.25
C. $6.00
D. $5.00
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares
80. A company whose share is selling for $24 announces a stock split of four-for-three. Which of the
following statements is correct?

A. There will be four times as many shares on issue and they will sell for $96.
B. There will be three times as many shares on issue, and they will sell for $8.
C. There will be one-third more shares on issue and they will sell for $18.
D. There will be three-quarters more shares on issue and they will sell for $32.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

81. 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?

A. $0.72
B. $0.90
C. $2.70
D. $3.35
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

82. Share market participants can regard a bonus issue favourably because:

A. bonus issues represent a change in the total assets of a company.


B. bonus issues increase the equity/debt ratio of a company, and so reduce financial risk.
C. they take it as a signal from the company of increased future profitability.
D. bonus issues increase the number of shares in an investor's portfolio and hence their total value.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

83. 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?

A. $200
B. $250
C. $400
D. $500
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares
84. 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.

A. $1.96
B. $2.85
C. $2.98
D. $3.05
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

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

A. To increase the number of shares on issue and so affect the capital structure
B. To reduce the dividend payments
C. To increase the share price
D. To try to improve the liquidity of shares
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

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

A. a measurable
B. a small
C. no
D. an adverse
Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

87. Share market participants can regard a rights issue favourably because:

A. a rights issue does not affect the capital structure of a company.


B. a rights issue increases the equity/debt ratio, and so reduces financial risk.
C. they can participate in the rights issue without having to pay the subscription price.
D. rights issues increase the value of shares in an investor's portfolio.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares
88. 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:

A. split the number of shares on issue.


B. have a bonus issue.
C. declare an increased dividend.
D. lower the dividend.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

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

A. changes in aggregate share market values of the largest 500 companies.


B. movements in the Australian share market relative to international markets.
C. the historical capitalisation of the 100 largest corporations.
D. changes in share market value, including dividend reinvestment.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-06 Analyse the functions and importance of share-market indices and interpret published share-market information.
Section: 6.6 Stock-market indices and published share information

90. According to the text, a tradable benchmark:

A. is a broad market index that represents 90% of the share market capitalisation.
B. may be a performance benchmark index but with a narrower focus upon which some derivative
contracts are priced.
C. is a broad market index that represents 99% of the share market capitalisation.
D. is an index that measures changes in share prices plus reinvestment of dividends.
Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-06 Analyse the functions and importance of share-market indices and interpret published share-market information.
Section: 6.6 Stock-market indices and published share information
91. 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?

A. 3 statements are true and 2 are false


B. 2 statements are true and 3 are false
C. 4 statements are true and 1 is false
D. 1 statement is true and 4 are false
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-03 Understand the importance of taxation in the investment decision process.
Section: 6.3 Taxation

92. 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?

A. i, ii, iii are true and iv and v are false


B. i, and iii are true and ii, iv and v are false
C. i, ii, iii and iv are true and v is false
D. i and ii are true and iii, iv and v are false
Difficulty: Hard
Est time: <1 minute
Learning Objective: 06-03 Understand the importance of taxation in the investment decision process.
Section: 6.3 Taxation

True / False Questions


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

FALSE

Material information must be disclosed to the stock exchange immediately.

Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: Introduction

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

FALSE

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

Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: Introduction

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

TRUE

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

Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

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

TRUE

The beta for the overall share market is 1.0.

Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment
97. Passive investment involves building an investment portfolio based on shares that are less risky than the
overall share market.

FALSE

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

Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

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

TRUE

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

Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

99. 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.

FALSE

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

Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

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

TRUE

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.

Difficulty: Easy
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
101. Historically, Australian banks have had low EPS ratios compared with the retail sector because of the
amount of lending they do.

FALSE

According to the text, Australian banks have had very high earnings per share ratios.

Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators

102. When a share is trading cum-dividend, this means the seller of the share will receive the dividend
payment.

FALSE

The buyer of the share trading cum-dividend will receive the dividend up to the specified record date
after which it trades ex-dividend.

Difficulty: Medium
Est time: <1 minute
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares.
Section: 6.5 Pricing of shares

Short Answer Questions

103. What are some factors that influence investors to buy listed rather than unlisted shares?

Some factors that encourage investors to buy shares quoted on an exchange are efficient price discovery
that includes share market listing rules such as continuous disclosure and other investor protection rules,
and depth and liquidity of share markets.

Est time: 1-3 minutes


Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment
104. Explain the concept of a diversified portfolio.

Under investment theory, an investor who holds a diversified portfolio is able to minimise the risk
exposure from investing in a single share. A diversified portfolio would include a range of investment
categories including shares, fixed-interest securities and property so that unsystematic risk is diversified
away.

Est time: 1-3 minutes


Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

105. Explain how an index fund might benefit an investor.

If an investor wishes to build a portfolio based on tracking a share index they might consider index
funds. Index funds use a range of techniques to replicate or track the share market, including full or
partial replication of a specified share-market index. Full replication occurs when a share manager
purchases all the stocks included in an index. For indexes that contain a large number of stocks such as
the S&P 500 a manger may partly replicate the index.

Est time: 1-3 minutes


Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are available and understand risks
associated with investments in shares of listed corporations.
Section: 6.1 Share-market investment

106. Define and explain what a share split involves.

A share split is a proportional division of the number of shares issued by a company. A share split may
be motivated by a company's share price increasing significantly over time and possibly being seen as
too expensive for some investors. The directors may be motivated to split the shares in, for example, a
20 per cent split that results in five new shares for one existing share. However, there is no fundamental
change in the asset value of the company.

Est time: 1-3 minutes


Learning Objective: 06-04 Identify and describe various indicators of financial performance.
Section: 6.4 Financial performance indicators
107. What is a stock-market index? Discuss three main types.

A stock-market index is a measure of the price performance of the share market or some section of it.
Three main types are performance benchmark indices, tradeable benchmark indices and market
indicator indices. A performance benchmark index measures the performance and risk of a broad market
based on capitalisation and liquidity; a tradable benchmark index is a narrower index and is the basis on
which some derivative contracts are priced, and a market indicator index measures the performance of
the overall market such as the Dow Jones Industrial Average (USA).

Est time: 1-3 minutes


Learning Objective: 06-06 Analyse the functions and importance of share-market indices and interpret published share-market information.
Section: 6.6 Stock-market indices and published share information
Chapter 06 - Test Bank Summary

Category # of Ques
tions
Difficulty: Easy 42
Difficulty: Hard 10
Difficulty: Medium 50
Est time: <1 minute 102
Est time: 1-3 minutes 5
Learning Objective: 06-01 Consider the role of an investor in the share market, appreciate the wide range of investment choices that are av 28
ailable and understand risks associated with investments in shares of listed corporations.
Learning Objective: 06-02 Detail the process for buying and selling of shares. 5
Learning Objective: 06-03 Understand the importance of taxation in the investment decision process. 4
Learning Objective: 06-04 Identify and describe various indicators of financial performance. 43
Learning Objective: 06-05 Apply quantitative methods to the pricing of shares. 24
Learning Objective: 06-06 Analyse the functions and importance of share-market indices and interpret published share-market information 3
.
Section: 6.1 Share-market investment 25
Section: 6.2 Buying and selling shares 5
Section: 6.3 Taxation 4
Section: 6.4 Financial performance indicators 43
Section: 6.5 Pricing of shares 24
Section: 6.6 Stock-market indices and published share information 3
Section: Introduction 3