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1. Passive investment means building a portfolio of shares based on the strategy of:
A. preference shares
B. shares
C. exchange-traded funds
D. all of the given choices
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:
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.
10. Which of the following is an example of an unsystematic risk exposure 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:
13. Which of the following about share market indices is NOT correct?
A. co-association.
B. correspondence.
C. covariance.
D. variance.
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. agents
B. dealers
C. negotiators
D. intermediaries
20. Major differences between a discount stockbroker and a full-advisory stockbroker lie in:
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?
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.
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.
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:
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.
A. Current
B. Liquid
C. Debt to gross cash flow
D. Interest cover
36. An example of a liquidity ratio for a company is:
37. A company has a higher current ratio than the industry average. This implies that the company:
38. If a company has a current ratio of 2, which of the following measures will increase the current ratio?
39. If a company has a current ratio of 0.9, in order to improve its current ratio it might:
40. If a company has a liquid ratio of 0.9, in order to improve its liquid ratio it might:
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:
46. Compared with a company's interest cover ratio, earnings before interest and tax measures its:
47. Which of the following groups of financial ratios provide information on the short-run operation of the
company?
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.
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
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
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?
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?
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
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
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?
73. On the day that a share goes ex-dividend, the price should theoretically:
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
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?
78. When shares are purchased cum-rights it means the purchaser of the share:
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:
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:
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. 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?
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
1. Passive investment means building a portfolio of shares based on the strategy of:
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. 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
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
10. Which of the following is an example of an unsystematic risk exposure 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.
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:
13. Which of the following about share market indices is NOT correct?
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
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. 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:
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?
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
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
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
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; 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
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:
37. A company has a higher current ratio than the industry average. This implies that the company:
38. If a company has a current ratio of 2, which of the following measures will increase the current ratio?
39. If a company has a current ratio of 0.9, in order to improve its current ratio it might:
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:
46. Compared with a company's interest cover ratio, earnings before interest and tax measures its:
47. Which of the following groups of financial ratios provide information on the short-run operation of the
company?
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.
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
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
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
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. 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?
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
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?
73. On the day that a share goes ex-dividend, the price should theoretically:
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?
78. When shares are purchased cum-rights it means the purchaser of the share:
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:
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
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. 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?
FALSE
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
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
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
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.
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.
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.
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.
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).
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