1.Rank the following long term securities in order of their credit
risk, using the drop down lists.
a)bank loan secured by a mortgage on business property
b)an initial public offering
c)an issue of long-term debt securities

2.Select the characteristics below that best describe debt funds.
a)The investor is subject to credit risk.
b)The investor becomes part owner of the company.
c)The term of the investment is fixed.
d)The debt investor is paid before anyone else if the company is liquidated.
e)The return consists of fixed or floating interest payments.

3.Classify each of the following characteristics as relating to either
debt or equity.
a)The investor ranks last if the company gets liquidated.
b)The company must pay the agreed return.
c)The investor's return could be negative.
		
4.A company whose shares are currently trading at $5.52 has just
announced a 2-for-4 rights issue. The theoretical price of the rights
has been calculated as $0.66. What will be the expected ex-rights
price of the company's shares? Give your answer in dollars and cents
to the nearest cent.

Ex-rights price = $

5.A company whose shares are currently trading at $7.49 has just
announced a 1-for-3 rights issue for a subscription price of $6.63.
What will be the expected ex-rights price of the company's shares?
Give your answer in dollars and cents to the nearest cent.

Ex-rights share price = $

6.Indicate which of the following sources of funds can be used as
additional sources of equity capital for a company.
a)private placement
b)rights issue
c)dividend reinvestment
d)bank loan
e)bond issue

7.Select all outcomes below that correctly complete the following sentence.
Increasing the amount of debt in the capital structure of a company
affects the shareholders through:
a)decreased variability of returns
b)decreased risk exposure
c)increased risk exposure
d)increased variability of returns

8.Classify the following statements as referring to either a fixed
rate loan or a floating rate loan:
  	Fixed rate loan 	Floating rate loan
a) 	'Our company prefers the safety of knowing exactly what our
monthly payments will be.'
b) 	'I think the reserve bank will lower interest rates in the next
year. Let's go with this loan.'
c) 	'We'll take whatever loan is has the lowest stated interest rate
as of right now.'

9.Select all the options below that are reasons why a private company
may be floated.
a)to provide access to a liquid market for shareholders to buy and sell
b)to allow the company to avoid needing to publicise accounting figures
c)the owners' wish to realise a capital gain
d)so the company can be on the stock exchange for extra national publicity
e)the need for additional capital

10.Mark each of the following statements about equity funds as either
true or false.

a)Equity funds are supplied by the owners of a business.
	TrueFalse

b)The return on equity funds is volatile and could be negative.
	TrueFalse

c)Equity funds are repaid at the end of their term.
	TrueFalse

11.Classify each of the following characteristics of a listed company
as either an advantage or a disadvantage relative to sole
proprietorships:
  	Advantage 	Disadvantage

a)Transfer of ownership in a company is achieved readily through trading shares.
		

b)The potential for a company to raise large amounts of equity capital.
		

c)A company is more expensive and complicated to establish.
		

d)In the event of insolvency the liability of a shareholder is limited
to their investment in the company, including any unpaid amount.
		
12.As debt is added to the company's capital structure the risk of
default for the company is increased. This is known as..........risk
and causes ordinary shareholders to.........their required rate of
return, which in turn affects the company's cost of capital.

13.Rank the following instruments according to their general level of
security from the point of view of an investor.

Give a rank of 1 to the instrument that is most secure (and least
risky) through to a rank of 4 to the least secure (and most risky)
instrument.

Instrument 	                 Rank
Floating charge debentures 	
Fixed charge loans 	
Unsecured notes 	
Shares 	

14.Leverage is an important part of a company's capital structure.
Indicate which formula below is a valid expression for leverage.
	a)Leverage ratio 	= 	
net debt/
market value of equity
	b)Leverage ratio 	= 	
total equity/
market value of debt
	c)Leverage ratio 	= 	
net income/
market value of debt
	d)Leverage ratio 	= 	
total debt/
market value of company

15.A company pays an interest rate of 5% per annum to its debenture
holders and 7% per annum to its unsecured note holders. Select the
general factors that are directly or indirectly responsible for this
difference in interest rates between debentures and unsecured notes.
	If a company is liquidated, unsecured note holders rank below secured
creditors for repayment of their loan.
	If a company is liquidated, debenture holders get priority in
receiving the sale proceeds of assets.
	Debentures place less restrictions on a company's financial operations.
	Unsecured notes place less restrictions on a company's financial operations.
	If a company is liquidated, unsecured note holders get priority in
receiving the sale proceeds of assets.
	Unsecured note holders do not have a charge over the company's assets.