1

Chapter 04 Testbank
 
1. A business organisation that is a separate legal entity, can buy property in its own name and
can enter into contracts with other entities is a:
A. sole proprietorship.
B. partnership.
C. special partnership.
D. corporation.
 
2. Listing on the stock exchange means:
A. taking a privately owned firm and creating a publicly owned corporation whose shares can be
traded on the stock exchange.
B. taking a privately owned firm and creating a publicly owned corporation whose shares cannot
be traded on the stock exchange until some designated time frame.
C. taking a publicly owned firm and creating a privately owned entity whose shares can no
longer be traded.
D. none of the given answers.
 
3. A publicly listed corporation:
A. has its shares listed on a formal exchange and designated with an exchange code.
B. is a legal entity (as part of the corporations law of a nation-state).
C. has to comply with the rules of the exchange where it is listed.
D. is all of the given answers.
 
4. A corporation:
A. has a widely dispersed ownership amongst its shareholders.
B. has its objectives and policies decided by a board of directors.
C. has an executive management group responsible for day-to-day management of the
corporation.
D. is all of the given answers.
 
5. The actual owners of a company is/are the:
A. board of directors.
B. executive management group.
C. shareholders.
D. creditors.
 
6. The _______ is/are responsible for conducting the day-to-day financial and operational affairs
of the company.

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A. board of directors
B. executive management group
C. shareholders
D. creditors
 
7. The _______ is/are responsible for the objectives and policies of the company, but not its day-
to-day affairs.
A. board of directors
B. executive management group
C. shareholders
D. creditors
 
8. Which of the following forms of business organisation is characterised by limited liability?
A. Sole partnership
B. Partnership
C. General partnership
D. Corporation
 
9. If a growing organisation wanted to set itself up so it had greater access to a wider range of
capital, it would become a:
A. sole proprietorship.
B. partnership.
C. general partnership.
D. listed corporation.
 
10. The owners of _______ face unlimited liability.
A. sole proprietorships only
B. sole proprietorships and partnerships only
C. corporations only
D. partnerships and corporations only
 
11. The liability of shareholders in ‘limited liability' companies means:
A. creditors of a company can call upon the shareholders in the case of company default to
contribute an amount based only on the current market price of the shares.
B. shareholders are only liable for any amount that is unpaid on the shares of a company.
C. in the event of company default, the creditors have no claim on the shareholders for any
contribution.
D. shareholders do not have a right to participate directly in the day-to-day management of a
company.
 

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12. Because of their _____ liability, corporate stockholders are more interested in chances of
_____.
A. limited; failure than success
B. limited; success than failure
C. unlimited; success than failure
D. unlimited; failure than success
 
13. Which of the following statements about a corporation is NOT correct?
A. The executive management group of a corporation is responsible to its board of directors.
B. Under corporation law the board of directors of a corporation must report to its shareholders.
C. The directors of a corporation have a legal responsibility to make sure the corporation acts in
the shareholders' best interests.
D. The shareholders of a publicly listed small corporation have the right to participate in the day-
to-day management of the business.
 
14. When a no-liability company defaults on its loans with its creditors, this means the:
A. creditors have a legal claim against the directors only.
B. creditors have a legal claim against the CEO only.
C. creditors have a legal claim against the chairman of the company.
D. shareholders do not have to meet any remaining payment on shares.
 
15. When the owners of a company hire full-time executives to be responsible for the day-to-day
decisions, this _____ the _____ problem.
A. lessens, shareholder-lender
B. lessens, managers-shareholders
C. brings on, managers-shareholders
D. brings on, shareholder-lender
 
16. All of the following are advantages of a corporation except:
A. freely transferable ownership.
B. limited liability.
C. access to capital markets.
D. low management costs.
 
17. Which of the following statements regarding companies is NOT correct?
A. A company is a discrete legal entity.
B. Since shares represent ownership in a company, ownership cannot be readily transferred to
new owners.
C. A company has a potentially unlimited life.
D. The shareholders' liability is limited.
 

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18. When a corporation continues to operate regardless of changes in ownership, this is known
as:
A. the right of perpetual succession.
B. perpetual shares.
C. perpetual trading.
D. unlimited succession.
 
19. Which of the following is NOT an advantage of the corporate form of organisation?
A. The corporate form is particularly suited to large-scale business operations.
B. There is a separation of ownership (shareholders) and management control.
C. The corporate form allows for continuity of business activities.
D. Large amounts of funding can be raised on relatively favourable terms.
 
20. Which of the following is an advantage of the corporate form of organisation?
A. The managers that control day-to-day operations have a strong incentive to act in the best
interests of shareholders.
B. As agents of the shareholders, the managers want to follow a growth maximisation strategy.
C. The managers want to increase the number of staff so they can grow.
D. A wide pool of investors can supply large amounts of corporate funding to the corporation.
 
21. Many companies use ______ to align the interests of shareholders with those of management.
A. bond options
B. share options
C. company cars
D. debentures
 
22. Agency theory is concerned with:
A. a conflict between owners and managers.
B. the agents who act on behalf of the company.
C. the relationship between employees.
D. the conflict of interests between outside agents and the company.
 
23. The conflict of interests between the goals of the firm's owners and those of its managers is:
A. the antagonism theory.
B. the agency problem.
C. reduced when the company is large.
D. serious only when sales volumes decline dramatically.
 
24. The key aspect of the agency relationship for the corporate form of business is that:
A. the firm's owners will always act in the best interests of the managers.
B. the managers will always act in the best interests of the firm's owners.

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C. with their management contracts, the managers have the incentive to act in the best interests
of the shareholders.
D. the managers have different incentives from the shareholders.
 
25. Which of the following would NOT relate to agency costs involving management's desire to
maximise its benefits?
A. Management goals to achieve sales growth.
B. Management goals to achieve market share.
C. Management remuneration packages.
D. Management reports to shareholders.
 
26. Agency problems are reduced by:
A. monitoring management behaviour.
B. the shareholders' ability to sell their shares.
C. the threat of takeover by another firm.
D. all of the given answers.
 
27. Agency problems would be less likely to exist in a:
A. sole proprietorship.
B. partnership.
C. private company.
D. public company.
 
28. The members of the board of directors of a corporation are elected by the:
A. executive management group.
B. shareholders.
C. creditors.
D. debt holders.
 
29. A primary aim of corporate management should be to:
A. maximise the company's profit.
B. maximise the number of shareholders.
C. maximise the shareholders' wealth.
D. minimise the company's costs.
 
30. The most appropriate goal for corporate management, according to finance theory, is to:
A. maximise the company's market share.
B. maximise the current profits of the company.
C. maximise the company's share price.
D. minimise the company's liabilities.
 

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31. A _______ represents a financial claim to the cash flow of a business after all other claims
have been deducted.
A. bond
B. debenture
C. share
D. preference share
 
32. Which of the following is NOT a feature of a share?
A. Part ownership in the company
B. The right to vote in the control of the company
C. Readily transferable
D. The right to periodic payments
 
33. Consider the following statements:
i. A corporation differs from other forms of business organisation only in that it tends to be
larger.
ii. The corporate form of business organisation is destined to fail because ‘managers', and not the
‘owners', run the business.
iii. The corporate entity ceases on the death or bankruptcy of the individual shareholders.
iv. The stock exchange is important to the corporation only because it provides the institutional
framework through which new shares may be sold to the public.
v. Maximisation of shareholder utility is presumed when managers maximise possible profit.
How many of these statements are true and how many are false?
A. 1 statement is true and 4 are false
B. 2 statements are true and 3 are false
C. 3 statements are true and 2 are false
D. 4 statements are true and 1 is false
 
34. Which of the following statements about share markets is NOT true?
A. They help carry out direct financing.
B. Most of the trading takes place in already-issued shares.
C. Share markets have aided in the increase in importance of corporations.
D. Every time a listed company's shares are bought or sold, the company receives funding.
 
35. The role of stock exchanges such as the ASX include:
A. they are a platform for firms’ shares to be listed.
B. they monitor the behaviour of market participants and also ensure compliance with the
regulatory requirements of the nation-state supervisor.
C. listing on a stock exchange requires the corporation to comply with the rules of that exchange.
D. all of the given answers.
 
36. An equity market is best described as:

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A. a place where shares of listed companies are traded.

B. a physical platform where buy and sell orders are made.
C. where the trading and issuing of equities, bonds and other classes of publicly listed companies
take place.
D. all of the given answers.
 
37. The following statements about the primary market are true except:
A. it is where companies float shares to the general public in an initial public offering (IPO) to
raise capital.
B. it is a platform for existing shareholders to liquidate previously owned shares.
C. only equities are issued.
D. all of the given answers.
 
38. The total number of equity raisings on the ASX primary market over the past 20 years has:
A. increased.
B. decreased.
C. remained stable.
D. decreased significantly.
 
39. The greatest number of issues of equity capital on the ASX over recent years has involved:
A. rights issues.
B. placements.
C. dividend reinvestment.
D. new floats.
 
40. The listing of new companies on an exchange such as the ASX and subsequently raising
funds is known as:
A. share buybacks.
B. initial public offerings.
C. share issues.
D. rights issues.
 
41. Which of the following security types is NOT usually listed on the ASX?
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper
 
42. An issue of new shares to the public must have:
A. a prospectus attached.
B. an underwriter.

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C. detailed documents called covenants.

D. a memorandum of understanding in place.
 
43. From a company's viewpoint, the existence of an active, liquid, well-organised secondary
market in existing shares:
A. facilitates the raising of further capital in the secondary market.
B. maintains the share price above the initial issue price.
C. encourages successful primary market issues.
D. is of little or no consequence.
 
44. The following statements about the secondary market are true except:
A. there is a transfer of ownership and a settlement of value for that transfer.
B. the existence of a well-developed secondary market is of great significance to a corporation
that may be seeking to raise new equity finance in the future.
C. corporations normally seek to raise additional equity in order to expand the business through
the secondary market because there are thousands of buyers and sellers of new securities.
D. all of the given answers.
 
45. An initial public share offering represents the share market's _____ role.
A. interest rate
B. information
C. primary
D. secondary
 
46. The primary market role of a stock exchange is:
A. to trade the shares of the largest corporations.
B. to ensure the sale of new-issue securities.
C. to ensure deep trades in listed securities.
D. to ensure that information about listed companies is quickly reflected in share prices.
 
47. Which of the following securities would you expect to buy on the primary market?
A. A bond that has no maturity left
B. A bond with a very long maturity date
C. A newly issued share
D. A previously issued share
 
48. The company process that gives the shareholders the chance to change their dividends into
additional company shares is called:
A. share placement.
B. dividend reinvestment scheme.
C. secondary public offering.

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D. rights issue.
 
49. The distribution of extra shares on pro-rata basis by a company to all existing shareholders is
called a:
A. new float.
B. private placement.
C. secondary float.
D. pro-rata rights issue.
 
50. The selling of new shares to a selected number of institutional investors is called a/an:
A. share release.
B. private placement.
C. share float.
D. initial offering.
 
51. Compared with other forms of equity raisings, private placements for shares:
A. can be quicker but more expensive because of the short time frame involved.
B. can be quicker if a prospectus is available for distribution.
C. can be quicker and often cheaper.
D. involve stricter regulatory requirements for meeting the shorter time frame involved.
 
52. The basic role of a company underwriter about to list a new share issue on a stock exchange
is to:
A. provide advice on the timing of the share issue.
B. ensure the company complies with the stock exchange's listing rules.
C. establish a deep and liquid secondary market in the shares.
D. purchase any unsold shares on issue.
 
53. If the depth and liquidity of a share market is high, it means:
A. corporations may raise funds at higher costs.
B. investors will experience higher risk exposures.
C. investors can passively manage their risk exposure.
D. corporations may raise funds at lower costs.
 
54. The document drawn up by a company stating the terms and conditions of a public share
issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.
 

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55. Secondary markets:

A. can provide liquidity but do not raise new funds.
B. make capital-raising in the primary market more attractive.
C. help borrowers raise long-term funds.
D. include all of the given answers.
 
56. A characteristic of secondary markets for shares is that:
A. only highly risky shares are traded.
B. only low-risk shares are traded.
C. they are where companies borrow funds for the second time.
D. companies do not get funds from the secondary market in shares.
 
57. A well-developed secondary market is likely to:
A. aid in raising extra finance in the primary market.
B. help manage risk exposures of investors.
C. help with corporate agency problems.
D. include all of the given answers.
 
58. In relation to a share market, the ratio of the value of turnover to market capitalisation is
called:
A. market depth.
B. market flow.
C. market transfer.
D. market liquidity.
 
59. The following descriptions are true of a derivative instrument:
A. it is a risk management product that derives its value from an underlying commodity or
financial instrument.
B. it helps determine the price today for an underlying asset, but delivered into a specified future
point in time.
C. it helps individuals, firms and other entities to hedge possible risk exposure in their
investment portfolio.
D. all of the given answers.
 
60. If a stock exchange provides a market for the trade of specific share market-related derivative
products, which of the following options is generally NOT correct?
A. The derivative products provide an investment tool to take advantage of future share price
movements.
B. The derivative products facilitate the management of risk within an existing share portfolio.
C. The derivative products provide protection against adverse movements in share prices.
D. The derivative products remove the share price volatility of stocks listed on the stock
exchange.

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61. Compared with an exchange-traded derivative product, over-the-counter derivative products:
A. are discussed and agreed upon by the parties involved.
B. are standardised.
C. have margin calls.
D. are traded between banks, not on the exchange.
 
62. To protect their portfolio of shares from a possible share price fall, an investor could buy a:
A. call option.
B. put option.
C. warrant on a matching share index.
D. matching share index future.
 
63. The strategy of lowering risk exposure by holding a number of investments in a portfolio is
called:
A. augmentation.
B. diversification.
C. expansion.
D. optimisation.
 
64. In options markets, option premiums are paid by:
A. option writers to buyers.
B. option buyers to sellers.
C. both option buyers and sellers.
D. put option buyers only.
 
65. Which of the following is NOT correct?
A. A real estate investment trust may purchase industrial property.
B. An infrastructure fund may hold investments in power stations.
C. The units of a listed REIT purchases property are generally illiquid.
D. An investor may use a CFD to go long in a rising market.
 
66. An investor holding an investment portfolio who purchases a put option is expecting:
A. share prices to go up in the short term.
B. share prices to fall in the short term.
C. interest rates to go up.
D. interest rates to go down.
 
67. The writer of a put option expects the share price to:
A. decrease.
B. increase.

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C. remain unchanged.
D. pay a dividend.
 
68. If an investor buys a put option on shares they own and then the price of the shares rises, the
investor:
A. must exercise the option.
B. must pay the difference between the contract start and close values.
C. has no obligation to exercise the option.
D. has to pay an additional premium to the option writer.
 
69. A futures contract is a:
A. contract that provides a specified commodity or instrument to be bought at a future date at a
price determined at the expiry date.
B. contract that provides a specified commodity or instrument to be bought at a future date at a
price decided today.
C. right to buy a specified commodity or instrument at a price determined today.
D. right to buy a specified commodity or instrument at a price determined at the expiry date.
 
70. Units sold in a managed investment scheme that follows the performance of a specified share
market index are called:
A. contracts for difference.
B. exchange traded funds.
C. option funds.
D. warrant funds.
 
71. A contract for difference is:
A. the difference between a put and a call option on the same security.
B. the difference between an option and a warrant on the same security.
C. the difference between a physical stock market and the futures market.
D. an agreement to exchange the difference between a contract start and close values.
 
72. A stock exchange may also list some debt issues of companies and governments. This
provision by a stock exchange is known as a/an:
A. subordinate debt market.
B. interest rate market.
C. primary debt market.
D. secondary bond market.
 
73. Which of the following statements, in regard to the provision of an interest rate market by a
stock exchange, is NOT correct?
A. It is beneficial to both borrowers and lenders because it can add liquidity.

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B. It can provide ease of access to information about debt securities.

C. It can reduce investors' transaction costs.
D. Its main function is to serve as a primary market for debt issues.
 
74. Which of the following debt securities is often quoted on the ASX?
A. Bank bills
B. Certificates of deposit
C. Floating rate notes
D. Commercial paper
 
75. Examples of debt instruments listed on a stock exchange do NOT include:
A. corporate bonds.
B. floating rate notes.
C. convertible notes.
D. promissory notes.
 
76. The corporate bond that pays a variable rate of interest based on interest rate changes for a
reference rate is a/an:
A. adjustable note.
B. convertible note.
C. floating rate note.
D. straight corporate bond.
 
77. Which of the following is NOT used by the ASX to promote an efficient market?
A. Rapid release of new information
B. A clearing house
C. Stock trading systems
D. Transaction settlement systems
 
78. Major determinants of an efficient stock market include:
A. the information is easily available to all the market participants.
B. the speed at which information is available to the market participant.
C. the speed at which this information is absorbed and reflected in a share price.
D. all of the given answers.
 
79. A security that pays a fixed dividend and usually converts to ordinary shares at a future date
is called a:
A. corporate bond.
B. floating rate note.
C. preference share.
D. debenture.

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80. The Australian Stock Exchange now operates a system known as ASX Trade. Which of the
following statements is correct in relation to ASX Trade?
A. It allows individual investors direct access to execute buy/sell orders on the ASX.
B. At opening of trade, overlapping bids and offers are shared between existing orders.
C. Share trading is also conducted on the floor of the ASX using ‘chalkies'.
D. It facilitates the efficient processing and settlement of market transactions through multiple
platforms.
 
81. The Clearing House Electronic Subregister System (CHESS) is operated by the ASX. Which
of the following statements regarding CHESS is NOT correct?
A. The system allows settlement of transactions within three working days.
B. A shareholder must conduct a CHESS transaction with a sponsor.
C. Shareholders can still hold traditional share certificates.
D. The clearing house issues holding statements to uncertified shareholders.
 
82. The risk that arises from the failure of parties to complete and resolve a transaction is called:
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
 
83. The probability that a party to a buy/sell transaction will not complete it is called:
A. basis risk.
B. clearing risk.
C. settlement risk.
D. transaction risk.
 
84. The reason for the requirement by the ASX for companies to abide by the Corporations Act
2001 (Cwlth) is to:
A. ensure that there will be an active market in the company's shares.
B. maintain investor confidence in the company's creditworthiness.
C. ensure a minimum number of shareholders in the company.
D. ensure that information which may have a material effect on the share price is provided to the
market.
 
85. The rules that apply to listed companies about promptly advising a stock exchange of any
material changes relating to the corporation are called:
A. informational disclosure.
B. continuous disclosure.
C. transaction disclosure.
D. related parties disclosure.

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86. Having regard to a number of high-profile situations where improper practices resulted in
share market volatility, losses to individual shareholders, and possible breaches of existing
legislation, the Commonwealth government transferred responsibility in 1991 for the
administration of Corporations Law to:
A. the Australian Securities Exchange.
B. the Australian Securities and Investments Commission.
C. individual state government corporate governance authorities.
D. the Australian Consumer and Competition Commission.
 
87. ASIC is the regulatory body responsible for the supervision of:
A. insurance companies only.
B. insurance and investment companies only.
C. initial public offerings only.
D. corporations law and markets.
 
88. The major supervisors of the Australian share market are:
A. RBA and ASX.
B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.
 
89. Which of the following statements is NOT correct?
A. The Corporations Act 2001 compels continuous disclosure requirements on a listed company.
B. All corporations, except mining companies, must submit half-yearly and annual audited
reports to the ASX.
C. The main supervisor in the Australian market is the ASX.
D. If a listed company does not fully disclose information to the satisfaction of the ASX, trading
in its shares may be suspended.
 
90. To try to remove potential conflicts of interest with regard to the ASX monitoring listed
companies, ____ has also assumed the role of supervising the ASX.
A. APRA
B. the Australian Reserve Bank (RBA)
C. ASIC
D. the Stock Brokers Association
 
91. Funding that is provided to higher risk companies seeking equity funding (but are unable to
access equity funding through a public issue in the share market) is generally called:
A. bank funding.
B. private placement funding.
C. preference share funding.

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D. equity funding.
 
92. Corporate takeovers may help address
A. agency problems in the modern corporation.
B. a rights issue.
C. the right of perpetual succession.
D. the problem with continuous disclosure.
 
93. Generally this is NOT a characteristic of ETFs:
A. listed on an exchange.
B. often seeks to match the performance of an index.
C. diversified portfolio.
D. strategies similar to a hedge fund.
 
94. In Australia settlement occurs in _____ business days. Settlement occurs through _____.
A. five; ASX Trade and ASX Trade 24
B. five; CHESS
C. three; ASX Trade and ASX Trade 24
D. three; CHESS
 
95. Which of the following is a security that involves both debt and equity?
A. Rights
B. Convertible bond
C. Floating rate note
D. Corporate bond
 
96. ‘Limited liability of a corporation’ means the:
A. corporation has only limited liability for the torts committed by its employees.
B. corporation is not liable for share market losses of its shareholders.
C. shareholders are not personally liable for the corporation's debts.
D. corporation has limited liability for the torts committed by its shareholders.
 
97. Listing of bonds does not create this advantage:
A. tax preference.
B. liquidity.
C. access to information.
D. easy purchase and sale.
 
98. Private equity funding:
A. is usually provided to lower-risk companies.

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B. seeks to help the firm move towards an IPO.

C. is normally provided for 10–15 years.
D. is funded through contracts for difference.
 
99. Shareholders of a public corporation have the right to participate in the profits and receive
annual dividends.
True   False
 
100. The shareholders of a public corporation do not participate directly in the day-to-day
operation of a company but appoint the executive management group to do so at the
shareholders' general meeting.
True   False
 
101. For a limited liability company the liability is restricted to the debt holders of the company
and not the shareholders.
True   False
 
102. The corporate entity means that if a major shareholder is declared bankrupt it does not
necessarily impact on the firm's operations.
True   False
 
103. As a part owner of a public corporation, a shareholder has residual claims against the firm’s
profit in the form of dividend.
True   False
 
104. Derivative securities are primitive financial securities that are used to raise much needed
funds.
True   False
 
105. If a listed company violates the listing rules of the stock exchange, the company is likely to
be delisted.
True   False
 
106. A growth maximisation strategy by management always results in wealth maximisation for
the shareholders.
True   False
 
107. When a shareholder first sells their shares on a stock exchange this involves the secondary
role of the share market.

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True   False
 
108. A common measure of market liquidity is the ratio of turnover to market capitalisation.
True   False
 
109. An active and well-organised secondary market in existing shares benefits a company
because it receives an additional payment from the share market.
True   False
 
110. The price of an equity-related derivative is directly related to the price of the corresponding
security on the stock exchange.
True   False
 
111. Discuss briefly what part agency theory plays in the corporate governance of a company.
______________________________________________________________________________
 
112. Discuss briefly the different types of equity capital involved in a modern stock exchange
such as the ASX.
______________________________________________________________________________
 
113. Discuss the roles of the participants in a primary market issue of shares.
______________________________________________________________________________
 
114. Discuss what is meant by the derivative role of a share market.
______________________________________________________________________________
 
115. Discuss what is meant by the interest rate role of a stock exchange.
______________________________________________________________________________
 
116. Explain why a good secondary market for the trading of a company’s shares is of interest to
the company.
______________________________________________________________________________
 
117. How can an investor gain exposure to the real estate market without direct purchase of real
estate? Explain.
______________________________________________________________________________
 

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of McGraw-Hill Education.
 19

118. A contract for difference (CFD) is not always understood. Describe and discuss the major
features of the CFD.
______________________________________________________________________________

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 20

Chapter 04 Testbank Key

 
1. A business organisation that is a separate legal entity, can buy property in its own name and
can enter into contracts with other entities is a:
A. sole proprietorship.
B. partnership.
C. special partnership.
D. corporation.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
2. Listing on the stock exchange means:
A. taking a privately owned firm and creating a publicly owned corporation whose shares can be
traded on the stock exchange.
B. taking a privately owned firm and creating a publicly owned corporation whose shares cannot
be traded on the stock exchange until some designated time frame.
C. taking a publicly owned firm and creating a privately owned entity whose shares can no
longer be traded.
D. none of the given answers.
Ans: A
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
3. A publicly listed corporation:
A. has its shares listed on a formal exchange and designated with an exchange code.
B. is a legal entity (as part of the corporations law of a nation-state).
C. has to comply with the rules of the exchange where it is listed.
D. is all of the given answers.
Ans: D

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 21

AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
4. A corporation:
A. has a widely dispersed ownership amongst its shareholders.
B. has its objectives and policies decided by a board of directors.
C. has an executive management group responsible for day-to-day management of the
corporation.
D. is all of the given answers.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
5. The actual owners of a company is/are the:
A. board of directors.
B. executive management group.
C. shareholders.
D. creditors.
Ans: C
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
6. The _______ is/are responsible for conducting the day-to-day financial and operational affairs
of the company.
A. board of directors
B. executive management group
C. shareholders
D. creditors
Ans: B

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 22

AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
7. The _______ is/are responsible for the objectives and policies of the company, but not its day-
to-day affairs.
A. board of directors
B. executive management group
C. shareholders
D. creditors
Ans: A
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
8. Which of the following forms of business organisation is characterised by limited liability?
A. Sole partnership
B. Partnership
C. General partnership
D. Corporation
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
9. If a growing organisation wanted to set itself up so it had greater access to a wider range of
capital, it would become a:
A. sole proprietorship.
B. partnership.
C. general partnership.
D. listed corporation.
Ans: D

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of McGraw-Hill Education.
 23

AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
10. The owners of _______ face unlimited liability.
A. sole proprietorships only
B. sole proprietorships and partnerships only
C. corporations only
D. partnerships and corporations only
Ans: B
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
11. The liability of shareholders in ‘limited liability' companies means:
A. creditors of a company can call upon the shareholders in the case of company default to
contribute an amount based only on the current market price of the shares.
B. shareholders are only liable for any amount that is unpaid on the shares of a company.
C. in the event of company default, the creditors have no claim on the shareholders for any
contribution.
D. shareholders do not have a right to participate directly in the day-to-day management of a
company.
Ans: B
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
12. Because of their _____ liability, corporate stockholders are more interested in chances of
_____.
A. limited; failure than success
B. limited; success than failure
C. unlimited; success than failure
D. unlimited; failure than success
Ans: B

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of McGraw-Hill Education.
 24

AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
13. Which of the following statements about a corporation is NOT correct?
A. The executive management group of a corporation is responsible to its board of directors.
B. Under corporation law the board of directors of a corporation must report to its shareholders.
C. The directors of a corporation have a legal responsibility to make sure the corporation acts in
the shareholders' best interests.
D. The shareholders of a publicly listed small corporation have the right to participate in the day-
to-day management of the business.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
14. When a no-liability company defaults on its loans with its creditors, this means the:
A. creditors have a legal claim against the directors only.
B. creditors have a legal claim against the CEO only.
C. creditors have a legal claim against the chairman of the company.
D. shareholders do not have to meet any remaining payment on shares.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
15. When the owners of a company hire full-time executives to be responsible for the day-to-day
decisions, this _____ the _____ problem.
A. lessens, shareholder-lender
B. lessens, managers-shareholders
C. brings on, managers-shareholders
D. brings on, shareholder-lender
Ans: C

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of McGraw-Hill Education.
 25

AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
16. All of the following are advantages of a corporation except:
A. freely transferable ownership.
B. limited liability.
C. access to capital markets.
D. low management costs.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
17. Which of the following statements regarding companies is NOT correct?
A. A company is a discrete legal entity.
B. Since shares represent ownership in a company, ownership cannot be readily transferred to
new owners.
C. A company has a potentially unlimited life.
D. The shareholders' liability is limited.
Ans: B
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
18. When a corporation continues to operate regardless of changes in ownership, this is known
as:
A. the right of perpetual succession.
B. perpetual shares.
C. perpetual trading.
D. unlimited succession.
Ans: A

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of McGraw-Hill Education.
 26

AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
19. Which of the following is NOT an advantage of the corporate form of organisation?
A. The corporate form is particularly suited to large-scale business operations.
B. There is a separation of ownership (shareholders) and management control.
C. The corporate form allows for continuity of business activities.
D. Large amounts of funding can be raised on relatively favourable terms.
Ans: B
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
20. Which of the following is an advantage of the corporate form of organisation?
A. The managers that control day-to-day operations have a strong incentive to act in the best
interests of shareholders.
B. As agents of the shareholders, the managers want to follow a growth maximisation strategy.
C. The managers want to increase the number of staff so they can grow.
D. A wide pool of investors can supply large amounts of corporate funding to the corporation.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
21. Many companies use ______ to align the interests of shareholders with those of management.
A. bond options
B. share options
C. company cars
D. debentures
Ans: B

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 27

AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
22. Agency theory is concerned with:
A. a conflict between owners and managers.
B. the agents who act on behalf of the company.
C. the relationship between employees.
D. the conflict of interests between outside agents and the company.
Ans: A
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
23. The conflict of interests between the goals of the firm's owners and those of its managers is:
A. the antagonism theory.
B. the agency problem.
C. reduced when the company is large.
D. serious only when sales volumes decline dramatically.
Ans: B
AACSB: Ethical
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
24. The key aspect of the agency relationship for the corporate form of business is that:
A. the firm's owners will always act in the best interests of the managers.
B. the managers will always act in the best interests of the firm's owners.
C. with their management contracts, the managers have the incentive to act in the best interests
of the shareholders.
D. the managers have different incentives from the shareholders.
Ans: D

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 28

AACSB: Ethical
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
25. Which of the following would NOT relate to agency costs involving management's desire to
maximise its benefits?
A. Management goals to achieve sales growth.
B. Management goals to achieve market share.
C. Management remuneration packages.
D. Management reports to shareholders.
Ans: D
AACSB: Ethical
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
26. Agency problems are reduced by:
A. monitoring management behaviour.
B. the shareholders' ability to sell their shares.
C. the threat of takeover by another firm.
D. all of the given answers.
Ans: D
AACSB: Ethical
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
27. Agency problems would be less likely to exist in a:
A. sole proprietorship.
B. partnership.
C. private company.
D. public company.
Ans: A

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of McGraw-Hill Education.
 29

AACSB: Ethical
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
28. The members of the board of directors of a corporation are elected by the:
A. executive management group.
B. shareholders.
C. creditors.
D. debt holders.
Ans: B
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
29. A primary aim of corporate management should be to:
A. maximise the company's profit.
B. maximise the number of shareholders.
C. maximise the shareholders' wealth.
D. minimise the company's costs.
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
30. The most appropriate goal for corporate management, according to finance theory, is to:
A. maximise the company's market share.
B. maximise the current profits of the company.
C. maximise the company's share price.
D. minimise the company's liabilities.
Ans: C

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of McGraw-Hill Education.
 30

AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
31. A _______ represents a financial claim to the cash flow of a business after all other claims
have been deducted.
A. bond
B. debenture
C. share
D. preference share
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: Introduction
Topic: The share market and the corporation

 
32. Which of the following is NOT a feature of a share?
A. Part ownership in the company
B. The right to vote in the control of the company
C. Readily transferable
D. The right to periodic payments
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: Introduction
Topic: The share market and the corporation

 
33. Consider the following statements:
i. A corporation differs from other forms of business organisation only in that it tends to be
larger.
ii. The corporate form of business organisation is destined to fail because ‘managers', and not the
‘owners', run the business.
iii. The corporate entity ceases on the death or bankruptcy of the individual shareholders.
iv. The stock exchange is important to the corporation only because it provides the institutional
framework through which new shares may be sold to the public.
v. Maximisation of shareholder utility is presumed when managers maximise possible profit.
How many of these statements are true and how many are false?

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of McGraw-Hill Education.
 31

A. 1 statement is true and 4 are false

B. 2 statements are true and 3 are false
C. 3 statements are true and 2 are false
D. 4 statements are true and 1 is false
Ans: A
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
34. Which of the following statements about share markets is NOT true?
A. They help carry out direct financing.
B. Most of the trading takes place in already-issued shares.
C. Share markets have aided in the increase in importance of corporations.
D. Every time a listed company's shares are bought or sold, the company receives funding.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 
35. The role of stock exchanges such as the ASX include:
A. they are a platform for firms’ shares to be listed.
B. they monitor the behaviour of market participants and also ensure compliance with the
regulatory requirements of the nation-state supervisor.
C. listing on a stock exchange requires the corporation to comply with the rules of that exchange.
D. all of the given answers.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 
36. An equity market is best described as:
A. a place where shares of listed companies are traded.
B. a physical platform where buy and sell orders are made.
C. where the trading and issuing of equities, bonds and other classes of publicly listed companies
take place.
D. all of the given answers.

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of McGraw-Hill Education.
 32

Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 
37. The following statements about the primary market are true except:
A. it is where companies float shares to the general public in an initial public offering (IPO) to
raise capital.
B. it is a platform for existing shareholders to liquidate previously owned shares.
C. only equities are issued.
D. all of the given answers.
Ans: A
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 
38. The total number of equity raisings on the ASX primary market over the past 20 years has:
A. increased.
B. decreased.
C. remained stable.
D. decreased significantly.
Ans: A
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
39. The greatest number of issues of equity capital on the ASX over recent years has involved:
A. rights issues.
B. placements.
C. dividend reinvestment.
D. new floats.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

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of McGraw-Hill Education.
 33

 
40. The listing of new companies on an exchange such as the ASX and subsequently raising
funds is known as:
A. share buybacks.
B. initial public offerings.
C. share issues.
D. rights issues.
Ans: B
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
41. Which of the following security types is NOT usually listed on the ASX?
A. Ordinary shares
B. Treasury bonds
C. Debentures
D. Commercial paper
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
42. An issue of new shares to the public must have:
A. a prospectus attached.
B. an underwriter.
C. detailed documents called covenants.
D. a memorandum of understanding in place.
Ans: A
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
43. From a company's viewpoint, the existence of an active, liquid, well-organised secondary
market in existing shares:
A. facilitates the raising of further capital in the secondary market.
B. maintains the share price above the initial issue price.

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of McGraw-Hill Education.
 34

C. encourages successful primary market issues.

D. is of little or no consequence.
Ans: C
AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
44. The following statements about the secondary market are true except:
A. there is a transfer of ownership and a settlement of value for that transfer.
B. the existence of a well-developed secondary market is of great significance to a corporation
that may be seeking to raise new equity finance in the future.
C. corporations normally seek to raise additional equity in order to expand the business through
the secondary market because there are thousands of buyers and sellers of new securities.
D. all of the given answers.
Ans: C
AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
45. An initial public share offering represents the share market's _____ role.
A. interest rate
B. information
C. primary
D. secondary
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
46. The primary market role of a stock exchange is:
A. to trade the shares of the largest corporations.
B. to ensure the sale of new-issue securities.
C. to ensure deep trades in listed securities.
D. to ensure that information about listed companies is quickly reflected in share prices.
Ans: B

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of McGraw-Hill Education.
 35

AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
47. Which of the following securities would you expect to buy on the primary market?
A. A bond that has no maturity left
B. A bond with a very long maturity date
C. A newly issued share
D. A previously issued share
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
48. The company process that gives the shareholders the chance to change their dividends into
additional company shares is called:
A. share placement.
B. dividend reinvestment scheme.
C. secondary public offering.
D. rights issue.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
49. The distribution of extra shares on pro-rata basis by a company to all existing shareholders is
called a:
A. new float.
B. private placement.
C. secondary float.
D. pro-rata rights issue.
Ans: D
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

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 36

 
50. The selling of new shares to a selected number of institutional investors is called a/an:
A. share release.
B. private placement.
C. share float.
D. initial offering.
Ans: B
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
51. Compared with other forms of equity raisings, private placements for shares:
A. can be quicker but more expensive because of the short time frame involved.
B. can be quicker if a prospectus is available for distribution.
C. can be quicker and often cheaper.
D. involve stricter regulatory requirements for meeting the shorter time frame involved.
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
52. The basic role of a company underwriter about to list a new share issue on a stock exchange
is to:
A. provide advice on the timing of the share issue.
B. ensure the company complies with the stock exchange's listing rules.
C. establish a deep and liquid secondary market in the shares.
D. purchase any unsold shares on issue.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
53. If the depth and liquidity of a share market is high, it means:
A. corporations may raise funds at higher costs.
B. investors will experience higher risk exposures.
C. investors can passively manage their risk exposure.

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of McGraw-Hill Education.
 37

D. corporations may raise funds at lower costs.

Ans: D
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
54. The document drawn up by a company stating the terms and conditions of a public share
issue is called a:
A. share directory.
B. memorandum.
C. share plan.
D. prospectus.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

 
55. Secondary markets:
A. can provide liquidity but do not raise new funds.
B. make capital-raising in the primary market more attractive.
C. help borrowers raise long-term funds.
D. include all of the given answers.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
56. A characteristic of secondary markets for shares is that:
A. only highly risky shares are traded.
B. only low-risk shares are traded.
C. they are where companies borrow funds for the second time.
D. companies do not get funds from the secondary market in shares.
Ans: D

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 38

AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
57. A well-developed secondary market is likely to:
A. aid in raising extra finance in the primary market.
B. help manage risk exposures of investors.
C. help with corporate agency problems.
D. include all of the given answers.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
58. In relation to a share market, the ratio of the value of turnover to market capitalisation is
called:
A. market depth.
B. market flow.
C. market transfer.
D. market liquidity.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
59. The following descriptions are true of a derivative instrument:
A. it is a risk management product that derives its value from an underlying commodity or
financial instrument.
B. it helps determine the price today for an underlying asset, but delivered into a specified future
point in time.
C. it helps individuals, firms and other entities to hedge possible risk exposure in their
investment portfolio.
D. all of the given answers.
Ans: D

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 39

AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.04 The secondary market role of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
60. If a stock exchange provides a market for the trade of specific share market-related derivative
products, which of the following options is generally NOT correct?
A. The derivative products provide an investment tool to take advantage of future share price
movements.
B. The derivative products facilitate the management of risk within an existing share portfolio.
C. The derivative products provide protection against adverse movements in share prices.
D. The derivative products remove the share price volatility of stocks listed on the stock
exchange.
Ans: D
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
61. Compared with an exchange-traded derivative product, over-the-counter derivative products:
A. are discussed and agreed upon by the parties involved.
B. are standardised.
C. have margin calls.
D. are traded between banks, not on the exchange.
Ans: A
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
62. To protect their portfolio of shares from a possible share price fall, an investor could buy a:
A. call option.
B. put option.
C. warrant on a matching share index.
D. matching share index future.
Ans: B

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 40

AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
63. The strategy of lowering risk exposure by holding a number of investments in a portfolio is
called:
A. augmentation.
B. diversification.
C. expansion.
D. optimisation.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
64. In options markets, option premiums are paid by:
A. option writers to buyers.
B. option buyers to sellers.
C. both option buyers and sellers.
D. put option buyers only.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
65. Which of the following is NOT correct?
A. A real estate investment trust may purchase industrial property.
B. An infrastructure fund may hold investments in power stations.
C. The units of a listed REIT purchases property are generally illiquid.
D. An investor may use a CFD to go long in a rising market.
Ans: C

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of McGraw-Hill Education.
 41

AACSB: Reflective thinking

Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
66. An investor holding an investment portfolio who purchases a put option is expecting:
A. share prices to go up in the short term.
B. share prices to fall in the short term.
C. interest rates to go up.
D. interest rates to go down.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
67. The writer of a put option expects the share price to:
A. decrease.
B. increase.
C. remain unchanged.
D. pay a dividend.
Ans: B
AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
68. If an investor buys a put option on shares they own and then the price of the shares rises, the
investor:
A. must exercise the option.
B. must pay the difference between the contract start and close values.
C. has no obligation to exercise the option.
D. has to pay an additional premium to the option writer.
Ans: C

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of McGraw-Hill Education.
 42

AACSB: Reflective thinking

Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
69. A futures contract is a:
A. contract that provides a specified commodity or instrument to be bought at a future date at a
price determined at the expiry date.
B. contract that provides a specified commodity or instrument to be bought at a future date at a
price decided today.
C. right to buy a specified commodity or instrument at a price determined today.
D. right to buy a specified commodity or instrument at a price determined at the expiry date.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
70. Units sold in a managed investment scheme that follows the performance of a specified share
market index are called:
A. contracts for difference.
B. exchange traded funds.
C. option funds.
D. warrant funds.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
71. A contract for difference is:
A. the difference between a put and a call option on the same security.
B. the difference between an option and a warrant on the same security.
C. the difference between a physical stock market and the futures market.
D. an agreement to exchange the difference between a contract start and close values.
Ans: D

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of McGraw-Hill Education.
 43

AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
72. A stock exchange may also list some debt issues of companies and governments. This
provision by a stock exchange is known as a/an:
A. subordinate debt market.
B. interest rate market.
C. primary debt market.
D. secondary bond market.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
73. Which of the following statements, in regard to the provision of an interest rate market by a
stock exchange, is NOT correct?
A. It is beneficial to both borrowers and lenders because it can add liquidity.
B. It can provide ease of access to information about debt securities.
C. It can reduce investors' transaction costs.
D. Its main function is to serve as a primary market for debt issues.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
74. Which of the following debt securities is often quoted on the ASX?
A. Bank bills
B. Certificates of deposit
C. Floating rate notes
D. Commercial paper
Ans: C

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of McGraw-Hill Education.
 44

AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
75. Examples of debt instruments listed on a stock exchange do NOT include:
A. corporate bonds.
B. floating rate notes.
C. convertible notes.
D. promissory notes.
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
76. The corporate bond that pays a variable rate of interest based on interest rate changes for a
reference rate is a/an:
A. adjustable note.
B. convertible note.
C. floating rate note.
D. straight corporate bond.
Ans: C
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
77. Which of the following is NOT used by the ASX to promote an efficient market?
A. Rapid release of new information
B. A clearing house
C. Stock trading systems
D. Transaction settlement systems
Ans: B
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange

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of McGraw-Hill Education.
 45

 
78. Major determinants of an efficient stock market include:
A. the information is easily available to all the market participants.
B. the speed at which information is available to the market participant.
C. the speed at which this information is absorbed and reflected in a share price.
D. all of the given answers.
Ans: D
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange

 
79. A security that pays a fixed dividend and usually converts to ordinary shares at a future date
is called a:
A. corporate bond.
B. floating rate note.
C. preference share.
D. debenture.
Ans: C
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
80. The Australian Stock Exchange now operates a system known as ASX Trade. Which of the
following statements is correct in relation to ASX Trade?
A. It allows individual investors direct access to execute buy/sell orders on the ASX.
B. At opening of trade, overlapping bids and offers are shared between existing orders.
C. Share trading is also conducted on the floor of the ASX using ‘chalkies'.
D. It facilitates the efficient processing and settlement of market transactions through multiple
platforms.
Ans: B
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
81. The Clearing House Electronic Subregister System (CHESS) is operated by the ASX. Which
of the following statements regarding CHESS is NOT correct?

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of McGraw-Hill Education.
 46

A. The system allows settlement of transactions within three working days.

B. A shareholder must conduct a CHESS transaction with a sponsor.
C. Shareholders can still hold traditional share certificates.
D. The clearing house issues holding statements to uncertified shareholders.
Ans: C
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange

 
82. The risk that arises from the failure of parties to complete and resolve a transaction is called:
A. Herstatt risk.
B. default risk.
C. settlement risk.
D. market risk.
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange

 
83. The probability that a party to a buy/sell transaction will not complete it is called:
A. basis risk.
B. clearing risk.
C. settlement risk.
D. transaction risk.
Ans: C
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange

 
84. The reason for the requirement by the ASX for companies to abide by the Corporations Act
2001 (Cwlth) is to:
A. ensure that there will be an active market in the company's shares.
B. maintain investor confidence in the company's creditworthiness.
C. ensure a minimum number of shareholders in the company.

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of McGraw-Hill Education.
 47

D. ensure that information which may have a material effect on the share price is provided to the
market.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.08 Recognise the importance of information flows to the efficiency and integrity of stock exchanges.
Section: 4.08 The information role of a stock exchange
Topic: The information role of a stock exchange

 
85. The rules that apply to listed companies about promptly advising a stock exchange of any
material changes relating to the corporation are called:
A. informational disclosure.
B. continuous disclosure.
C. transaction disclosure.
D. related parties disclosure.
Ans: B
AACSB: Ethical
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.08 Recognise the importance of information flows to the efficiency and integrity of stock exchanges.
Section: 4.08 The information role of a stock exchange
Topic: The information role of a stock exchange

 
86. Having regard to a number of high-profile situations where improper practices resulted in
share market volatility, losses to individual shareholders, and possible breaches of existing
legislation, the Commonwealth government transferred responsibility in 1991 for the
administration of Corporations Law to:
A. the Australian Securities Exchange.
B. the Australian Securities and Investments Commission.
C. individual state government corporate governance authorities.
D. the Australian Consumer and Competition Commission.
Ans: B
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange

 
87. ASIC is the regulatory body responsible for the supervision of:
A. insurance companies only.
B. insurance and investment companies only.
C. initial public offerings only.
D. corporations law and markets.
Ans: D

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of McGraw-Hill Education.
 48

AACSB: Ethical
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange

 
88. The major supervisors of the Australian share market are:
A. RBA and ASX.
B. ASIC and ASX.
C. APRA and ASX.
D. EFIC and ASIC.
Ans: C
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange

 
89. Which of the following statements is NOT correct?
A. The Corporations Act 2001 compels continuous disclosure requirements on a listed company.
B. All corporations, except mining companies, must submit half-yearly and annual audited
reports to the ASX.
C. The main supervisor in the Australian market is the ASX.
D. If a listed company does not fully disclose information to the satisfaction of the ASX, trading
in its shares may be suspended.
Ans: C
AACSB: Diverse and multicultural
Bloom's: Evaluation
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange

 
90. To try to remove potential conflicts of interest with regard to the ASX monitoring listed
companies, ____ has also assumed the role of supervising the ASX.
A. APRA
B. the Australian Reserve Bank (RBA)
C. ASIC
D. the Stock Brokers Association
Ans: C

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of McGraw-Hill Education.
 49

AACSB: Ethical
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange

 
91. Funding that is provided to higher risk companies seeking equity funding (but are unable to
access equity funding through a public issue in the share market) is generally called:
A. bank funding.
B. private placement funding.
C. preference share funding.
D. equity funding.
Ans: D
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.09 Identify the principal regulators that affect the behaviour of participants in the Australian share market.
Section: 4.09 The regulatory role of a stock exchange
Topic: The regulatory role of a stock exchange

 
92. Corporate takeovers may help address
A. agency problems in the modern corporation.
B. a rights issue.
C. the right of perpetual succession.
D. the problem with continuous disclosure.
Ans: A
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
93. Generally this is NOT a characteristic of ETFs:
A. listed on an exchange.
B. often seeks to match the performance of an index.
C. diversified portfolio.
D. strategies similar to a hedge fund.
Ans: D

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of McGraw-Hill Education.
 50

AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
94. In Australia settlement occurs in _____ business days. Settlement occurs through _____.
A. five; ASX Trade and ASX Trade 24
B. five; CHESS
C. three; ASX Trade and ASX Trade 24
D. three; CHESS
Ans: D
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and settlement (CHESS) platforms used for share-market
transactions by the Australian Securities Exchange (ASX).
Section: 4.07 The trading and settlement roles of a stock exchange
Topic: The trading and settlement roles of a stock exchange

 
95. Which of the following is a security that involves both debt and equity?
A. Rights
B. Convertible bond
C. Floating rate note
D. Corporate bond
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
96. ‘Limited liability of a corporation’ means the:
A. corporation has only limited liability for the torts committed by its employees.
B. corporation is not liable for share market losses of its shareholders.
C. shareholders are not personally liable for the corporation's debts.
D. corporation has limited liability for the torts committed by its shareholders.
Ans: C

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 51

AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
97. Listing of bonds does not create this advantage:
A. tax preference.
B. liquidity.
C. access to information.
D. easy purchase and sale.
Ans: A
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
98. Private equity funding:
A. is usually provided to lower-risk companies.
B. seeks to help the firm move towards an IPO.
C. is normally provided for 10–15 years.
D. is funded through contracts for difference.
Ans: B
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
99. Shareholders of a public corporation have the right to participate in the profits and receive
annual dividends.
Ans: False
Feedback: Shareholders are entitled to a share in profits but are not automatically entitled to
dividend payments, unlike bond holders.
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

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 52

 
100. The shareholders of a public corporation do not participate directly in the day-to-day
operation of a company but appoint the executive management group to do so at the
shareholders' general meeting.
Ans: False
Feedback: The executive management group is appointed by the board of directors.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
101. For a limited liability company the liability is restricted to the debt holders of the company
and not the shareholders.
Ans: False
Feedback: Limited liability concerns the shareholders.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
102. The corporate entity means that if a major shareholder is declared bankrupt it does not
necessarily impact on the firm's operations.
Ans: True
Feedback: This arises out of the concept of the right of perpetual succession where a corporation
continues to operate regardless of changes in ownership.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
103. As a part owner of a public corporation, a shareholder has residual claims against the firm’s
profit in the form of dividend.
Ans: True
Feedback: The shareholders are residual claimholders, as such they receive their entitlement of
benefits after all other stakeholders are paid.

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 53

AACSB: Communication
Bloom's: Knowledge
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
104. Derivative securities are primitive financial securities that are used to raise much needed
funds.
Ans: False
Feedback: Derivative securities such as options, futures and swaps are risk management products
used by individual investors, fund managers, financial institutions and others to manage possible
risk exposure.
AACSB: Communication
Bloom's: Synthesis
Difficulty: Hard
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
105. If a listed company violates the listing rules of the stock exchange, the company is likely to
be delisted.
Ans: True
Feedback: A stock exchange’s listing rules are additional to a company’s statutory obligations
under the corporations legislation of the nation-state in which the stock exchange is located. If
listed companies do not comply with the listing rule, they may be delisted.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 
106. A growth maximisation strategy by management always results in wealth maximisation for
the shareholders.
Ans: False
Feedback: It is generally accepted in corporate finance that an organisation should be managed in
such a way as to maximise shareholder value.
AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

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of McGraw-Hill Education.
 54

 
107. When a shareholder first sells their shares on a stock exchange this involves the secondary
role of the share market.
Ans: True
Feedback: The secondary market transactions in a stock exchange involve the buying and selling
of existing securities.
AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
108. A common measure of market liquidity is the ratio of turnover to market capitalisation.
Ans: True
Feedback: It is a widely used measure of market liquidity.
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
109. An active and well-organised secondary market in existing shares benefits a company
because it receives an additional payment from the share market.
Ans: False
Feedback: A company does not receive any funds from secondary market transactions, only
primary.
AACSB: Communication
Bloom's: Comprehension
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
110. The price of an equity-related derivative is directly related to the price of the corresponding
security on the stock exchange.
Ans: True
Feedback: As the underlying security price increases (decreases) so the derivative's price directly
increases (decreases).

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 55

AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
111. Discuss briefly what part agency theory plays in the corporate governance of a company.
Ans: Since the shareholders are not directly involved in running the company, but the managers
are, there is the problem of separation of control. Since the managers of the company do not own
the company they will not necessarily have a strong incentive to act in the best interests of the
shareholders. Since they may be tempted to run the company for their own personal benefit, this
may lead to a conflict of interest known as the agency problem.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3 minutes
Learning Objective: 4.01 Understand the structure of a corporation and identify advantages and disadvantages of being a publicly
listed corporation.
Section: 4.01 The nature of a corporation
Topic: The nature of a corporation

 
112. Discuss briefly the different types of equity capital involved in a modern stock exchange
such as the ASX.
Ans: The different types of equity capital for a modern stock exchange are ordinary shares (the
most common type), preference shares, rights and derivative products such as options and
warrants. Ordinary shares have a residual claim on the company assets if the company goes into
liquidation. But ordinary shareholders are the ‘owners' of the company and may share in any
profits. Preference shareholders have a fixed payment.
AACSB: Diverse and multicultural
Bloom's: Evaluation
Difficulty: Medium
Est time: 1-3 minutes
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange.
Section: 4.02 The stock exchange
Topic: The stock exchange

 
113. Discuss the roles of the participants in a primary market issue of shares.
Ans: The participants in a primary market issue of shares are the advisers and underwriters
(usually brokers, investment banks and other specialists), the corporations, brokers and the stock
exchange.
AACSB: Diverse and multicultural
Bloom's: Evaluation
Difficulty: Medium
Est time: 1-3 minutes
Learning Objective: 4.03 Understand the primary market role of a stock exchange through which corporations raise new funding.
Section: 4.03 The primary market role of a stock exchange
Topic: The primary market role of a stock exchange

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 56

114. Discuss what is meant by the derivative role of a share market.

Ans: Stock exchanges may provide a market for the trading of equity-related derivative products
such as options, warrants and futures, where a derivative is a financial security that derives its
price from an underlying commodity or financial instrument.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: 1-3 minutes
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
115. Discuss what is meant by the interest rate role of a stock exchange.
Ans: Not only may a stock exchange have a market for equities but it may also offer a market for
debt instruments such as straight corporate bonds, debentures, floating rate notes, convertible
notes and preference shares.
AACSB: Reflective thinking
Bloom's: Synthesis
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.06 Examine the interest rate market role of a stock exchange.
Section: 4.06 The interest rate market role of a stock exchange
Topic: The interest rate market role of a stock exchange

 
116. Explain why a good secondary market for the trading of a company’s shares is of interest to
the company.
Ans: The secondary market does not raise funds for a firm as only newly issued securities in the
primary market would do that. However, a good secondary market helps support the future
issuance of securities. Investors are more willing to buy new securities if they foresee that they
can easily sell. The secondary market also provides important information such as pricing.
AACSB: Communication
Bloom's: Comprehension
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange through which existing securities are bought and
sold.
Section: 4.04 The secondary market role of a stock exchange
Topic: The secondary market role of a stock exchange

 
117. How can an investor gain exposure to the real estate market without direct purchase of real
estate? Explain.
Ans: Real estate investment trusts (REIT) are listed on the stock exchange. A REIT is a trust
which holds properties. These are diversified up to a point as usually the REIT has a focus on a
type of real estate, such as shopping centres, hotels, housing units and so forth. They generate
capital gains and rental income. Note that the REIT investment is much more liquid than the
underlying assets held in the trust—modern finance at work.

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 57

AACSB: Communication
Bloom's: Knowledge
Difficulty: Medium
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

 
118. A contract for difference (CFD) is not always understood. Describe and discuss the major
features of the CFD.
Ans: A CFD is a contract listed on a stock exchange that is an agreement between two parties,
typically described as a ‘buyer’ and ‘seller’, to exchange the difference in the value of a CFD.
The difference in value is calculated by subtracting the value of the CFD contract at the start date
from the value of the contract at the close date. Typically, the seller will pay to the buyer the
difference between the current value of an asset and its value at contract time if the difference is
positive, and vice versa. The CFD may be based on a nominated security listed on a local or
international stock exchange, stock exchange indices, foreign currencies or commodities. For
example, a CFD may be based on BHP Billiton Limited shares listed on the ASX. The value of
the CFD is directly correlated with the value of the underlying BHP shares at the start and close
date specified in the CFD contract. A CFD provides a high level of leverage for an investor as
the buyer of a CFD only pays a deposit or initial margin; that is, the investor does not pay the full
value of the underlying shares. This means that an investor may be able to take a much larger
exposure to the market in that more of the underlying security can be bought or sold because full
payment is not required.
AACSB: Communication
Bloom's: Knowledge
Difficulty: Easy
Est time: <1 minute
Learning Objective: 4.05 Examine the managed product (exchange traded funds, contracts for difference, real estate investment
trusts and infrastructure funds) and derivative product (options, warrants and futures contracts) roles of a stock exchange.
Section: 4.05 The managed product and derivative product roles of a stock exchange
Topic: The managed product and derivative product roles of a stock exchange

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of McGraw-Hill Education.
 58

Chapter 04 Testbank Summary

# of
Category Questions
AACSB: Communication 85
AACSB: Diverse and multicultural 3
AACSB: Ethical 8
AACSB: Reflective thinking 22
Bloom's: Comprehension 55
Bloom's: Evaluation 3
Bloom's: Knowledge 43
Bloom's: Synthesis 17
Difficulty: Easy 57
Difficulty: Hard 6
Difficulty: Medium 56
Est time: 1-3 minutes 4
Est time: <1 minute 114
Learning Objective: 4.01 Understand the structure of a corporation and identify 42
advantages and disadvantages of being a publicly listed corporation.
Learning Objective: 4.02 Consider the origins and purpose of a stock exchange. 6
Learning Objective: 4.03 Understand the primary market role of a stock 18
exchange through which corporations raise new funding.
Learning Objective: 4.04 Discuss the secondary market role of a stock exchange 8
through which existing securities are bought and sold.
Learning Objective: 4.05 Examine the managed product (exchange traded funds, 19
contracts for difference, real estate investment trusts and infrastructure funds)
and derivative product (options, warrants and futures contracts) roles of a stock
exchange.
Learning Objective: 4.06 Examine the interest rate market role of a stock 11
exchange.
Learning Objective: 4.07 Explain the electronic trading (ASX Trade) and 6
settlement (CHESS) platforms used for share-market transactions by the
Australian Securities Exchange (ASX).
Learning Objective: 4.08 Recognise the importance of information flows to the 2
efficiency and integrity of stock exchanges.
Learning Objective: 4.09 Identify the principal regulators that affect the 6
behaviour of participants in the Australian share market.
Section: 4.01 The nature of a corporation 40
Section: 4.02 The stock exchange 6
Section: 4.03 The primary market role of a stock exchange 18
Section: 4.04 The secondary market role of a stock exchange 9
Section: 4.05 The managed product and derivative product roles of a stock 18
exchange
Section: 4.06 The interest rate market role of a stock exchange 11
Section: 4.07 The trading and settlement roles of a stock exchange 6

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 59

Section: 4.08 The information role of a stock exchange 2

Section: 4.09 The regulatory role of a stock exchange 6
Section: Introduction 2
Topic: The information role of a stock exchange 2
Topic: The interest rate market role of a stock exchange 11
Topic: The managed product and derivative product roles of a stock exchange 19
Topic: The nature of a corporation 40
Topic: The primary market role of a stock exchange 18
Topic: The regulatory role of a stock exchange 6
Topic: The secondary market role of a stock exchange 8
Topic: The share market and the corporation 2
Topic: The stock exchange 6
Topic: The trading and settlement roles of a stock exchange 6

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of McGraw-Hill Education.