Professional Documents
Culture Documents
The board of directors must implement policies that align the interests of
management with those of the shareholders. Corporate governance
policies seek, in part, to address potential agency problems.
Question 4
The five principal functions of a modern and efficient stock exchange are:
Question 6
Liquidity in the share market means that participants can buy and sell
shares without unduly disturbing current market prices of the shares that
are being traded.
Question 12
If stockbrokers received orders to buy RIO shares and another to sell RIO
shares, the stockbrokers initiate buy/sell orders of their clients by entering
the orders into the ASX Trade platform. ASX Trade matches buy and sell
orders and initiates the transaction.
Question 13
Listed corporations raise their equity funds and part of their debt funds
through the issue of securities on a stock exchange. Investors purchase
these securities because they have confidence in the operation of the
primary and secondary markets on the exchange. The current price of a
security reflects all known information relevant to that stock. The stock
price will change in response to new information coming to the market.
Therefore, the efficiency at which information is provided to the market
and the speed at which it is absorbed will directly affect the pricing of
listed securities.
Question 14
The Reserve Bank of Australia (RBA) is responsible for the monitoring and
assessment of licensed clearing and settlement platforms and systems. In
particular, the RBA ensures participants comply with its Financial Stability
Standards in order to reduce systemic risk within the financial system.
Corporations Issuing Equity in the Share Market
Question 2
CF 1 n 5
NPV =CF 0+
r g( ( ))
1
1+ g
1+r
78000000+
25000000
0.10.17( ( ))
1
1.17
1.1
32491840.92
Question 3
Question 4
The four main criteria that a corporation should analyse when determining
the firms appropriate debt-to-equity ratio are:
First, a firm may consider the ratio that is the norm in the industry in
which the firm operates, and adopt something near that ratio.
The second criterion for determining future gearing ratios is the
history of the ratio for the firm. The ratio employed in the past may
be regarded as the norm, and management may be reluctant to
change it greatly. If the business has been performing with a return
on assets that is acceptable to shareholders, it may be deemed
appropriate to continue with a similar gearing ratio.
The third criterion, and a more appropriate one than the first two, is
the limited imposed by lenders. It is quite common for lenders to
impose various loan covenants on the borrowings of a company.
Loan covenants are conditions or restrictions incorporated in loan
contracts that are designed to protect the interests of the lender. A
common covenant is a limit on the ratio of debt liabilities to total
assets.
The fourth criterion in determining the debt-to-equity ratio, and
perhaps the most relevant, is managements decision concerning
the firms capacity to service debt. The assessment is made by
determining the charges, the interest payments and the principal
repayments associated with a given level of debt, and assessing the
capacity of the firms expected future income flows to cover the
payments while leaving sufficient profits to satisfy shareholders
expectations for a return on their equity
Question 5
The only choice facing most businesses is should the business incorporate
as a limited liability company or as a no liability company?
Question 6
Santos might use an underwriting facility to assist in the selling task and
to guarantee the promoter that all shares offered for sale will be taken up.
The underwriters will provide advice on:
If the market prices fall below $11.45 and the new issue is unattractive
under the current circumstances, the underwriters may be left to take a
large proportion of the shares on issue. The underwriters may be released
from the underwriting obligation.
Question 8
Rio Tinto Limited has decided to sell its shale coal part of the
business by establishing a new limited liability company to be
known as Shoal Limited. Shoal Limited will be a listed corporation
on the ASX. Rio Tinto and Shoal decide to issue of instalment
receipts. An initial payment of $1.25 is payable on application and
a final payment of $1.40 is due 12 months later.
a) Shoal Limited will be a limited liability company. What are
the rights and financial obligations of shareholders that
purchase shares in the company?
Limited liability shares are usually sold on a fully paid basis; that is, on the
initial issue of the share, the shareholder pays the total issue price to the
corporation.
Question 11
Advantages:
A rights issue is a financial instrument that provides a future right to
the holder, therefore the right has value.
Disadvantages:
Advantages:
Disadvantages:
Question 12