Financial Markets and Institutions

Choose the best answer from the given alternatives

1. An arrangement that consolidates small amounts of funds to satisfy the demandfor large amounts is known as:
   A) Financial innovation.
   B) Leverage.
   C) Retail banking.
   D) Coincidence of wants
   E) Polling of funds.
2. Identify the correct statement about Australia’s financial system.
   A) The main source of funds is household savings.
   B) Savings can be in the form of deposits and/or investments.
   C) Governments are a source of savings when they have budget surpluses.
   D) Firms are a source of savings when they retain earnings.
   E) All of these.
3. Moonaca is a small country with only listed stocks on its stock exchange. Using the following data create a market capitalisation index.
   Stock Price on Index Creation Day Number of Shares issued
   A $35 200
   B $72 400
   C $15 700
   D $10 800

If the value of the stock index is set at 100 on the index creation date, what will be the value of the index when stock prices are the following:
Stock Stock Price
A $30
B $75
C $13
D $8

A) 100.25
B) 105.44
C) 94.84
D) 1.0219
E) None of the above

1. Of the following, which is NOT a feature of debt?
   A) Interest payments.
   B) Maturity date.
   C) Dividends.
   D) Security arrangements.
   E) Risk premiums.
2. If financial markets are efficient, then:
   A) There is reason to believe that prices are too high or too low.
   B) It is possible to profit regularly from analysing publicly available information.
   C) Prices will adjust quickly to correctly reflect new information.
   D) There will be periods where expectations are too bullish and too bearish.
   E) Historical price trends will give you a good idea of where prices are headed in the near future.
3. Ordinary shares:
   A) Are perpetual and transferable.
   B) Have limited liability.
   C) Entitle owners to vote in elections for the company’s board of directors.
   D) Entitle owners to participate in the profits of the company.
   E) All of these are correct.
4. A difference between ordinary and preference shares is:
   A) Preference dividends are payable only after ordinary dividends have been paid.
   B) Preference dividends are tax deductible.
   C) Preference dividends are a fixed amount.
   D) Ordinary shares are less risky.
   E) Preference shares have greater potential for capital gains.
5. If you put $10 in a savings account at the end of each year for 11 years, how much money will be in the account at the end of the 11th year? Assume that the account earns 11% per annum and round to the nearest dollar.
   A) $110
   B) $121
   C) $196
   D) $62
   E) $31
6. A listed company can raise additional capital through all of the following means
   EXCEPT:
   A) An IPO.
   B) Retained earnings.
   C) Private placement.
   D) Dividend reinvestment schemes.
   E) Rights issues.
7. Kena Bio-Technology Company preference shares are selling for $18. If it has a yearly dividend of $1.5, what is your expected rate of return (dividend yield) if you purchase the shares at market price?
   A) 12.0%
   B) 8.3%
   C) 25.0%
   D) 7.7%
   E) None of the above.
   Activity 2
   Fully document all calculations. Use 4 decimal points in interest calculations (e.g. 7%/12 = 0.5833% p/month) and round answers to 2 decimal places (e.g. $103.5512 = $103.55).
   Part A
   (a) You want to travel to Europe to visit relatives when you graduate three years from now. The trip is expected to cost a total of $10,000 at that time. Your parents have deposited $5,000 for you in an account paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda’s gift in an investment earning 10% over the next three years, how much must she deposit now, so you can visit your relatives at the end of three years?

(b) What is the annual compounded interest rate of an investment with a stated interest rate of 6% per annum, compounded quarterly, for 7 years?

Part B
(a) Zarra Ltd. shares are trading at $35.72, it has 1.5 billion ordinary shares issued and annual earnings available to ordinary shareholders of $2.85 billion. What is Zarra’s P/E ratio?

(b) Given a risk-free rate of 5.5% and a market return of 12%, calculate
ACD’s required return on equity if its beta is 1.4.
Activity 3
You should show your understanding in your own words, rather than simply coping or quoting directly from the book or other sources.
Part A
(a) Describe the rights of shareholders in a large company.
(b) Explain the difference between direct and indirect financing.
(Maximum: 300 words)
Part B
(a) Distinguish between the functions of the primary and secondary markets.
(b) What does it mean to ‘float’ a company? What is the purpose to float a company?
(Maximum: 300 words)