Legal Aspects of Business | Raising of Capital | MCQs
Raising of Capital, Green Shoe Option, Underwriting, Buy Back of Shares, Rights Shares, Inter Corporate Loans & Investments, Company Management, Corporate Governance
1. What is Private Placement of shares?
- a) A method where shares are offered to the public
- b) A method where shares are sold to a select group of investors
- c) A method where shares are issued to existing shareholders only
- d) A method where shares are sold through an issue house
Answer: b) A method where shares are sold to a select group of investors
2. Which document is NOT required for private placement of shares?
- a) Prospectus
- b) Statement in lieu of Prospectus
- c) Offer letter
- d) Application form
Answer: a) Prospectus
3. Under which arrangement does the company allot shares to a financial institution for sale to the public?
- a) Private Placement
- b) Offer for Sale
- c) Rights Issue
- d) Book Building
Answer: b) Offer for Sale
4. What is required when raising capital through a public offering via a prospectus?
- a) No prior approval from SEBI
- b) Invitation for public subscription to shares or debentures
- c) Private placement of shares
- d) Special resolution for buyback
Answer: b) Invitation for public subscription to shares or debentures
5. What is a Rights Issue?
- a) Shares are offered to the public for the first time
- b) Shares are allotted to existing shareholders based on their proportion of holding
- c) Shares are issued to the employees only
- d) Shares are sold through brokers
Answer: b) Shares are allotted to existing shareholders based on their proportion of holding
Book Building
6. What does Book Building primarily involve?
- a) Raising capital through private placement
- b) Collecting orders from institutional buyers based on an indicative price range
- c) Offering shares to the public at a fixed price
- d) Raising capital through debt securities
Answer: b) Collecting orders from institutional buyers based on an indicative price range
7. Who is responsible for determining the final price during the Book Building process?
- a) SEBI
- b) Underwriters
- c) Issuer company and book runner
- d) Government
Answer: c) Issuer company and book runner
8. Which of the following is NOT a benefit of the Book Building process?
- a) Efficient capital raising with reduced paperwork
- b) Optimal demand-based pricing
- c) Uncertainty in pricing
- d) Helps evaluate the intrinsic value of the instrument
Answer: c) Uncertainty in pricing
9. What is the Green Shoe Option?
- a) An option to raise additional funds by issuing new shares
- b) A mechanism to stabilize the price of securities post-IPO
- c) A government loan scheme for companies
- d) A process to buy back shares from the market
Answer: b) A mechanism to stabilize the price of securities post-IPO
Minimum Subscription and Underwriting
10. What is the minimum subscription requirement for a public issue of shares according to SEBI guidelines?
- a) 60%
- b) 90%
- c) 50%
- d) 100%
Answer: b) 90%
11. In case of inadequate subscription to a public issue, who can step in to ensure the issue is fully subscribed?
- a) Government
- b) Book runner
- c) Underwriters
- d) SEBI
Answer: c) Underwriters
12. Which of the following is the maximum commission payable to underwriters for shares as per SEBI guidelines?
- a) 10%
- b) 5%
- c) 2.5%
- d) 1%
Answer: b) 5%
13. Underwriting is mandatory for public issues according to SEBI guidelines.
- a) True
- b) False
Answer: b) False
Buy Back of Shares
14. Which of the following conditions is NOT required for a company to buy back its shares?
- a) Authorization by the company’s articles
- b) Passing a special resolution
- c) The buyback should not exceed 10% of paid-up capital
- d) The buyback can be funded through proceeds from earlier share issues
Answer: d) The buyback can be funded through proceeds from earlier share issues
15. What is the maximum limit of buyback of shares as a percentage of paid-up capital and free reserves?
- a) 25%
- b) 50%
- c) 10%
- d) 15%
Answer: a) 25%
Rights Shares and Bonus Shares
16. Rights shares must first be offered to whom?
- a) New investors
- b) Existing shareholders
- c) Financial institutions
- d) Government
Answer: b) Existing shareholders
17. Bonus shares are issued to existing members:
- a) At a discounted rate
- b) For free
- c) At a higher price than market value
- d) Through a public offering
Answer: b) For free
Inter Corporate Loans and Investments
18. What is the maximum limit for inter-corporate loans or investments as per Section 372A?
- a) 100% of paid-up capital and free reserves
- b) 60% of paid-up capital and free reserves
- c) 100% of free reserves
- d) 80% of paid-up capital
Answer: b) 60% of paid-up capital and free reserves
Company Management: Directors and their Roles
19. Which of the following is a disqualification for being appointed as a director of a company?
- a) A person of sound mind
- b) An undischarged insolvent
- c) A person who has paid for all calls on shares
- d) A person who is a shareholder
Answer: b) An undischarged insolvent
20. What is the minimum number of directors required for a private company under the Companies Act?
- a) 3
- b) 2
- c) 5
- d) 1
Answer: b) 2
21. Which of the following does NOT qualify as a form of director under the Companies Act?
- a) Alternate Director
- b) Nominee Director
- c) Honorary Director
- d) First Director
Answer: c) Honorary Director
22. The appointment of directors at a general meeting requires a resolution from:
- a) Board of directors
- b) Shareholders
- c) Government
- d) CEO
Answer: b) Shareholders
23. What is the term limit for an alternate director appointed by the board?
- a) Until the next AGM
- b) 3 years
- c) 6 months
- d) 1 year
Answer: a) Until the next AGM
24. What is the maximum managerial remuneration a company can pay according to the Companies Act, 2013?
- a) 15% of net profits
- b) 5% of net profits for a managing director
- c) 11% of net profits
- d) 3% of net profits for any director
Answer: c) 11% of net profits
Corporate Governance
25. Which of the following is a core principle of good corporate governance?
- a) Profit maximization
- b) Honesty and transparency
- c) Market domination
- d) Employee welfare
Answer: b) Honesty and transparency
26. According to the McKinsey & Co. survey, institutional investors are willing to pay a premium for companies with:
- a) High profits
- b) Strong governance
- c) Large market share
- d) Diversified portfolios
Answer: b) Strong governance
27. Which of the following is NOT an objective of good corporate governance?
- a) Ensuring a properly structured Board
- b) Promoting investor confidence
- c) Focusing solely on profit maximization
- d) Keeping shareholders informed of relevant developments
Answer: c) Focusing solely on profit maximization
28. What is the benefit of transparency in corporate governance?
- a) Increased regulatory oversight
- b) Improved investor confidence
- c) Enhanced operational secrecy
- d) Higher market volatility
Answer: b) Improved investor confidence
Bonus and Rights Shares
29. The issuance of bonus shares is usually funded by:
- a) Borrowed capital
- b) Profits and reserves
- c) External financing
- d) Debentures
Answer: b) Profits and reserves
30. Which of the following is a correct statement about the "Rights Shares" method of raising capital?
A) Rights shares can only be issued to new investors, not existing shareholders.
B) Rights shares must be issued to existing shareholders in proportion to their capital paid up.
C) A special resolution is not required for issuing rights shares.
D) Rights shares are issued by the company without any restrictions.
Answer: B
Rights shares must be issued to existing shareholders in proportion to their capital paid up.
31. In which of the following cases does a company issue Bonus Shares?
A) When the company raises additional capital through a rights issue.
B) When the company capitalizes its profits by issuing fully paid-up shares to its members.
C) When the company seeks to increase the number of shares in the market through a public offering.
D) When the company issues shares to the public through a prospectus.
Answer: B
Bonus shares are issued when the company capitalizes its profits and issues fully paid-up shares to its existing members.
32. What is the maximum commission that can be paid to underwriters for debentures?
A) 5%
B) 2.5%
C) 10%
D) 3%
Answer: B
The maximum commission payable to underwriters for debentures is 2.5%.
33. The Green Shoe Option is designed to:
A) Maximize the profit margins for underwriters in an IPO.
B) Ensure that the underwriters are given a right to purchase additional securities if the IPO is oversubscribed.
C) Offer more shares to the public during an IPO.
D) Prevent the company from making a public offer through a prospectus.
Answer: B
The Green Shoe Option allows underwriters to purchase additional securities to stabilize the price after an IPO.
34. What is the minimum percentage of subscription required for a public company to make an allotment of shares?
A) 90% of the total subscription.
B) 75% of the total subscription.
C) 60% of the total subscription.
D) 100% of the total subscription.
Answer: A
A minimum of 90% subscription is required for allotment to be made.
35. Under which condition can a company buy back its shares?
A) Buyback is allowed only if the company has profits for the last 5 years.
B) Buyback can be made from proceeds of any earlier issue of the same kind of shares.
C) Buyback is permitted as long as it doesn't exceed 25% of the total paid-up capital and free reserves.
D) The company can buy back shares without any restrictions.
Answer: C
Buyback can be made provided it doesn't exceed 25% of the paid-up capital and free reserves of the company.
36. What is the role of a "book runner" in the book-building process?
A) To evaluate the company's corporate governance.
B) To act as an intermediary who helps in collecting orders and setting the final offer price.
C) To prepare the prospectus for the IPO.
D) To act as a financial advisor to the company.
Answer: B
The book runner helps collect orders and determines the final offer price for an IPO in the book-building process.
37. What is the primary benefit of the book-building process?
A) The price of the IPO is determined by the company alone without any external input.
B) It allows the company to evaluate the intrinsic worth of the instrument and better determine the offer price.
C) It ensures that all securities will be sold to the public.
D) It guarantees that the IPO will be oversubscribed.
Answer: B
Book building helps the company evaluate the intrinsic worth of the instrument and set a realistic offer price based on investor demand.
38. Which of the following is NOT a reason why a company would use the "Offer for Sale" method of raising capital?
A) To avoid issuing a prospectus for the public.
B) To provide financial institutions or an Issue House an opportunity to sell shares to the public.
C) To directly issue shares to the public without using an intermediary.
D) To sell shares at a higher price than the original price.
Answer: C
The Offer for Sale method involves using an intermediary to sell shares to the public, not a direct sale.
39. What is the maximum percentage of shareholding that a company can allow a director to hold without violating shareholder rights in a public company?
A) 5%
B) 10%
C) 15%
D) No maximum percentage is prescribed.
Answer: D
There is no maximum prescribed percentage for a director to hold shares unless stated in the company's articles.
40. Which of the following conditions is NOT required for a company to buy back its shares?
A) The buyback must be authorized by the company’s articles.
B) The company must pass a special resolution to approve the buyback.
C) The buyback cannot exceed 25% of the paid-up capital and free reserves of the company.
D) The company can buy back shares only using profits generated from the sale of shares.
Answer: D
Buyback can be made using free reserves or securities premium account, but not from proceeds of earlier issues of the same kind of shares.
41. In the context of inter-corporate loans and investments, which of the following is TRUE?
A) Companies can freely make loans exceeding 60% of their paid-up capital without restrictions.
B) Companies are prohibited from making any inter-corporate loans or investments.
C) A company can make loans and investments exceeding 60% of its paid-up capital only with approval from the shareholders.
D) A company can give loans to any other company without any limitations.
Answer: C
A company can make loans and investments exceeding 60% of its paid-up capital only under specific conditions, as per Section 372A.
42. Which of the following is a primary purpose of a "Prospectus" during an initial public offering (IPO)?
A) To list the executive members of the company.
B) To provide detailed information about the company and its financial performance for potential investors.
C) To offer discounted shares to existing shareholders.
D) To raise capital only through debt instruments.
Answer: B
The primary purpose of a prospectus is to provide detailed information about the company, including its financial health, operations, and risks, to potential investors during an IPO.
43. Which of the following types of shares cannot be issued by a company according to the Companies Act, 2013?
A) Redeemable preference shares.
B) Non-redeemable preference shares.
C) Convertible preference shares.
D) Irredeemable preference shares.
Answer: D
The Companies Act, 2013 does not permit companies to issue irredeemable preference shares. Preference shares must be redeemable in nature.
44. What is a "Red Herring Prospectus" used for in the context of a public offering?
A) To finalize the allotment of shares to investors.
B) To provide an outline of the offering and generate interest before the final details are settled.
C) To announce the official price of the shares.
D) To provide the exact number of shares being offered for sale.
Answer: B
A Red Herring Prospectus is used to generate interest in the offering before the final price and details are disclosed to the public.
45. A company has received more than 90% subscription in its IPO. What should the company do next?
A) Reject the subscription and refund the amount to subscribers.
B) Proceed with the allotment of shares to the subscribers.
C) Return the entire subscription amount to the investors.
D) Request a fresh subscription to complete the offering.
Answer: B
Once the IPO is oversubscribed by more than 90%, the company can proceed with the allotment of shares to the subscribers.
46. Which of the following is an example of a "Preference Share"?
A) A share that carries no voting rights and provides fixed dividend payment before any common shares.
B) A share that provides dividends based on the company’s profit.
C) A share that is convertible into common stock after a set period.
D) A share that entitles the holder to receive an equal amount of dividends as common shares.
Answer: A
A preference share carries fixed dividends and provides priority in dividend payments over common shares, but usually does not carry voting rights.
47. In which of the following cases will a company issue a "Rights Issue"?
A) The company issues additional shares to the public without offering to existing shareholders.
B) The company offers shares at a discount to raise capital from new investors.
C) Existing shareholders are given the right to buy additional shares in proportion to their current holdings.
D) The company issues bonus shares to shareholders based on profits.
Answer: C
In a rights issue, existing shareholders are given the right to purchase additional shares in proportion to their current holdings.
48. Which of the following is a characteristic feature of "Convertible Debentures"?
A) They are always repaid in cash.
B) They can be converted into equity shares after a predetermined period.
C) They cannot be traded in the secondary market.
D) They are not redeemable and are a form of permanent capital.
Answer: B
Convertible debentures can be converted into equity shares after a predetermined period, providing the holder with an opportunity to convert debt into ownership.
49. What is the role of an "Underwriter" during an IPO?
A) To provide capital for the company through direct investment.
B) To guarantee the sale of shares and take responsibility for any unsold shares.
C) To create a market for the company's shares post-listing.
D) To oversee the company’s internal audit and financial reports.
Answer: B
An underwriter guarantees the sale of shares during an IPO and may take responsibility for any unsold shares, ensuring the company raises the intended capital.
50. What is the primary objective of "Debenture Trustees"?
A) To act as an agent for the company in a rights issue.
B) To ensure the company complies with the terms of the debenture issue and protects the interests of debenture holders.
C) To underwrite the debenture issue.
D) To arrange the redemption of debentures at maturity.
Answer: B
Debenture trustees ensure that the company complies with the terms of the debenture issue and safeguards the interests of the debenture holders.
51. What does the "Debt Equity Ratio" measure in a company's financial structure?
A) The proportion of the company's revenue to its debt.
B) The proportion of debt to equity in financing the company’s operations.
C) The proportion of equity to total assets.
D) The amount of interest the company pays on its debt.
Answer: B
The Debt Equity Ratio measures the proportion of debt to equity in financing the company's operations and is a key indicator of financial leverage.
52. In the book-building process, the "Price Band" refers to:
A) The range of prices at which shares are offered to the public.
B) The minimum price set by the company for its shares.
C) The average market price at which shares are expected to trade.
D) The price set by the underwriters for buying shares.
Answer: A
The price band in the book-building process is the range of prices at which the shares are offered to the public, within which investors can place their bids.
53. Which of the following is a primary characteristic of a "Non-Convertible Debenture" (NCD)?
A) NCDs can be converted into equity shares after a certain period.
B) NCDs cannot be traded in the secondary market.
C) NCDs provide fixed interest but cannot be converted into equity.
D) NCDs are issued only by private companies.
Answer: C
Non-Convertible Debentures (NCDs) provide fixed interest payments and cannot be converted into equity shares.
54. What is the maximum number of members that a private company can have according to the Companies Act, 2013?
A) 50 members
B) 100 members
C) 200 members
D) There is no limit to the number of members in a private company.
Answer: A
A private company can have a maximum of 50 members under the Companies Act, 2013.
55. Which of the following is NOT a type of corporate bond?
A) Secured bond
B) Unsecured bond
C) Equity bond
D) Convertible bond
Answer: C
Equity bonds are not a standard type of corporate bond. Corporate bonds typically include secured, unsecured, and convertible bonds.
56. A company plans to issue shares to raise capital. It is offering shares directly to a select group of investors rather than through a public offering. This method is known as:
A) Public Issue
B) Private Placement
C) Rights Issue
D) Offer for Sale
Answer: B
A Private Placement refers to issuing shares to a select group of investors, rather than offering them to the public.
57. The "Book Value" of a share is defined as:
A) The current market price of a share.
B) The value of assets minus liabilities divided by the number of shares outstanding.
C) The price at which shares are listed on the stock exchange.
D) The dividend payout per share.
Answer: B
The book value of a share is calculated by dividing the company's net asset value (assets minus liabilities) by the number of shares outstanding.
58. The term "Convertible Preference Shares" refers to shares that:
A) Can be converted into common equity shares after a specific time period or event.
B) Cannot be traded in the stock market.
C) Carry a fixed dividend rate but cannot be converted into equity.
D) Are redeemable after a set period.
Answer: A
Convertible Preference Shares can be converted into common equity shares after a specific period or under certain conditions.
59. A company planning to raise funds through the issuance of debentures must provide:
A) A comprehensive set of financial reports and projections for the next 10 years.
B) A Debenture Trust Deed that outlines the terms of the issue.
C) An audited balance sheet of the company for the last five years.
D) A list of the board members with their professional background.
Answer: B
A company must provide a Debenture Trust Deed that details the terms of the debenture issue.
60. What is the "Fixed Interest Rate" in the context of debentures?
A) The interest rate that can fluctuate based on the company’s performance.
B) The fixed rate of return that debenture holders receive regardless of the company's profit.
C) The rate of interest that increases each year as per the agreement.
D) The rate of return that is determined by the stock market’s performance.
Answer: B
The fixed interest rate is the rate of return that debenture holders receive, irrespective of the company’s performance or profits.
61. What is the "Public Offer" in the context of securities?
A) An offer made exclusively to institutional investors.
B) A proposal to sell securities to a limited number of individuals or entities.
C) An offer made to the public at large to buy securities.
D) An offer made solely to existing shareholders of the company.
Answer: C
A public offer is an offer made to the general public to buy securities, usually in the form of an IPO or public issue.
62. Which of the following is a key difference between "Convertible Debentures" and "Non-Convertible Debentures"?
A) Convertible debentures can be converted into equity, while non-convertible debentures cannot.
B) Non-convertible debentures offer a lower interest rate.
C) Convertible debentures can be repaid in shares, while non-convertible debentures can only be repaid in cash.
D) Non-convertible debentures can be traded in the secondary market, while convertible debentures cannot.
Answer: A
Convertible debentures can be converted into equity shares after a specific period, whereas non-convertible debentures cannot.
63. What does the "Term Sheet" in the context of an IPO typically include?
A) The final price at which shares will be offered.
B) A detailed financial forecast for the next 5 years.
C) An outline of the offering, including price band, number of shares, and other terms.
D) A list of the company’s future business partners and customers.
Answer: C
A term sheet outlines the key terms and conditions of the offering, including the price band, number of shares, and other details of the IPO.
64. In the context of a stock exchange listing, what is a "Listing Agreement"?
A) A contract that allows the company to issue more shares.
B) An agreement between a company and a stock exchange to list its securities.
C) An agreement to buy and sell stocks at a fixed price.
D) A document that outlines the terms of a merger or acquisition.
Answer: B
A Listing Agreement is a contract between a company and a stock exchange to list its securities and comply with the exchange’s rules and regulations.
65. What is meant by "Book Building" in the context of an IPO?
A) A method used by underwriters to sell shares to retail investors at a fixed price.
B) A process in which a company sells its shares to a selected group of investors at a discounted price.
C) A process where investors indicate the price at which they are willing to purchase shares within a set price range.
D) A process where the company decides the final issue price based on its internal valuation.
Answer: C
In the book-building process, investors place bids for shares within a set price range, and the company determines the final issue price based on the demand.
66. What is a "Debenture Redemption Reserve" (DRR)?
A) A reserve created to pay off debenture holders at maturity.
B) A legal requirement to allocate a portion of profits for the redemption of debentures.
C) A fund established to pay interest on debentures.
D) A fund that can be used by the company for future expansions.
Answer: B
A Debenture Redemption Reserve (DRR) is a reserve that companies are required to create, using a portion of profits, to ensure funds are available for the redemption of debentures.
67. Which of the following documents is essential for a company to issue securities to the public?
A) Memorandum of Association
B) Articles of Association
C) Offer Document or Prospectus
D) Annual Report
Answer: C
An Offer Document or Prospectus is essential for issuing securities to the public. It provides potential investors with information about the company and the securities being offered.
68. What is the purpose of the "Securities and Exchange Board of India (SEBI)" in the context of IPOs?
A) To create market liquidity for newly listed shares.
B) To regulate and oversee the conduct of the securities market, ensuring transparency and protection of investors.
C) To directly underwrite the IPO.
D) To ensure that shares are offered at the highest possible price.
Answer: B
SEBI regulates and oversees the securities market to ensure transparency, fairness, and investor protection during an IPO process.
69. What is meant by "Rights Issue" of shares?
A) An offer to purchase shares at a discounted price for all current shareholders in proportion to their existing holdings.
B) The offering of new shares to the public at large.
C) An offer of shares to foreign investors only.
D) A bonus share distribution to current shareholders.
Answer: A
A Rights Issue is an offer made to existing shareholders, allowing them to purchase additional shares in proportion to their existing holdings, often at a discounted price.
70. Which of the following is a key benefit of issuing "Preference Shares"?
A) The company can avoid paying interest on preference shares.
B) Preference shareholders receive dividends before common shareholders and have limited voting rights.
C) Preference shares are automatically convertible into equity shares.
D) Preference shareholders receive equal dividends as common shareholders.
Answer: B
Preference shares allow holders to receive dividends before common shareholders and usually come with limited or no voting rights.
71. Which of the following is NOT a feature of a "Convertible Bond"?
A) It can be converted into a set number of common shares.
B) It typically offers a lower interest rate compared to non-convertible bonds.
C) It gives the bondholder the option to convert the bond into equity.
D) It cannot be traded in the secondary market.
Answer: D
Convertible bonds can generally be traded in the secondary market. The key feature is the option to convert them into equity at a predetermined price.
72. What is the significance of a "Prospectus" in the process of an IPO?
A) It provides detailed information about the company, its operations, and financial statements, helping investors make an informed decision.
B) It specifies the exact price at which shares will be sold.
C) It ensures the company is listed on the stock exchange.
D) It guarantees that the company’s shares will be sold at the issue price.
Answer: A
The Prospectus provides comprehensive details about the company, including its financial condition, business model, and potential risks, to help investors decide whether to invest in the IPO.
73. What is "Price Stabilization" in the context of an IPO?
A) Setting a fixed price for shares offered in an IPO.
B) A mechanism used to stabilize the price of the stock in the market after it has been listed.
C) A strategy to increase the price of shares after the IPO.
D) A method of distributing shares equally among investors.
Answer: B
Price stabilization is a technique used by underwriters to help maintain the price of a company’s stock in the secondary market following an IPO.
74. What is the "Lock-In Period" for promoters in an IPO?
A) The period during which promoters are allowed to buy additional shares from the market.
B) The period during which the promoters and other major shareholders are restricted from selling their shares after the IPO.
C) The period during which the shares are offered at a fixed price.
D) The period during which the company is restricted from issuing new shares.
Answer: B
The lock-in period refers to the time during which promoters and other major shareholders are prohibited from selling their shares following an IPO, typically to ensure market stability.
75. What does "Underwriting" mean in the context of an IPO?
A) The process where investors are guaranteed a minimum return on their investment.
B) The process by which a third party guarantees the sale of securities and assumes the risk of the issue.
C) The process of setting the final price of securities offered in an IPO.
D) The agreement between a company and a stock exchange to list its shares.
Answer: B
Underwriting refers to the process in which an underwriter (usually an investment bank) guarantees the sale of securities by assuming the risk of the issue.
76. What is a "Green Shoe Option" in an IPO?
A) An option that allows the company to increase the number of shares issued in the IPO if demand is high.
B) An option to purchase additional shares after the IPO at a fixed price.
C) A guarantee that investors will make a profit on their investment.
D) An option to provide a fixed dividend to investors.
Answer: A
A Green Shoe Option allows the company to issue additional shares if demand exceeds expectations, providing flexibility in managing over-subscription.
77. Which of the following is the role of the "Registrar" in an IPO?
A) To market and sell the securities to the public.
B) To verify the financial health of the issuing company.
C) To maintain the records of shareholders and handle the distribution of securities.
D) To determine the final price at which the shares will be sold.
Answer: C
The Registrar is responsible for maintaining shareholder records, handling the distribution of securities, and ensuring accurate processing of applications.
78. In which of the following scenarios would a company likely use a "Private Placement" instead of an IPO?
A) When the company is aiming for a large-scale public offering.
B) When the company wants to raise funds quickly without going through the public market process.
C) When the company needs to offer shares to the general public.
D) When the company wants to sell shares only to retail investors.
Answer: B
Private placement involves raising capital by selling shares to a small group of institutional investors or accredited individuals, often for quicker fundraising without the public market process.
79. What is a "Debt-Equity Ratio" and why is it important in assessing a company’s financial structure?
A) A ratio showing how much of a company’s debt is covered by its equity.
B) A ratio used to determine the interest rates offered by banks.
C) A ratio that measures the company's profitability.
D) A ratio that compares the company’s total assets to its liabilities.
Answer: A
The Debt-Equity Ratio is a measure of the company’s financial leverage, showing how much debt is used relative to equity. It is an important indicator of financial risk.
80. What does the "Market Capitalization" of a company represent?
A) The total amount of debt issued by the company.
B) The total market value of a company’s outstanding shares, calculated as the share price multiplied by the number of shares.
C) The total assets owned by the company.
D) The company’s annual revenue.
Answer: B
Market capitalization is the total market value of a company’s outstanding shares of stock, calculated by multiplying the stock price by the number of shares.
81. Which of the following is an example of a "Secondary Market"?
A) The initial sale of shares during an IPO.
B) The exchange of stocks between buyers and sellers after they have been issued.
C) A private sale of securities between institutional investors.
D) A market for bonds issued by the government.
Answer: B
The Secondary Market refers to the buying and selling of shares and securities after the initial issuance, such as in the stock exchange.
82. What is the primary goal of "Corporate Governance" in relation to listed companies?
A) To ensure that the company maximizes its profits for shareholders.
B) To promote transparency, accountability, and fairness in a company's dealings with its stakeholders.
C) To allow the company to issue more securities to raise funds.
D) To prevent companies from participating in mergers and acquisitions.
Answer: B
Corporate governance focuses on maintaining transparency, accountability, and fairness in a company's relationships with its stakeholders, which is crucial for maintaining investor confidence and market stability.
83. What is meant by the "Issue Price" of shares in an IPO?
A) The price at which the shares are sold to institutional investors.
B) The price at which shares are offered to the public during an IPO.
C) The price determined by the market after the IPO.
D) The price at which the company buys back shares from shareholders.
Answer: B
The Issue Price is the price at which shares are offered to the public in an IPO.
84. What is the "Price-to-Earnings (P/E) Ratio" used for?
A) To determine how much debt a company has relative to its equity.
B) To evaluate the valuation of a company by comparing its share price to its earnings per share.
C) To measure the company’s operational efficiency.
D) To calculate the total value of a company’s assets.
Answer: B
The P/E Ratio is a valuation metric that compares a company’s current share price to its earnings per share (EPS), indicating how much investors are willing to pay for a company’s earnings.
85. What is the "Public Issue" in the context of capital raising?
A) An offer of securities made only to existing shareholders.
B) The issuance of securities to the public for the first time through an IPO or follow-on offering.
C) A private agreement with investors to raise capital.
D) An internal process for allocating shares among top executives.
Answer: B
A Public Issue involves offering securities (shares or bonds) to the public to raise capital, typically through an IPO or a subsequent offering.
86. Which of the following is an advantage of issuing "Debentures" for a company?
A) Debenture holders do not need to be repaid, only interest is paid.
B) Debentures are a form of equity, allowing the company to avoid interest payments.
C) Issuing debentures does not dilute the company’s ownership or control.
D) Debentures offer a lower cost of capital than equity.
Answer: C
Issuing debentures does not dilute ownership or control because debenture holders are creditors and not equity holders.
87. What is a "Bond Rating" and why is it important?
A) It is an assessment of a company's profitability.
B) It is a measure of a bond’s interest rate relative to other bonds in the market.
C) It is an evaluation of the creditworthiness of the issuer of the bond, indicating the risk of default.
D) It is a tool used to predict the future price movements of bonds.
Answer: C
A Bond Rating assesses the creditworthiness of the issuer, helping investors gauge the risk of default and the likelihood of receiving interest payments.
88. What is "Asset-Backed Security" (ABS)?
A) A type of security backed by the issuer’s future earnings.
B) A security backed by a pool of assets such as loans, mortgages, or receivables.
C) A government bond with a guarantee of repayment.
D) A type of stock issued by a company that owns valuable assets.
Answer: B
An Asset-Backed Security (ABS) is a financial instrument backed by a pool of assets such as loans, mortgages, or receivables, which generate cash flows to pay back investors.
89. What does the term "Liquidity" refer to in the context of financial markets?
A) The ability of a company to generate profits.
B) The ease with which an asset or security can be quickly bought or sold in the market without affecting its price.
C) The amount of cash available for investment.
D) The overall stability of the financial markets.
Answer: B
Liquidity refers to how easily an asset can be converted into cash or sold without causing significant price changes.
90. What is "Equity Financing" in relation to raising capital for a company?
A) The process of raising capital through borrowing money from financial institutions.
B) The process of selling ownership stakes in the company in exchange for capital.
C) The process of issuing bonds to raise funds.
D) The process of leveraging assets to obtain working capital.
Answer: B
Equity financing refers to raising capital by selling ownership stakes, usually in the form of shares, to investors in exchange for capital.
91. What does the "Beta" of a stock represent?
A) The total return on the stock compared to the market.
B) The risk of the stock relative to the overall market.
C) The total market capitalization of the company.
D) The average volume of trading for the stock.
Answer: B
Beta measures the volatility or risk of a stock relative to the overall market, indicating how much the stock’s price moves in relation to market movements.
92. What does "Dilution" refer to in the context of a company issuing new shares?
A) The increase in a company's overall value due to new investments.
B) The decrease in earnings per share (EPS) as a result of new shares being issued.
C) The decrease in shareholder equity from the reduction of a company’s debt.
D) The increase in stock prices due to a high demand for shares.
Answer: B
Dilution refers to the reduction in earnings per share (EPS) and ownership percentage of existing shareholders when a company issues additional shares.
93. What is a "Convertible Bond"?
A) A bond that can be exchanged for a predetermined number of shares of stock in the issuing company.
B) A bond that allows the bondholder to convert it into a different type of security.
C) A bond that provides the bondholder with a fixed interest rate and principal payment.
D) A type of bond that is issued with a variable interest rate.
Answer: A
A Convertible Bond is a bond that can be converted into a predetermined number of shares of stock, offering the bondholder the potential to benefit from the company’s equity appreciation.
94. What is the "Yield" on a bond?
A) The total price at which a bond is issued.
B) The amount of interest paid on a bond as a percentage of its face value.
C) The risk associated with investing in a particular bond.
D) The market price of a bond after it has been issued.
Answer: B
The Yield on a bond is the return on investment, calculated as the annual interest payment divided by the bond’s face value, expressed as a percentage.
95. What is the role of a "Credit Rating Agency"?
A) To help companies raise capital by issuing new securities.
B) To provide investors with insights into the company’s management structure.
C) To assign a credit rating to bonds and securities to evaluate their creditworthiness.
D) To set interest rates for loans and mortgages.
Answer: C
A Credit Rating Agency evaluates the creditworthiness of issuers of bonds and securities, providing a rating that helps investors assess risk.
96. What is the "Lock-up Period" in the context of an IPO?
A) The time during which company executives are allowed to trade shares after the IPO.
B) The period after the IPO during which shareholders and insiders cannot sell their shares.
C) The time when the company is allowed to issue more shares in the market.
D) The time it takes to complete the IPO registration process.
Answer: B
The Lock-up Period is a designated period after an IPO during which company insiders (executives, employees, etc.) are restricted from selling their shares to prevent market volatility.
97. What is a "Rights Issue" in relation to equity raising?
A) A public offering of additional shares where existing shareholders have the right to buy shares before they are offered to the public.
B) A sale of bonds to raise capital from investors.
C) A type of share buyback program.
D) A secondary offering of shares to institutional investors.
Answer: A
A Rights Issue allows existing shareholders to purchase additional shares at a discounted price before the shares are offered to the public, usually to raise additional capital.
98. What is meant by "Investment Grade" bonds?
A) Bonds issued by government entities with the lowest risk of default.
B) Bonds rated by credit agencies as having a relatively low risk of default.
C) Bonds that are highly speculative and have a high risk of default.
D) Bonds that are issued by emerging market companies.
Answer: B
Investment Grade bonds are those that are rated by credit rating agencies as having a relatively low risk of default, making them suitable for conservative investors.
99. What is the "IPO Pricing" process?
A) The process of determining how much equity to offer to the market.
B) The setting of the offer price for an IPO based on demand from investors and market conditions.
C) The negotiation of commission rates between the company and the underwriters.
D) The decision-making process behind the listing of the company on a stock exchange.
Answer: B
IPO Pricing is the process of setting the price at which shares will be sold to the public, considering factors such as demand, market conditions, and the company’s financial health.
100. What is a "Dividends" distribution?
A) A portion of a company’s earnings distributed to its shareholders, usually in cash or stock.
B) A payment made to the company's creditors to reduce outstanding debt.
C) The process of repurchasing shares from the market.
D) A loan made to a shareholder for purchasing additional shares.
Answer: A
Dividends are a portion of a company’s earnings that are distributed to its shareholders as a reward for holding the stock, typically in cash or additional shares.
101. What is a "Hedge Fund"?
A) A mutual fund that primarily invests in government bonds.
B) A private investment fund that uses advanced strategies like leverage, derivatives, and short-selling to generate high returns.
C) A government-controlled investment vehicle to stabilize the economy.
D) A fund that primarily invests in stocks of blue-chip companies.
Answer: B
A Hedge Fund is a private investment vehicle that employs sophisticated investment strategies such as leverage, derivatives, and short selling to achieve high returns, often with high risk.
102. What is the "Securities and Exchange Commission (SEC)" responsible for?
A) Regulating government bonds and securities.
B) Overseeing financial markets to protect investors and ensure fair trading practices.
C) Setting interest rates for all types of securities.
D) Acting as a central exchange for trading all securities.
Answer: B
The SEC regulates financial markets and ensures transparency, fairness, and protection for investors, preventing fraud and market manipulation.
103. What does "Market Risk" refer to?
A) The risk that a company will not be able to meet its debt obligations.
B) The risk of loss due to the overall movement of the market.
C) The risk that an individual stock will perform poorly.
D) The risk related to fluctuations in exchange rates for international investments.
Answer: B
Market Risk is the risk of financial loss due to overall changes in the market, such as economic downturns or market volatility, affecting all securities.
104. What does "Price Discovery" refer to in financial markets?
A) The process of determining the price at which a bond will be issued.
B) The determination of the fair value of an asset in the market based on supply and demand.
C) The calculation of a company’s profitability.
D) The setting of interest rates for loans and bonds.
Answer: B
Price Discovery is the process of determining the fair market price of an asset through the interaction of buyers and sellers in the market.
105. What is a "Treasury Stock"?
A) Stock that is bought back by the company and held in its own treasury.
B) Stock that is issued by the government to raise funds.
C) Stock that is offered exclusively to institutional investors.
D) Stock that has been held for more than five years and is eligible for tax exemptions.
Answer: A
Treasury Stock refers to shares that a company has repurchased and is holding in its own treasury, which are not considered when calculating earnings per share or dividends.
106. What is the "Price-to-Earnings (P/E) Ratio"?
A) The ratio of a company's market price to its total revenue.
B) The ratio of a company's net income to its total assets.
C) The ratio of a company's market price per share to its earnings per share, used to evaluate stock valuation.
D) The ratio of a company's dividend payout to its earnings.
Answer: C
The P/E Ratio is calculated by dividing a company’s market price per share by its earnings per share, used to assess whether a stock is overvalued or undervalued.
107. What is the "Capital Asset Pricing Model (CAPM)"?
A) A model used to calculate the risk-free rate of return on an investment.
B) A method for evaluating a company’s historical performance based on market trends.
C) A model used to determine the expected return on an asset based on its risk relative to the market.
D) A method for calculating the interest rate on corporate bonds.
Answer: C
The Capital Asset Pricing Model (CAPM) is used to determine the expected return on an asset based on its risk (measured by beta) relative to the overall market.
108. What does "Leverage" mean in a financial context?
A) The use of debt to finance investments in order to amplify potential returns.
B) The act of trading stocks frequently to take advantage of short-term price movements.
C) The reduction of risk by diversifying an investment portfolio.
D) The strategy of investing solely in government securities.
Answer: A
Leverage refers to using borrowed money (debt) to finance investments, aiming to amplify potential returns, though it also increases risk.
109. What is "Financial Leverage"?
A) The ratio of equity used in the capital structure of a company.
B) The use of debt to finance a company's assets and increase potential returns to shareholders.
C) The use of cash flow to finance operating activities.
D) The management of operational costs to improve profitability.
Answer: B
Financial Leverage refers to the use of debt in a company’s capital structure, allowing for the possibility of greater returns, but also increasing financial risk.
110. What is a "Municipal Bond"?
A) A bond issued by private corporations to raise capital.
B) A bond issued by local or state governments to finance public projects.
C) A bond issued by central banks to control money supply.
D) A bond sold by the government to foreign investors.
Answer: B
A Municipal Bond is issued by local or state governments to finance public projects like infrastructure, and it is often tax-exempt at the federal level.
111. What is "Short Selling"?
A) Selling a stock that you do not own, typically with the intention of buying it back later at a lower price.
B) Selling stock that has been held for less than a year for tax purposes.
C) Selling stock directly to institutional investors to reduce risk exposure.
D) Selling bonds instead of stocks to mitigate market volatility.
Answer: A
Short Selling involves borrowing stock from a broker and selling it with the intention of buying it back later at a lower price, profiting from a decline in the stock’s value.
112. What is an "Asset-backed Security" (ABS)?
A) A bond issued by the government to fund private investments.
B) A security backed by a pool of assets, such as mortgages or loans, that generate income.
C) A stock issued by companies with a high debt-to-equity ratio.
D) A type of derivative that is based on the performance of an index.
Answer: B
An Asset-backed Security (ABS) is a financial product backed by a pool of assets like loans, leases, or receivables, providing income to investors.
113. What is "Liquidity" in finance?
A) The ability of an asset to generate income over time.
B) The ability to buy and sell an asset in the market without affecting its price.
C) The amount of debt a company holds compared to its equity.
D) The risk associated with an asset's volatility.
Answer: B
Liquidity refers to how quickly and easily an asset can be bought or sold in the market without affecting its price significantly.
114. What does "Yield to Maturity (YTM)" represent for a bond?
A) The total return an investor can expect to receive if the bond is held until maturity.
B) The amount of interest paid to bondholders each year.
C) The market price of the bond at the time of purchase.
D) The tax rate applicable to the bond’s returns.
Answer: A
Yield to Maturity (YTM) represents the total return an investor can expect if a bond is held until it matures, accounting for interest payments and any capital gains or losses.
115. What is a "Venture Capitalist" (VC)?
A) A person or firm that invests in established companies to fund their expansion.
B) A person or firm that invests in early-stage companies with high growth potential in exchange for equity.
C) A person who lends money to startups at high interest rates.
D) A company that underwrites initial public offerings (IPOs) for emerging companies.
Answer: B
A Venture Capitalist is an investor who provides capital to early-stage, high-growth companies in exchange for equity, aiming to generate high returns.
116. What is "Market Capitalization" of a company?
A) The total value of a company’s assets, including both current and fixed assets.
B) The total value of a company’s outstanding shares of stock, calculated by multiplying the share price by the number of shares.
C) The total earnings of a company over the past year.
D) The amount of debt a company holds in its capital structure.
Answer: B
Market Capitalization refers to the total value of a company’s outstanding shares of stock, calculated by multiplying the share price by the total number of shares.
117. What is "Risk Management" in financial terms?
A) The process of choosing investments based on potential returns only.
B) The identification, assessment, and prioritization of risks followed by the application of resources to minimize or control those risks.
C) The act of diversifying an investment portfolio across various asset classes.
D) The use of short-term trading strategies to avoid losses.
Answer: B
Risk Management in finance involves identifying and managing risks that could impact investments, using strategies like diversification, hedging, and insurance to mitigate potential losses.
118. What is "A Margin Call"?
A) A demand by a broker for an investor to deposit additional funds to cover potential losses in their margin account.
B) A fee charged by a broker for the use of borrowed funds.
C) A notification of the arrival of dividends in a margin account.
D) A request for the withdrawal of profits from an investor's account.
Answer: A
A Margin Call occurs when the value of an investor’s margin account falls below the required level, prompting the broker to ask the investor to deposit more funds or sell securities.
119. What does "Inflation Risk" refer to?
A) The risk that the value of an investment will decrease due to rising inflation.
B) The risk that a company will default on its debt obligations.
C) The risk of losing principal due to market volatility.
D) The risk of interest rates increasing on a bond investment.
Answer: A
Inflation Risk refers to the potential loss of purchasing power of returns on investments due to rising inflation, reducing the real value of money.
