1. Which of the following risks can be eliminated through diversification?

a. Systematic risk

b. Idiosyncratic risk

c. Market risk

d. Non-diversifiable risk

2. A company is considering a rights issue of one new share for every three shares held, at a price of 4.60. The existing shares have a nominal value of 1p, a book value of 2.75, and a market value of 5. What is the theoretical ex-rights price?

a. 5.00

b. 4.90

c. 3.90

d. 3.21

3. The cost of capital is typically HIGHEST for:

a. Subordinated debt.

b. Preference shares.

c. Ordinary shares.

d. Senior debt.

4. For a conventional bond paying a fixed coupon rate, an INCREASE in the risk of default would lead to:

a. A fall in the market price, to ensure that bondholders receive a higher yield.

b. A rise in the market price, to ensure that bondholders receive a higher yield.

c. A fall in the market price, to ensure that bondholders receive a lower yield.

d. A rise in the market price, to ensure that bondholders receive a lower yield.

5. Which of the following is an argument for the relevance of dividends?

a. High dividends are a signal of financial strength.

b. Personal taxes differ between income and capital gains.

c. Some investors preference for current income.

d. All of the above.

6. Which of the following is an incentive for firms to conduct an IPO?

a. Underwriter and advisor fees are typically substantial.

b. Venture capitalists will be more able to sell their shares.

c. Reporting requirements are more stringent for public companies.

d. The company may become subject to a hostile takeover.