Investment and Financing Concepts Quiz

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Questions and Answers

What is a primary advantage for companies when issuing preference shares?

Increased voting rights for shareholders

Lower costs compared to equity financing (correct)

Higher risk of liquidation for shareholders

Predictable tax liabilities due to fixed dividends

Which stage of PE-VC funding typically comes after seed-capital?

Venture (correct)

Series B

Self-funding

IPO

What is a Red Herring Prospectus?

A preliminary version of the prospectus without pricing details (correct)

The final version of an IPO prospectus

A financial statement submitted by companies before an IPO

A document providing detailed price and share information

What does intrinsic value represent in the context of shares?

The perceived true worth of a company's share Signup and view all the answers

What does the lock-in period in an IPO refer to?

A duration during which certain investors cannot sell their shares Signup and view all the answers

Which model is NOT typically used to calculate intrinsic value?

Price-to-Earnings Ratio (P/E) Signup and view all the answers

Which type of investor is classified as a Retail Individual Investor (RII)?

An individual applying for shares under ₹2 lakhs Signup and view all the answers

What is the formula for calculating share premium?

Issue Price - Face Value Signup and view all the answers

What is one benefit to preference shareholders in the event of liquidation?

They receive priority in asset distribution Signup and view all the answers

Which of the following is NOT a use of share premium funds as per legal regulations?

Paying dividends Signup and view all the answers

What is the primary purpose of financial covenants in loan agreements?

To ensure that borrowers maintain certain levels of financial health Signup and view all the answers

In the book building process, what determines the final price of shares during an IPO?

The demand within a set price band Signup and view all the answers

What are pre-emptive rights designed to protect?

Ownership dilution for existing shareholders Signup and view all the answers

Which of the following stages is typically the last in the PE-VC funding cycle?

Series D Signup and view all the answers

Which value represents the original value stated in a bond certificate?

Face Value Signup and view all the answers

When a share with a face value of ₹10 is issued at ₹15, what is the share premium for one share?

₹5 Signup and view all the answers

How is book value per share calculated?

Total assets minus total liabilities divided by total shares outstanding Signup and view all the answers

Which statement about market value is FALSE?

It is determined solely by the company's performance. Signup and view all the answers

What characterizes equity compared to debt in terms of control?

Equity holders gain voting rights and control in company decisions Signup and view all the answers

What distinguishes intrinsic value from market value?

Market value reflects actual trading price, intrinsic value is based on fundamentals Signup and view all the answers

What must a company provide to existing shareholders when issuing new shares?

Pre-emptive rights to purchase additional shares Signup and view all the answers

Which of the following is NOT a cash flow characteristic of debt?

Dividends paid to shareholders Signup and view all the answers

What happens if a borrower violates a financial covenant?

They may face penalties or increased interest rates Signup and view all the answers

What does the term 'life' refer to in the context of equity versus debt?

The lifespan of financial instruments before maturity Signup and view all the answers

What is the primary role of lead managers during an IPO process?

Manage the IPO process including pricing and underwriting Signup and view all the answers

Which of the following best describes the function of underwriters in an IPO?

They guarantee the sale of shares by purchasing any unsold shares. Signup and view all the answers

What is one main objective of money markets?

Short-term borrowing and lending Signup and view all the answers

Which of the following instruments is NOT a constituent of money markets?

Corporate Bonds Signup and view all the answers

How does the Repo Rate primarily influence the economy?

By controlling inflation and liquidity Signup and view all the answers

What is the purpose of reverse repo operations conducted by the central bank?

To manage the money supply by absorbing excess liquidity Signup and view all the answers

What characterizes Commercial Paper (CP) in money markets?

It is an unsecured, short-term debt instrument. Signup and view all the answers

What is the primary purpose of a Fresh Issue of shares?

To allow the company to raise capital for growth and other purposes Signup and view all the answers

Which of the following is a disadvantage of going public through an IPO?

Pressure to meet quarterly earnings expectations Signup and view all the answers

What is a key feature of Treasury Bills (T-Bills)?

They are redeemed at face value but issued at a discount. Signup and view all the answers

What is one of the eligibility norms for a company to conduct an IPO?

Prior profitability for at least three out of five years Signup and view all the answers

What distinguishes an Offer for Sale (OFS) from a Fresh Issue?

In an OFS, existing shareholders sell shares, while a Fresh Issue raises new capital Signup and view all the answers

Which method of IPO pricing involves setting a price beforehand?

Fixed Price Method Signup and view all the answers

Which of the following represents a benefit of going public?

Enhanced company visibility Signup and view all the answers

What is one reason companies may face pressures after going public?

Demand from shareholders for consistent performance and earnings Signup and view all the answers

What is one requirement related to net tangible assets for IPO eligibility?

At least ₹3 crores in net tangible assets in each of the last three years Signup and view all the answers

What is one primary feature of preference capital?

Fixed dividend rate paid before equity dividends Signup and view all the answers

In the case of liquidation, who gets repaid first?

Preference shareholders Signup and view all the answers

What distinguishes a mortgage from hypothecation?

Mortgage is secured by real estate while hypothecation is secured by movable assets Signup and view all the answers

What happens to Rajita's ownership percentage without pre-emptive rights?

It can decrease due to dilution from new shares Signup and view all the answers

What is a key characteristic of redeemable preference shares?

They are repaid after a fixed maturity period Signup and view all the answers

Which statement is true regarding voting rights of preference shareholders?

They can vote only if their dividends are in arrears Signup and view all the answers

If Rajita holds 10% of shares and the company issues more shares without any pre-emptive rights, what will happen?

Her voting power will decrease if she buys no new shares Signup and view all the answers

How are hypothecated loans different in terms of asset ownership?

Borrower retains ownership of the asset Signup and view all the answers

Study Notes

Equity vs. Debt

Equity represents ownership in a company, including common and preferred shares.
Equity holders have residual claims on profits and voting rights.
Dividends from equity are paid if profitable, but not guaranteed.
Dividends are taxable, with no deduction for the company, potentially leading to double taxation.
Equity financing is perpetual, with no repayment obligation.
Shareholders have voting rights and can influence major decisions.
Equity is typically more expensive than debt, as investors require higher returns to compensate for higher risks.
Costs include dividends and capital gains.
Debt represents a loan to a company, including bonds, debentures, and term loans.
Debt holders are creditors, with no ownership rights.
Debt requires fixed interest payments, regardless of profitability.
Principal repayment is due at maturity.
Interest payments are tax deductible, reducing taxable income.
Debt financing has a fixed maturity date.
Debt holders have no voting rights or control over company decisions as long as debt obligations are met.
Debt is often less costly than equity due to tax-deductible interest and reduced risk.

Financial Covenants

Financial covenants are clauses in loan agreements or bond indentures that impose financial obligations on the borrower.
Covenants protect the lender by ensuring the borrower maintains a certain level of financial health.
Violating covenants can lead to penalties, increased interest rates, or immediate loan repayment.

Face Value

Face value, also known as nominal or par value, is the original value of a stock or bond.
It's the stated value when the company issues shares (e.g., ₹10 or ₹1).

Book Value

Book value represents the total assets minus total liabilities.
In shares, it's the company's net asset value (NAV) divided by the number of outstanding shares.
Doesn't include intangible assets like goodwill.

Intrinsic Value

Intrinsic value is the actual worth of a company's share based on fundamental analysis.
It considers factors like financials, growth, cash flows, and investor sentiment.
Models used include DCF (Discounted Cash Flow) or DDM (Dividend Discount Model) to estimate this value.

Market Value

Market value is the current trading price of a share on an exchange.
Determined by supply and demand, influenced by market conditions, investor sentiment and company performance.

Share premium is the excess amount received by a company when issuing shares above their face value.
Can be used for specific purposes, like issuing bonus shares or writing off preliminary expenses, but it's not for dividends or general expenses.

Preemptive Rights

Preemptive rights allow existing shareholders to purchase additional shares before they're offered to new investors.
This protects proportional ownership and prevents dilution.

Term Loans vs. Debentures

Term Loans: Bank loans with a fixed repayment schedule. Typically secured by assets.
Debentures: Marketable instruments issued to the public. Can be secured (by assets) or unsecured. Longer-term financing, usually.

Mortgage vs. Hypothecation

Mortgage: Loan secured by immovable property (real estate). The lender has the right to take possession if the borrower defaults.
Hypothecation: Loan secured by movable property (e.g., vehicles, stock). The borrower retains ownership, but the lender can seize assets if there's a default.

Preference Capital

Preference capital shares offer a fixed dividend, and are prioritized over equity in dividend payouts and liquidation.
May have no voting rights; or maybe convertible; or redeemable after a certain period.

IPO Stages

Self-funding
Seed-capital
Venture
Series A
Series B 6.Series C
Series D
IPO (initial public offering)

IPO Intermediaries

Lead Managers (Investment Banks)
Underwriters
Registrars
Brokers
Legal Advisors

Money Markets

Money markets facilitate short-term borrowing and lending (typically less than a year).
Objectives include liquidity management, monetary policy implementation, and facilitating trade.
Constituents include: Treasury Bills (T-Bills), Commercial Paper (CP), Certificates of Deposit (CDs), Repurchase Agreements (Repo), Call Money.

Repo/Reverse Repo/Bank Rates

Repo Rate: Central bank's lending rate to commercial banks against government securities. Used for inflation and liquidity control.
Reverse Repo Rate: Central bank's borrowing rate from commercial banks. Used for absorbing excess liquidity.
Bank Rate: Central bank's lending rate to commercial banks without collateral. Influences long-term lending rates and credit expansion control.

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Description

Test your knowledge about key concepts in investments and financing, including preference shares, share premiums, and the PE-VC funding cycle. This quiz covers essential terms and their applications in the financial sector, providing insights into IPO processes and shareholder rights.