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CCM Equity Securities study materials
CCM Equity Securities study resources

CCM Equity Securities practice questions

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Question 1Equity markets, instruments and market participants

A corporation raises capital by selling newly issued shares directly to investors, with the proceeds going to the company. This transaction takes place in the:

  1. primary market Correct answer.
  2. money market
  3. secondary market
  4. derivatives market

Explanation

Newly issued shares sold by the issuer to investors are a primary-market transaction, and the issuing company receives the proceeds. Once those shares trade between investors, the venue is the secondary market.

Question 2Equity markets, instruments and market participants

In a liquidation, common shareholders have a claim on remaining assets that is:

  1. residual after creditors and preferred Correct answer.
  2. guaranteed by the listing exchange for the shares
  3. fixed at the shares' par value
  4. senior to all bondholders

Explanation

Common shareholders have a residual claim: they are paid only after creditors, bondholders, and preferred shareholders have been satisfied. Their claim is not fixed and is not guaranteed by any exchange.

Question 3Equity markets, instruments and market participants

A designated market maker on a stock exchange is typically required to:

  1. quote continuous bids and offers Correct answer.
  2. set opening prices regardless of demand
  3. purchase any shares investors wish to sell
  4. guarantee every investor a trading profit

Explanation

A market maker provides liquidity by continuously quoting a bid and an offer for the securities it is assigned. It does not guarantee profits, set prices without regard to supply and demand, or promise to buy unlimited shares.

Question 4Equity markets, instruments and market participants

A company has cumulative preferred stock outstanding and omits the dividend for two years. Before any dividend can be paid to common shareholders, the company must:

  1. obtain shareholder approval for the omission
  2. pay only the current year's preferred dividend to holders
  3. pay all arrears plus the current preferred dividend Correct answer.
  4. convert the preferred stock into common stock

Explanation

Cumulative preferred dividends omitted in prior years accumulate as arrears. The company must clear those arrears and the current preferred dividend before common shareholders can receive any distribution.

Question 5Equity markets, instruments and market participants

A U.S. investor purchases a dollar-denominated ADR of a Japanese company on the NYSE. Which risk is the investor still exposed to that a direct U.S. stock purchase would not carry?

  1. Settlement in a foreign currency
  2. Lack of SEC oversight of the ADR
  3. Changes in the yen-dollar exchange rate Correct answer.
  4. Inability to trade the ADR during U.S. hours

Explanation

An ADR trades in U.S. dollars and is registered with the SEC, but its economic value depends on the foreign shares and the foreign currency. Therefore the investor still bears yen-dollar exchange-rate risk.

Question 6Equity markets, instruments and market participants

An investor who owns shares bought at $30 places a sell stop order at $27. The main purpose of this order is to:

  1. guarantee a sale price of exactly $27
  2. buy additional shares if the price rises above the $30 purchase price
  3. prevent the stock from falling below $27
  4. limit losses by triggering a sale if price falls to $27 Correct answer.

Explanation

A sell stop becomes a market order when the stop price is reached, so it is designed to limit losses but does not guarantee an exact sale price. A limit order, by contrast, specifies a minimum execution price.

Question 7Equity markets, instruments and market participants

Under the current U.S. standard settlement cycle for regular-way trades in exchange-listed corporate equities, the trade settles on:

  1. the trade date (T+0)
  2. the second business day after trade date (T+2)
  3. the fifth business day after trade date (T+5)
  4. the next business day after trade date (T+1) Correct answer.

Explanation

The U.S. securities industry moved to a T+1 standard settlement cycle for regular-way trades in exchange-listed corporate equities. Settlement occurs on the next business day after the trade date.

Question 8Equity markets, instruments and market participants

An investor sells short 1,000 shares at $40 and later buys them back at $32. Ignoring commissions and margin interest, the profit is:

  1. an $8,000 loss
  2. $72,000 profit
  3. $8,000 profit Correct answer.
  4. $32,000 profit

Explanation

Short selling profit equals the difference between the sale price and the repurchase price, multiplied by the number of shares. Here $40 minus $32 is $8 per share, or $8,000 on 1,000 shares.

Question 9Equity markets, instruments and market participants

An alternative trading system (ATS) that executes equity trades for institutional clients typically:

  1. matches orders without registering as a national exchange Correct answer.
  2. displays all customer limit orders to the public in real time
  3. guarantees execution at the national best bid or offer
  4. operates only during the exchange's opening auction

Explanation

An ATS is a trading venue that matches orders but is not registered as a national securities exchange; it typically operates as a broker-dealer and may be a dark pool. It does not publicly display all orders or guarantee execution at the NBBO.

Question 10Equity markets, instruments and market participants

In an IPO, the underwriters exercise the greenshoe (over-allotment) option. This allows the syndicate to:

  1. sell up to 15% more shares at the offer price Correct answer.
  2. cancel the offering if demand weakens before the first trade
  3. require the company to repurchase shares at the offer price
  4. set the final offer price after the stock begins trading

Explanation

The greenshoe is an over-allotment option that lets underwriters sell up to 15% additional shares at the offer price. The syndicate uses it to cover short positions and support the stock after the IPO.

Question 11Equity markets, instruments and market participants

An investor owns 100 shares of a corporation's common stock and wants to vote on the election of directors at the annual meeting. Which right does common stock ordinarily provide in this situation?

  1. The right to vote in the election of directors Correct answer.
  2. Priority over bondholders in a bankruptcy proceeding
  3. A contractual right to receive a fixed annual dividend
  4. The right to redeem the shares with the issuer at par value

Explanation

Common shareholders normally hold residual voting rights, including the election of directors, and may vote in person or by proxy. Common dividends are declared at the board's discretion rather than fixed by contract, and common stock ranks behind debt and preferred stock in liquidation. Common shares also generally have no issuer redemption right at par.

Question 12Equity markets, instruments and market participants

An investor submits a buy limit order at $48 for a stock currently quoted at $50.00 bid / $50.10 ask. What is the immediate outcome?

  1. It is rejected because buy limit orders must be priced above the current ask
  2. It executes immediately at $50.10 because the order is marketable
  3. It rests on the order book until the offer falls to $48 or lower Correct answer.
  4. It converts automatically into a market order at the closing auction

Explanation

A buy limit at $48 is below the current ask of $50.10, so it is not marketable and cannot execute immediately. It becomes a resting bid and executes only if the market offer reaches $48 or better. A limit order does not convert into a market order merely because it is not filled.

Question 13Equity markets, instruments and market participants

In U.S. equity markets, a central clearinghouse such as DTCC's NSCC interposes itself between trade counterparties primarily to:

  1. Set the official opening price for each listed equity security
  2. Guarantee that issuers remit declared dividends to shareholders
  3. Novate each trade as central counterparty Correct answer.
  4. Route retail marketable orders to venues paying the highest rebate

Explanation

The clearinghouse novates eligible trades, becoming the buyer to every seller and the seller to every buyer. This central counterparty role reduces bilateral counterparty risk and supports netting and settlement. It does not set opening prices, guarantee issuer dividend payments, or handle order routing.

Question 14Equity markets, instruments and market participants

A company issues preferred stock that is participating. In a year when the board declares a large common dividend, the participating preferred holder generally:

  1. Converts automatically into common stock before the dividend is paid
  2. Receives the stated dividend plus an agreed share of excess dividends Correct answer.
  3. Defers the preferred dividend until the common dividend is suspended
  4. Receives only the stated preferred dividend and has no claim on excess distributions

Explanation

Participating preferred receives its stated dividend and then may share with common shareholders in additional distributions according to a formula. This feature can increase the security's income upside beyond a fixed preferred rate. It does not automatically convert or defer the stated dividend in the way described.

Question 15Equity markets, instruments and market participants

A company completes a 3-for-1 stock split. Just before the split, an investor owns 300 shares trading at $90. Which statement best describes the immediate effect, ignoring market moves?

  1. 900 shares at approximately $30 each, with total market value unchanged Correct answer.
  2. 300 shares at $90 each, plus a $180 cash payment
  3. 900 shares at $90 each, tripling the investor's total market value
  4. 100 shares at approximately $270 each, with total market value unchanged

Explanation

A 3-for-1 split triples the share count and divides the price by three, so 300 shares at $90 become 900 shares at about $30. The investor's proportional ownership and total market value do not change solely because of the split. A split is not a cash distribution and does not create value by itself.

Question 16Equity markets, instruments and market participants

A pension fund manages its own equity portfolio and places orders through several broker-dealers. In market terminology, the pension fund is best described as:

  1. A buy-side institution that manages assets for beneficiaries Correct answer.
  2. A clearing broker because it settles its own trades
  3. A transfer agent because it holds shares in book-entry form
  4. A sell-side market maker because it trades listed equities

Explanation

Buy-side participants include asset managers, pension funds, and other investors that allocate capital and place orders. Sell-side firms, such as broker-dealers and market makers, execute, finance, or make markets for clients. Holding shares or settling trades does not turn an asset owner into a transfer agent or clearing broker.

Question 17Equity markets, instruments and market participants

A broker-dealer receives a retail marketable order in a stock listed on an exchange but also traded on several ATSs. Under best-execution obligations, the broker-dealer should:

  1. Consider price, speed, execution likelihood, and other quality factors Correct answer.
  2. Route to the exchange because listed stocks must execute on an exchange
  3. Choose the venue paying the highest rebate regardless of execution quality
  4. Send the order to its own ATS without comparing other available venues

Explanation

Best execution requires a broker-dealer to seek the most favorable terms reasonably available for the customer under the circumstances. That analysis can include price, speed, likelihood of execution, size, and execution quality across exchanges and ATSs. Rebates or internalization alone do not satisfy the duty.

Question 18Equity markets, instruments and market participants

A stock goes ex-dividend on Tuesday, May 13. A customer buys the shares on Monday, May 12, in a regular-way trade under the T+1 settlement cycle. Who is entitled to the dividend?

  1. The issuer, because the dividend is cancelled for trades before the record date
  2. The broker-dealer, because it holds the shares at settlement
  3. The buyer, because the purchase occurs before the ex-dividend date Correct answer.
  4. The seller, because the trade settles on the ex-dividend date

Explanation

To receive a dividend, an investor generally must buy before the ex-dividend date. A purchase on Monday, May 12, is before the Tuesday ex-date, so the buyer is entitled even though regular-way settlement occurs later. The seller would be entitled only to a sale executed on or after the ex-date.

Question 19Equity markets, instruments and market participants

An investor short sells 500 shares at $80 with a 50% initial margin and a 30% maintenance margin. If the price rises to $120, what is the minimum margin call amount?

  1. $0
  2. $12,000
  3. $24,000
  4. $18,000 Correct answer.

Explanation

Short proceeds are 500 × $80 = $40,000, and the initial margin deposit is 50% × $40,000 = $20,000, for total credit of $60,000. At $120, the cost to cover is 500 × $120 = $60,000, so account equity is $60,000 − $60,000 = $0. Maintenance margin is 30% × $60,000 = $18,000, so the call is $18,000 − $0 = $18,000.

Question 20Equity markets, instruments and market participants

A company has Class A shares with one vote per share and Class B shares with ten votes per share. A public investor owns 1% of the company's total equity but only 0.4% of total voting power. Which conclusion is most consistent with this dual-class structure?

  1. Economic ownership and voting control can diverge, concentrating control in Class B Correct answer.
  2. The public investor controls the company because 1% of equity exceeds 0.4% of votes
  3. Class A and Class B shares must have identical economic rights and identical voting rights
  4. The Class B shares must pay a lower dividend to compensate for their superior voting power

Explanation

Dual-class structures separate economic ownership from voting control by assigning different votes per share to different classes. If the public investor has less voting power than equity ownership, the high-vote Class B shares likely carry disproportionate control, often held by founders or insiders. Dividend rights are a separate design choice and are not necessarily lower for high-vote shares.

Question 21Equity markets, instruments and market participants

An equity security that normally pays a stated dividend, ranks ahead of common shares for dividends and liquidation, and usually has no voting rights is best described as:

  1. Common shares
  2. Share purchase warrants
  3. Treasury shares
  4. Preferred shares Correct answer.

Explanation

Preferred shares have a stated dividend preference and rank ahead of common shares for dividends and liquidation, while normally lacking voting rights. Common shares carry residual claims and voting rights, and treasury shares are issued shares reacquired by the issuer. Warrants are options to buy shares, not equity ownership with a dividend preference.

Question 22Equity markets, instruments and market participants

On most North American exchanges, a standard round lot for an actively traded equity is:

  1. 100 shares Correct answer.
  2. 1,000 shares
  3. Any number of shares
  4. 10 shares

Explanation

A round lot is the standard trading unit, commonly 100 shares for actively traded equities in North America. Orders for fewer than a round lot are odd lots, while 1,000 shares is not the standard unit. Exchanges may set different round lots for low-priced or inactive securities.

Question 23Equity markets, instruments and market participants

A broker-dealer that buys shares from a client for its own inventory and later resells them to another client is acting in which capacity?

  1. Underwriter
  2. Agent
  3. Principal Correct answer.
  4. Transfer agent

Explanation

When a broker-dealer trades for its own account and takes ownership of the shares, it acts as a principal or dealer. An agent arranges a trade for a client without taking the other side. Underwriters distribute new issues, and transfer agents maintain shareholder records.

Question 24Equity markets, instruments and market participants

An investor places a sell stop-limit order with a stop price of $45 and a limit price of $44 while the stock is trading at $50. If the stock falls to $45, the order:

  1. is executed immediately at the best available price
  2. becomes a buy limit order at $44
  3. becomes a sell limit order at $44 Correct answer.
  4. is canceled if it cannot fill at exactly $45

Explanation

A stop-limit order becomes a limit order once the stop price is reached. For a sell stop-limit, triggering at $45 converts the order into a sell limit at $44, so it can execute at $44 or higher but not below. It does not guarantee execution, because the market may trade below the limit.

Question 25Equity markets, instruments and market participants

In the ETF creation and redemption process, an authorized participant typically:

  1. acts as the transfer agent for the ETF's registered shareholders
  2. guarantees that the ETF trades at net asset value in the secondary market
  3. creates and redeems ETF shares in large blocks with the fund Correct answer.
  4. sets the ETF's official net asset value each trading day

Explanation

Authorized participants are entities that can create or redeem ETF shares in large creation units directly with the ETF provider. This arbitrage mechanism helps keep the exchange price close to net asset value but does not guarantee it. NAV is calculated by the fund, and transfer-agent duties are separate.

Question 26Equity markets, instruments and market participants

In a pure auction market, share prices are determined primarily by:

  1. the posted bid and ask quotations published by competing dealers
  2. the net asset value calculated at the close
  3. a formula set by the exchange's listing committee
  4. competing bids and offers in a central order book Correct answer.

Explanation

A pure auction market matches buy and sell orders against one another in a central order book, so competing bids and offers set the price. Dealer quotations are central to a dealer or quote-driven market. Listing committees and closing NAV calculations do not set auction prices.

Question 27Equity markets, instruments and market participants

In a typical IPO, a lock-up agreement restricts:

  1. underwriters from stabilizing the IPO price after listing
  2. all IPO buyers from selling their shares on the first day
  3. the issuer from issuing additional common shares for one year
  4. pre-IPO shareholders from selling for a set period Correct answer.

Explanation

A lock-up is a contractual restriction that usually prevents existing shareholders and company insiders from selling shares for a specified period after the IPO. It is intended to limit supply and support the aftermarket. It does not apply to ordinary IPO buyers or prohibit underwriter stabilization.

Question 28Equity markets, instruments and market participants

In a short sale, the securities lender generally:

  1. can recall the shares, forcing the borrower to replace them Correct answer.
  2. guarantees the short seller against any increase in the share price
  3. becomes the legal issuer of the shares while the loan is outstanding
  4. receives no fee or other compensation for lending the securities

Explanation

The lender retains ownership of loaned securities and can recall them, for example if it wants to vote the shares or sell them. The short seller must then borrow replacement shares or buy shares to close the position. Lenders typically receive compensation, and they do not insure the borrower against price risk.

Question 29Equity markets, instruments and market participants

Under price-time priority in an exchange order book, which order has priority to execute at a given price?

  1. A retail order rather than an institutional order
  2. The order with the largest number of shares
  3. A market order rather than a limit order
  4. The order that arrived first at that price Correct answer.

Explanation

Price-time priority first ranks orders by price, then by the time they were entered at that price. At the same price, the earliest order is filled before later orders, regardless of size or investor type. Market orders may execute immediately, but they do not override time priority at a given price.

Question 30Equity markets, instruments and market participants

A stock dividend differs from a cash dividend because a stock dividend:

  1. requires a cash outflow from retained earnings
  2. adds shares and reduces EPS proportionally Correct answer.
  3. changes total shareholders' equity immediately
  4. reduces the number of shares outstanding

Explanation

A stock dividend distributes additional shares to existing holders, increasing the share count while total equity is unchanged. Because earnings are spread over more shares, earnings per share and book value per share fall proportionally. A cash dividend reduces cash and total equity.

Question 31Equity markets, instruments and market participants

An investor wants to buy an equity security immediately and is willing to accept the best available price in the market. Which order type is most appropriate?

  1. Stop order
  2. Market order Correct answer.
  3. Stop-limit order
  4. Limit order

Explanation

A market order is entered to execute promptly at the best available price, so execution is prioritized over price certainty. A limit order specifies a maximum purchase price, while stop and stop-limit orders become active only after a trigger price is reached.

Question 32Equity markets, instruments and market participants

An American depositary receipt (ADR) traded in the United States represents:

  1. A debt obligation issued by a foreign government treasury
  2. A pooled fund investing in short-term domestic money market instruments
  3. A futures contract tied to a foreign currency exchange rate
  4. A certificate representing foreign shares held by a depositary Correct answer.

Explanation

An ADR is a negotiable certificate issued by a depositary bank that represents ownership of shares in a foreign company, with the underlying shares held in custody. ADRs let U.S. investors trade foreign equity exposure in U.S. markets and in U.S. dollars.

Question 33Equity markets, instruments and market participants

The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept for an equity security is called:

  1. The settlement interval
  2. The margin requirement
  3. The tick size
  4. The bid-ask spread Correct answer.

Explanation

The best bid is the highest displayed buying price and the best ask is the lowest displayed selling price. Their difference is the bid-ask spread, which is a measure of immediate trading cost and liquidity.

Question 34Equity markets, instruments and market participants

A stock trades at $30. A rights offering gives existing holders one right per share; five rights plus $20 can buy one new share. What is the theoretical ex-rights price per share?

  1. $25.00
  2. $30.00
  3. $26.67
  4. $28.33 Correct answer.

Explanation

The theoretical ex-rights price equals the value of the old shares plus the subscription cash, divided by the total shares after exercise. Here it is (5 × $30 + $20) ÷ 6 = $170 ÷ 6 = $28.33.

Question 35Equity markets, instruments and market participants

Which statement about open-end and closed-end equity funds is accurate?

  1. Open-end fund shares normally trade at a premium to net asset value.
  2. Both fund types trade only on an exchange at market prices.
  3. Closed-end funds continuously issue and redeem shares at net asset value.
  4. Open-end funds redeem shares at net asset value on request. Correct answer.

Explanation

Open-end funds stand ready to issue and redeem shares at net asset value, typically once per day based on the fund's valuation. Closed-end funds generally do not redeem continuously; their shares trade in the secondary market and may trade at premiums or discounts to net asset value.

Question 36Equity markets, instruments and market participants

A regular-way trade in a U.S. listed equity executes on Thursday. Under a T+1 settlement cycle, and assuming Friday is a business day, settlement is due on:

  1. Monday
  2. Friday Correct answer.
  3. Wednesday
  4. Thursday of the following week

Explanation

Under a T+1 settlement cycle, a trade settles one business day after execution. A Thursday execution therefore settles on Friday when Friday is a business day.

Question 37Equity markets, instruments and market participants

In a price-weighted equity index, which stock has the greatest influence on the index level, all else equal?

  1. The stock with the highest dividend yield
  2. The stock with the largest number of shares outstanding
  3. The stock with the largest market capitalization
  4. The stock with the highest share price Correct answer.

Explanation

A price-weighted index gives greater weight to constituents with higher share prices, regardless of company size. Market capitalization affects cap-weighted indexes, but it is not the primary weighting factor in a price-weighted index.

Question 38Equity markets, instruments and market participants

A company uses cash to repurchase common shares in the open market. Ignoring taxes and financing effects, the immediate effect is:

  1. Shares outstanding rise and EPS falls.
  2. Shares outstanding fall and EPS may rise. Correct answer.
  3. Shares outstanding are unchanged and EPS is unchanged.
  4. Shares outstanding fall and total equity rises.

Explanation

A share repurchase reduces the number of shares outstanding, which can increase earnings per share if earnings remain unchanged. Cash and total equity decline by the amount spent on the buyback, so total equity does not rise.

Question 39Equity markets, instruments and market participants

A convertible preferred share has a conversion ratio of four common shares. The preferred trades at $110 and the common at $24. What is the conversion premium?

  1. 14.6% Correct answer.
  2. 10.0%
  3. 12.5%
  4. 4.2%

Explanation

Conversion value is four common shares × $24 = $96. The conversion premium is ($110 − $96) ÷ $96 = 14.6%, approximately.

Question 40Equity markets, instruments and market participants

A price-weighted index contains three stocks priced at $20, $40, and $60 with divisor 3, giving an index level of 40. The $60 stock splits 3-for-1. What divisor keeps the index at 40 immediately after the split?

  1. 2.5
  2. 3.0
  3. 2.0 Correct answer.
  4. 1.5

Explanation

After the 3-for-1 split, the prices are $20, $40, and $20, for a sum of $80. To keep the index at 40, the new divisor must satisfy $80 ÷ divisor = 40, so the divisor is 2.0.

Question 41Primary markets, issuance and corporate actions

In an equity initial public offering, the process by which the bookrunner collects indications of interest from institutional investors and uses that demand information to set the final offer price is called:

  1. a share consolidation
  2. a bonus issue
  3. a scrip dividend
  4. bookbuilding Correct answer.

Explanation

Bookbuilding is the price discovery and allocation process used in many IPOs: the bookrunner canvasses institutional demand, builds an order book at a range of prices, and then prices the deal and allocates shares. It is a primary-market issuance technique rather than a corporate action applied to shares already in issue.

Question 42Primary markets, issuance and corporate actions

A bonus issue, also called a capitalisation issue, is best described as:

  1. a sale of new shares to selected institutional and other investors at a negotiated price
  2. an offer of new shares to existing shareholders at a discount to the prevailing market price
  3. a reduction in the number of shares outstanding without any cash inflow
  4. the issue of free shares to existing shareholders in proportion to their holdings Correct answer.

Explanation

A bonus issue gives existing shareholders additional shares for no cash consideration, usually in proportion to their existing holdings. Total shareholders' equity is unchanged; the number of shares rises and the market price per share adjusts downward accordingly.

Question 43Primary markets, issuance and corporate actions

Which corporate action reduces the number of shares outstanding while leaving the company's total shareholders' equity unchanged?

  1. Scrip dividend
  2. Rights issue
  3. Share consolidation Correct answer.
  4. Bonus issue

Explanation

A share consolidation combines several existing shares into one new share, for example two old shares for one new share. The share count falls and the market price per share rises proportionately, but total equity and each holder's proportionate interest are unchanged.

Question 44Primary markets, issuance and corporate actions

A company announces a 1-for-4 rights issue at a subscription price of HK$8 per new share. The current market price is HK$10 per share. What is the theoretical ex-rights price per share?

  1. HK$9.80
  2. HK$9.40
  3. HK$9.20
  4. HK$9.60 Correct answer.

Explanation

The theoretical ex-rights price is the weighted average of the market value of the existing shares and the cash paid for the new shares. With four existing shares at HK$10 and one new share at HK$8, TERP = (4 × HK$10 + 1 × HK$8) ÷ 5 = HK$9.60.

Question 45Primary markets, issuance and corporate actions

Which statement about an open offer of new equity is correct?

  1. The subscription rights are renounceable and can normally be sold on the exchange.
  2. The offer can only be used to distribute a bonus issue to shareholders.
  3. The offer is made to existing shareholders but the rights are normally non-renounceable. Correct answer.
  4. The offer must be fully underwritten by a sponsor in every case.

Explanation

An open offer is an offer of new shares to existing shareholders, but unlike a rights issue the entitlement is normally non-renounceable, so shareholders cannot sell the subscription right itself. Underwriting may be arranged but is not a legal requirement in every case.

Question 46Primary markets, issuance and corporate actions

A company declares a scrip dividend with a share election. Which statement is correct?

  1. Shareholders receive a cash payment in lieu of the declared share dividend.
  2. Shareholders may elect to take new shares instead of cash. Correct answer.
  3. It reduces the number of shares in issue.
  4. The dividend is paid only to the directors and senior managers.

Explanation

Under a scrip dividend with a share election, shareholders may choose to receive the dividend as new fully paid shares rather than cash. If shares are elected, the share count increases and the cash that would otherwise have been paid is retained by the company.

Question 47Primary markets, issuance and corporate actions

Which statement best describes a key difference between a placing and a rights issue?

  1. A placing can only be made at par value.
  2. A placing requires a prospectus in every case.
  3. A placing always increases the holdings of existing shareholders.
  4. A placing need not be offered pro rata to existing holders. Correct answer.

Explanation

In a placing, new or existing shares are sold to a selected group of investors, often institutions, and the shares do not have to be offered to all existing shareholders pro rata. A rights issue, by contrast, is generally made on a pre-emptive basis to existing holders in proportion to their holdings.

Question 48Primary markets, issuance and corporate actions

A cornerstone investor agrees to a six-month lock-up on shares subscribed in an IPO. Which statement is correct?

  1. They may sell their shares immediately after the listing date.
  2. The lock-up applies only to the company and not to the investor.
  3. They may not sell during the lock-up without consent. Correct answer.
  4. The lock-up expires on the first day of trading.

Explanation

A lock-up restricts the cornerstone or pre-IPO investor from disposing of the shares for a specified period after listing, commonly six or twelve months, without the consent of the underwriter or the company. It is intended to support the aftermarket and signal the investor's commitment to the issuer.

Question 49Primary markets, issuance and corporate actions

In an IPO using the standard Hong Kong clawback mechanism, the initial public offer tranche is 10% and the placing tranche is 90%. If the public offer tranche is oversubscribed by 100 times, the public offer tranche is typically increased to:

  1. 50% Correct answer.
  2. 20%
  3. 30%
  4. 90%

Explanation

Under the clawback mechanism, the public offer tranche is initially set at around 10% of the deal and is increased if the public tranche is heavily oversubscribed. At 100 times oversubscription or more, the standard clawback raises the public offer tranche to 50% of the total offer.

Question 50Primary markets, issuance and corporate actions

A company repurchases shares at a price above the prevailing net asset value per share. What is the effect on net asset value per share for the remaining shareholders?

  1. Decrease NAV per share Correct answer.
  2. Increase NAV per share only if earnings per share also rises
  3. Leave NAV per share unchanged
  4. Increase NAV per share

Explanation

Buying back shares above net asset value per share means the company pays more than the book value attributable to those shares, transferring value to the selling shareholders. The net asset value attributable to the remaining shares therefore falls, even though the number of shares outstanding is reduced.