Question 1: The Equity Market and Corporations. A fundamental characteristic of a publicly listed corporation is the separation between owners and managers. Required: 1. Discuss the rights, roles and responsibilities of the shareholders, board of directors and executive management. 2. Why might a business organisation seek listing as a publicly listed corporation? Include in your answer the advantages of the corporate form of business organisation. 3. Maximisation of shareholder value is a principal objective of an organisation. What is the relationship between this objective and the problems identified in agency theory? 4. A stock exchange provides a formal market that facilitates the flow of equity funds into the capital markets. Explain this flow-of-funds process from the perspective of a listed corporation raising equity finance. 5. Discuss the secondary market role of the equity market and its importance to the corporation. Demonstrate your answer through the use of examples. 6. What is meant by the liquidity of the equity market? Explain why liquidity in the secondary market is important to both shareholders and to the corporation.
Question 2: Two securities that are traded in the corporate bond market are debentures and unsecured notes. Required: a) Outline the attributes of each of these securities. In your answer, include a discussion on the nature of a fixed and floating charge. Identify the types of borrowers that have access to funds through the issue of debentures and unsecured note. The corporate bond market is a significant source of funds for corporations raising finance direct from the capital markets. Required: b) Describe the nature of the corporate bond market. In you answer explain why corporations seek to raise debt funds direct from the markets, why investors provide debt funds directly to the capital markets and where direct investment funds come from. A highly rated corporation has issued $1 million of debentures, with a fixed-interest coupon equal to current interest rates of 13.00 per cent per annum, coupons paid half-yearly and a maturity of seven years. Required: c) What amount would the corporation have raised on the initial issue of the debentures? d) After one year, yields on identical types of securities are now 12.00 per cent per annum. The existing debenture now has exactly six years to maturity. What is the value, or price, of the existing debenture in the secondary market? e) Explain why the value of the debenture has changed.