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NEW QUESTION 113
Company A is located in Country A, where the currency is the A$.
It is listed on the local stock market which was set up 10 years ago.
It plans a takeover of Company B, which is located in Country B where the currency is the B$, and where the stock market has been operating for over 100 years.
Company A is considering how to finance the acquisition, and how the shareholders of Company B might respond to a share exchange or cash (paid in B$).
Which of the following is likely to explain why the shareholders of Company B would prefer a share exchange as opposed to a cash offer?
- A. It would allow them to realise their investment and make a capital gain.
- B. It would enable them to benefit from the future performance of the combined entity.
- C. It would avoid them being exposed to foreign currency risk.
- D. They would receive shares in a market that is likely to be more efficient.
Answer: B
NEW QUESTION 114
A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders.
Although the company has excellent long-term growth prospects, it is experiencing short-term profit and cash flow problems.
Which of the following statements is most likely to be a reason for choosing the scrip dividend?
- A. It is a way of increasing earnings per share.
- B. It is a way of raising additional finance to promote future growth.
- C. It is a way of encouraging shareholders to allow cash to be retained in the business.
- D. It is a way of increasing dividend per share.
Answer: C
NEW QUESTION 115
An all equity financed company reported earnings for the year ending 31 December 20X1 of $5 million.
One of its financial objectives is to increase earnings by 5% each year.
In the year ending 31 December 20X2 it financed a project by issuing a bond with a $1 million nominal value and a coupon rate of 7%.
The company pays corporate income tax at 30%.
If the company is to achieve its earnings target for the year ending 31 December 20X2, what is the minimum operating profit (profit before interest and tax) that it must achieve?
- A. $7.50 million
- B. $7.57 million
- C. $5.25 million
- D. $8.40 million
Answer: B
NEW QUESTION 116
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:
Which THREE of the following items are errors within the appraisal?
- A. Lease payments are timed incorrectly
- B. Using the 10% discount rate is incorrect
- C. The bank loan repayments should be included
- D. Tax relief on lease payments have not been lagged correctly
- E. The salvage value has been included within the lease option
- F. The project's operating cashflows should be included
Answer: B,D,E
NEW QUESTION 117
Company X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whose currency is the B$.
Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.
Company A has the following forecast revenue:
The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.
If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of total revenue will:
- A. rise to 27.0%.
- B. fall to 22.7%.
- C. fall to 23.3%.
- D. rise to 30.3%.
Answer: C
NEW QUESTION 118
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by
5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
Answer:
Explanation:
$ ?
14.37
NEW QUESTION 119
The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.
Their calculation is:
Value if the company's equity = $6 million x 10 =$60 million where.
* $6 million is the company's reported profit before interested and tax in the most recent accounting period and
* 10 is the average price-earnings ratio for all listed companies
Which THREE of the following are weakness of this valuation?
- A. A forecast of sustainable profit should have been used instead of a historical figure
- B. The price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies
- C. Profit after tax should have been used in the calculation instead of profit before interest and tax.
- D. The equity result needs to be uplifted in recognition that this is an unlisted company.
- E. The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.
Answer: A,B,C
NEW QUESTION 120
Which THREE of the following are the most likely exit routes that apply to a venture capitalist?
- A. Trade sale to another company
- B. Selling back to the original owners
- C. Raising long term debt from the company
- D. Flotation via a stock market listing
- E. Liquidation of the company
Answer: A,B,D
NEW QUESTION 121
A company has:
* 10 million $1 ordinary shares in issue
* A current share price of $5.00 a share
* A WACC of 15%
The company holds $10 million in cash. No interest is earned on this cash.
It will invest this in a project with an expected NPV of $4 million.
In a semi-strong efficient stock market, which of the following is the most likely share price immediately after the announcement of the new investment?
- A. $5.30
- B. $6.80
- C. $5.40
- D. $6.40
Answer: C
NEW QUESTION 122
The following information relates to Company A's current capital structure:
Company A is considering a change in the capital structure that will increase gearing to 30:70 (Debt:Equity).
The risk -free rate is 3% and the return on the market portfolio is expected to be 10%.
The rate of corporate tax is 25%
Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.
- A. 11.4%
- B. 9.3%
- C. 12.3%
- D. 10.1%
Answer: C
NEW QUESTION 123
Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product's success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 - 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?
- A. Today's share price x number of shares in issue.
- B. P/E valuation based on the company's long term P/E and earnings for the year ended 31 December
20X1. - C. Today's share price x number of shares in issue + retained earnings.
- D. Discounted free cash flow using the company's forecast growth rates.
Answer: A
NEW QUESTION 124
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION 125
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 150 million shares in issue, with market price currently at $7.00 per share.
* Company T has 120 million shares in issue,. with market price currently at $6.00 each share.
* Synergies valued at $50 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in T.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price of each of Company A's shares be?
Give your answer to two decimal places.
Answer:
Explanation:
8.24
NEW QUESTION 126
A company has 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.
Each share:
* has a current market value of $5.60
* is expected to grow at 5% each year
What is the expected conversion value of each $100 nominal value bond in 3 years' time?
- A. $117.6
- B. $112.0
- C. $129.6
- D. $100.0
Answer: C
NEW QUESTION 127
An unlisted company wishes to obtain an estimated value for its shares in anticipation of a private sale of a large parcel of shares.
Relevant data for the unlisted company:
* It has a residual dividend policy.
* It has earnings that are highly sensitive to underlying economic conditions.
* It is a small business in a large industry where there are listed companies but there are none with a similar capital structure.
The company intends to base valuations on the cost of equity of a proxy company after adjusting for any differences in capital structure where appropriate.
Which of the following methods is likely to give the most accurate equity value for this unlisted company?
- A. P/E based valuation using the P/E of a similar listed company in the same industry.
- B. Dividend valuation model.
- C. Net asset valuation.
- D. Discounted cash flow analysis at WACC based on free cash flow to equity.
Answer: B
NEW QUESTION 128
A company's Board of Directors is considering raising a long-term bank loan incorporating a number of covenants.
The Board members are unsure what loan covenants involve.
Which THREE of the following statements regarding loan covenants are true?
- A. A financial covenant usually requires the company to adhere to specific financial conditions or targets.
- B. A restrictive covenant prohibits the company from conducting certain actions without the approval of the lending institution.
- C. A positive loan covenant would require the company to undertake specific actions.
- D. A loan covenant has no contractually binding obligations.
- E. A covenant gives the financial institution the right but not the obligation to convert debt into equity in a case of non-compliance.
Answer: A,B,C
NEW QUESTION 129
Which of the following statements are true with regard to interest rate swaps?
Select ALL that apply.
- A. Risk of default is high from the floating interest rate payer if interest rates rise.
- B. When interest rates are falling the risk of default by the fixed interest rate payer is low.
- C. An nicest rate swap is an internal hedging technique.
- D. Some companies interest rate swap to deliberately increase their risks because they believe that they are better at predicting future interest rates than the market.
- E. An interest rate swap is an external hedging technique.
Answer: A,B,E
NEW QUESTION 130
A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?
- A. Covenant is breached as retained earnings = $1.92 million.
- B. Covenant is not breached as retained earnings = $2.40 million.
- C. Covenant is not breached as retained earnings = $2.10 million.
- D. The covenant is not breached as retained earnings = $4.68 million.
Answer: A
NEW QUESTION 131
M is an accountant who wishes to take out a forward rate agreement as a hedging instrument but the company treasurer has advised that a short-term interest rate future would be a better option.
Which of the following is true of a short-term interest rate future?
- A. It must be kept for ne whole duration of the contract
- B. The date is flexible and the position can be closed quickly and easily.
- C. It can be tailored to the exact reeds of the company.
- D. It interest rates have gone down the price of the future will have fallen.
Answer: A
NEW QUESTION 132
Listed company R is in the process of making a cash offer for the equity of unlisted company S.
Company R has a market capitalisation of $200 million and a price/earnings ratio of 10.
Company S has a market capitalisation of $50 million and earnings of $7 million.
Company R intends to offer $60 million and expects to be able to realise synergistic benefits of $20 million by combining the two businesses. This estimate excludes the estimated $8 million cost of integrating the two businesses.
Which of the following figures need to be used when calculating the value of the combined entity in $ millions?
- A. 8, 20, 50, 200
- B. 20, 50, 60, 200
- C. 8, 20, 50, 60, 200
- D. 7, 10, 20, 50, 200
Answer: C
Explanation:
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NEW QUESTION 133
CI IJ has decided to move its production plant to overseas country X.
This would make the product cheaper to produce.
The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Answer:
Explanation:
NEW QUESTION 134
Company Z wishes to borrow $50 million for 10 years at a fixed rate of interest.
Two alternative approaches are being considered: A. Issue a 10 year bond at a fixed rate of 6%, or B. Borrow from the bank at Libor +2.5% for a 10 year period and simultaneously enter into a 10 year interest rate swap.
Current 10 year swap rates against Libor are 4.0% - 4.2%.
What is the difference in the net interest cost between the two alternative approaches?
- A. Approach A is 0.7% a year less expensive
- B. Approach B is 2.2% a year less expensive
- C. Approach A is 0.5% a year less expensive
- D. Approach B is 2.0% a year less expensive
Answer: A
NEW QUESTION 135
A listed company in a high technology industry has decided to value its intellectual capital using the Calculated Intangible Value method (CIV).
Relevant data for the company:
* Pays corporate income tax at 30%
* Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%
* The value spread has been calculated as $26 million
Calculate the CIV for the company.
- A. 228 million
- B. 325 million
- C. 289 million
- D. 531 million
Answer: A
NEW QUESTION 136
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
- A. A decrease in the dividend cover ratio.
- B. A decrease in the (Net debt) / (Earnings before interest, tax, depreciation and amortisation) ratio.
- C. An increase in the free cashflow generated from operations.
- D. An increase in the interest cover ratio.
- E. A decrease in the (Book value of debt) / (Book value of equity) ratio.
Answer: B,C,D
NEW QUESTION 137
Company A plans to acquire Company B, an unlisted company which has been in business for 3 years.
It has incurred losses in its first 3 years but is expected to become highly profitable in the near future.
No listed companies in the country operate the same business field as Company B, a unique new high- risk business process.
The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine.
Company A is assessing the validity of using the dividend growth method to value Company B.
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company B?
- A. The future growth rate in earnings and dividends will be difficult to accurately determine.
- B. The company has been unprofitable to date and hence, there is no established dividend payment pattern.
- C. The cost of capital will be difficult to estimate.
- D. The future projected dividend stream is used as the basis for the valuation.
- E. The dividend growth model does not take the time value of money into consideration.
Answer: A,B,C
NEW QUESTION 138
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