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NEW QUESTION 52
A company is financed as follows:
* 400 million $1 shares quoted at $3.00 each.
* $800 million 5% bonds quoted at par.
The company plans to raise $200 million long term debt to finance a project with a net present value of
$100 million.
The bank that is providing the debt is insisting on a maximum gearing level covenant.
Gearing will be based on market values and calculated as debt/(debt + equity).
What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?
- A. 46%
- B. 44%
- C. 45%
- D. 43%
Answer: B
NEW QUESTION 53
Company R is a major food retailer. It wishes to acquire Company S, a food manufacturer.
Company S currently supplies many stores owned by Company R with food products that it manufactures.
Company S is of similar size to Company R but has a lower credit rating.
Which of the following is most likely to be a synergistic benefit to R on purchasing S?
- A. Savings due to a reduction in purchase costs and more control over the value chain.
- B. Lower cost of borrowing due to the acquistion of a company with a different credit rating.
- C. Reduced competition resulting in the ability to raise retail selling prices for food products.
- D. Cost savings due to reducing the range of products manufactured by Company S.
Answer: A
NEW QUESTION 54
Company J plans to acquire Company K, an unlisted company whose equity is to be valued using a P/E ratio approach.
A listed company has been identified which is very similar to Company K and which can be used as a proxy.
However, the growth prospects of Company K are higher than those of the proxy.
The Directors of Company J are aware that certain adjustments will be necessary to the proxy company's P/E ratio in order to obtain a more reliable valuation.
The following adjustments have been agreed:
* 20% due to Company K being unlisted.
* 15% to allow for the growth rate difference.
The total adjustment to the proxy p/e ratio is:
- A. 5% decrease
- B. 5% increase
- C. 35% decrease
- D. 35% increase
Answer: A
NEW QUESTION 55
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
- A. Rights issue
- B. Retained earnings
- C. Bank overdraft
- D. Private placement of a bond
Answer: A
NEW QUESTION 56
A private company manufactures goods for export, the goods are priced in foreign currency B$.
The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.
The company therefore has significant long term exposure to the B$.
This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.
The company does not apply hedge accounting and this has led to high volatility in reported earnings.
Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?
- A. To provide a more appropriate earnings figure for use in calculating the annual dividend.
- B. To make it easier for the market to value the business when it is listed on the Stock Exchange.
- C. To ensure that the venture capitalist receives regular annual returns on its investment.
- D. To fully adopt IFRS in preparation for listing the company.
Answer: B
NEW QUESTION 57
An unlisted software development company has recently reported disappointing results. This was partly due to weak economic conditions but also because of its poor competitive position. The company has a number of exciting development opportunities which would enable it to achieve significant future growth. The company's growth potential has been hindered by its inability to secure sufficient new finance.
To enable the company raise new finance the Directors are considering working forwards an IPO in 10 years and accepting finance from a venture capitalist in order support in the intervening period.
The directors are keen to retain a controlling stake in the company and full representation on the board. They therefore require venture capitalists to provide funds as a mix of debt and equity and not soley equity finance.
Which THREE of the following are most likely to disrupt the directors' plans to use venture capital finance?
- A. The venture capital finance offered is much more expensive than expected.
- B. Venture capitalists always require ownership of more than 50% of the shares in a company to ensure control.
- C. Venture capitalists only provide equity finance and will therefore not be interested in providing a combination of debt and equity finance.
- D. Venture capitalists normally expect an exit strategy sconer than the planned IPO in 10 years'time.
- E. Venture capitalists normally expect at least one seat on the board.
Answer: A,D,E
NEW QUESTION 58
A company has undertaken a transaction with its shareholders which has had the following impact on its financial statements:
* Retained earnings has decreased
* Share capital has increased
* Earnings per share has decreased
* The book value of equity is unchanged
The company has undertaken a:
- A. share repurchase.
- B. rights issue.
- C. scrip dividend.
- D. cash dividend.
Answer: C
NEW QUESTION 59
XYZ is a multi-national group with subsidiary AA in Country A and subsidiary BB in Country B.
The capital structures of AA and BB are set up to take advantage of the lower tax rate in Country A Thin capitalisation rules in Country B will limit the ability for either AA or BB to claim tax relief on:
- A. interest paid by BB
- B. interest paid by AA
- C. interest earned by BB.
- D. interest earned by AA
Answer: A
NEW QUESTION 60
A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase programme.
This programme will be funded from the proceeds of a planned new long-term bond issue.
Its financial projections show no change to next year's expected earnings.
As a result, the company plans to pay the same total dividend in future years.
If the share re-purchase is implemented, which THREE of the following measures are most likely to decrease?
- A. The gearing, based on book value (debt / (debt + equity))
- B. The number of shares in issue
- C. Next year's dividend per share
- D. The Weighted Average Cost of Capital
- E. The interest cover
- F. The cost of equity
Answer: B,D,E
NEW QUESTION 61
A new company was set up two years ago using the personal financial resources of the founders.
These funds were used to acquire suitable premises.
The company has entered into a long-term lease on the premises which are not yet fully fitted out.
The founders are considering requesting loan finance from the company's bank to fund the purchase of custom-made advanced technology equipment.
No other companies are using this type of equipment.
The company expects to continue to be profitable for the forseeable future.
It re-invests some of its surplus cash in on-going essential research and development.
Which THREE of the following features are likely to be considered negatives by the bank when assessing the company's credit-worthiness?
- A. The equipment is advanced technology custom-made equipment.
- B. The company premises are on a long-term lease but are not yet fully fitted out.
- C. Essential on-going research and development expenditure is required.
- D. The company will continue to remain profitable and to generate net cash.
- E. The founders invested their personal financial resources in the company.
Answer: A,B,C
NEW QUESTION 62
A large multi-divisional company in the food processing and distribution business is conducting a strategic review. The divisions all compete in the same market.
The sale of one of its underperforming food processing divisions to the divisional management team is currently being considered. The purchase by the divisional management team will require venture capital finance.
Which THREE of the following are likely to influence the multi-divisional company's decision on whether or not to sell the under-performing division to the management team?
- A. The quality of the management team and its ability to manage the divested division successfully.
- B. The divisional management team has detailed confidential information about the operation of the other divisions.
- C. The ability of the management team to raise the finance required to complete the purchase of the division at a reasonable price.
- D. The specific conditions imposed on the management team by the venture capital provider.
- E. The divisional management team has skills and experience that are important for the future successful operation of other divisions.
Answer: B,C,E
NEW QUESTION 63
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
- A.
- B.
- C.
- D.
Answer: C
NEW QUESTION 64
A profitable company wishes to dispose of a loss-making division that generated negative free cashflow in the last financial year.
The division requires significant new investment to return it to profitability.
Which of the following valuation approaches is likely to be the most useful to the company when negotiating the sales price?
- A. Asset basis
- B. Dividend growth model
- C. Discounted forecast free cashflow
- D. P/E ratio applied to forecast earnings next year
Answer: C
NEW QUESTION 65
A government is currently considering the privatisation of the national airline. The shares are to be offered to the public via a fixed price Initial Public Offering (IPO).
Which THREE of the following statements are correct?
- A. The use of a fixed price offer will ensure that the government raises the maximum amount of finance.
- B. The rational airline will receive significant financial resources as a direct result of the shares company shares in the IPO.
- C. The rational airline employees will no longer be public sector employees following the completion of the privatisation
- D. An IPO is normally underwritten
- E. The government will receive significant financial resources from the sale of its shareholding in the national airline.
Answer: A,B,E
NEW QUESTION 66
Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.
Company B is all-equity financed. Its cost of equity is 17%.
Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%.
Company A and Company B both pay corporate income tax at 30%.
What is the cost of equity for Company A?
- A. 17.0%
- B. 20.5%
- C. 21.2%
- D. 22.0%
Answer: B
NEW QUESTION 67
Company Z has just completed the all-cash acquisition of Company A.
Both companies operate in the advertising industry.
The market considered the acquisition a positive strategic move by Company Z.
Which THREE of the following will the shareholders of Company Z expect the company's directors to prioritise following the acquisition?
- A. The development of a dividend policy to meet the expectations of the target company shareholders.
- B. The realisation of anticipated post-acquisition synergies.
- C. The integration and retention of key employees.
- D. The retention of key customers of the acquired company.
- E. The regulatory approval required to complete the acquisition.
Answer: B,C,D
NEW QUESTION 68
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. 9.3%
- B. 11.4%
- C. 12.3%
- D. 10.1%
Answer: C
NEW QUESTION 69
A company aims to increase profit before interest and tax (PBIT) each year.
The company reports in A$ but has significant export sales priced in B$.
All other transactions are priced in A$.
In 20X1, the company reported:
In 20X2, the only changes expected are:
* An increase in export prices of 10%, but no change to units sold.
* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5) Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?
- A. No, PBIT would fall by A$ 150 million.
- B. Yes, PBIT would increase by A$ 48 million.
- C. No, PBIT would fall by A$ 48 million.
- D. Yes, PBIT would increase by A$ 150 million.
Answer: C
NEW QUESTION 70
The ex div share price of a company's shares is $2.20.
An investor in the company currently holds 1,000 shares.
The company plans to issue a scrip dividend of 1 new share for every 10 shares currently held.
After the scrip dividend, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.
Answer:
Explanation:
$ ? .
2200
NEW QUESTION 71
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 30.3%.
- B. rise to 27.0%.
- C. fall to 23.3%.
- D. fall to 22.7%.
Answer: C
NEW QUESTION 72
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 73
Select the category of risk for each of the descriptions below:
Answer:
Explanation:
NEW QUESTION 74
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