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NEW QUESTION 28
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.

If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:

• A. $75,000
• B. $100,000
• C. $50,000
• D. $25,000

Answer: D

 

NEW QUESTION 29
A company intends to sell one of its business units, Company R by a management buyout (MBO).
A selling price of $100 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal:

The VCC requires a minimum return on its equity investment in the MBO of 30% a year on a compound basis over 5 years.
What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.

Answer:

Explanation:
$ ? million
111.4, 111, 111.0, 111.1, 111.2, 111.3, 111.5, 111.6, 111.7

 

NEW QUESTION 30
A listed company is planning a share repurchase.
Research into different offer prices has given the following data with regards acceptance by the shareholders at different prices:

What price should be offered to shareholders if the retained earnings of the company are to remain unchanged?

• A. $9.00
• B. $8.50
• C. $10.00
• D. $9.50

Answer: D

 

NEW QUESTION 31
A project requires an initial outlay of $2 million which can be financed with either a bank loan or finance lease.
The company will be responsible for annual maintenance under either option.
The tax regime is:
* Tax depreciation allowances can be claimed on purchased assets.
* If leased using a finance lease, tax relief can be claimed on the interest element of the lease payments and also on the accounting depreciation charge.
The trainee management accountant has begun evaluating the lease versus buy decision and has produced the following dat a. He is not confident that all this information is relevant to this decision.
Using only the relevant data, which of the following is correct?

• A. The bank loan is $70,000 LESS expensive than the finance lease.
• B. The bank loan is $20,000 LESS expensive than the finance lease.
• C. The bank loan is $30,000 MORE expensive than the finance lease.
• D. The bank loan is $120,000 LESS expensive than the finance lease.

Answer: A

 

NEW QUESTION 32
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. Retained earnings
• B. Private placement of a bond
• C. Bank overdraft
• D. Rights issue

Answer: D

 

NEW QUESTION 33
A listed publishing company owns a subsidiary company whose business activity is training.
It wishes to dispose of the subsidiary company.
The following information is available:
The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.
Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

• A. A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.
• B. A cost of equity that reflects the asset beta of a listed company that provides training activities.
• C. A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
• D. A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.

Answer: C

 

NEW QUESTION 34
Company M plans to bid for Company J.
Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
$ ? million

Answer:

Explanation:
8

 

NEW QUESTION 35
On 1 January:
* Company X has a value of $50 million
* Company Y has a value of $20 million
* Both companies are wholly equity financed
Company X plans to take over Company Y by means of a share exchange. Following the acquisition the post-tax cashflow of Company X for the foreseeable future is estimated to be $8 million each year. The post-acquisition cost of equity is expected to be 10%.
What is the best estimate of the value of the synergy that would arise from the acquisition?

• A. $10 million
• B. $60 million
• C. $30 million
• D. $100 million

Answer: A

 

NEW QUESTION 36
A company's main objective is to achieve an average growth in dividends of 10% a year.
In the most recent financial year:
Sales are expected to grow at 8% a year over the next 5 years.
Costs are expected to grow at 5% a year over the next 5 years.
What is the minimum dividend payout ratio in 5 years' time that would allow the company to achieve its objective?

• A. 27.5%
• B. 22.5%
• C. 21.7%
• D. 30.0%

Answer: C

 

NEW QUESTION 37
The Board of Directors of a small listed company engaged in exploration are currently considering the future dividend policy of the company. Exploration is considered a high-risk business and consequently the company has a low level of debt finance.
Forecasts indicate a period of profit fluctuation in the next few years as the company is planning to embark on a major capital investment project. Debt finance is unlikely to be available due to the project's high business risk.
Which THREE of the following are practical considerations when determining the company's dividend/retention policy?

• A. The general level of interest rates and the tax savings on interest costs relating to debt finance.
• B. The legislation and regulation governing distributable profits.
• C. The timing and size of the cash flow requirements for the new investment.
• D. The fluctuating nature of the projected future profits.
• E. The dividend policies of mature listed multinational companies in the exploration industry.

Answer: B,C,D

Explanation:
Explanation
Discursive_F0

 

NEW QUESTION 38
Company A plans to acquire a minority stake in Company B.
The last available share price for Company B was $0.60.
Relevant data about Company B is as follows:
* A dividend per share of $0.08 has just been paid
* Dividend growth is expected to be 2%
* Earnings growth is expected to be 4%
* The cost of equity is 15%
* The weighted average cost of capital is 13%
Using the dividend growth model, what would be the expected change in share price?

• A. $0.07 fall
• B. $0.16 increase
• C. $0.14 increase
• D. $0.03 increase

Answer: D

 

NEW QUESTION 39
Company A has made an offer to take over all the shares in Company B on the following terms:
* For every 20 shares currently held, Company B's shareholders will receive $100 bond with a coupon rate of 3%
* The bond will be repaid in 10 years' time at its par value of $100.
* The current yield on 10 year bonds of similar risk is 6%.
What is the effective offer price per share being made to Company B's shareholders?

• A. $3.89
• B. $6.43
• C. $4.50
• D. $6.89

Answer: A

 

NEW QUESTION 40
KKL is a listed sports clothing company with three separate business units. KKL is seeking to sell TT', one of these business units TTP cwns a new. brand of trail running shoes that have Droved hugely popular with lone distance runners.
The management team of TTP are frustrated by the constraints imposes b/ KKL in managing tie brand and developing. the bus ness and they believe that TTF has huge growth potential.
The management team of TTP have approached KKL with a proposal to purchase 1~P through a management layout (MDO). KKL has accepted this proposal as TTP has not proved to be a good fit' with the rest of the business and has agreed on the selling price.
Which THREE of the following factors a-e mast Likely to affect the success of the MBO?

• A. The motivation of the TTP management team to invest in future growth.
• B. The ability of the TTF management team to take over the head office functions successfully.
• C. Searing sufficient. funding for the MBO.
• D. The ability the TTP management team to develop the brand and achieve the expected growth.
• E. The constraints imposed by KKL managing TTF's brand.

Answer: B,C,D

 

NEW QUESTION 41
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 B is 2.2% a year less expensive
• B. Approach A is 0.5% a year less expensive
• C. Approach A is 0.7% a year less expensive
• D. Approach B is 2.0% a year less expensive

Answer: C

 

NEW QUESTION 42
A company is concerned about the interest rate that it will be required to pay on a planned bond issue.
It is considering issuing bonds with warrants attached.
Advise the directors which of the following statements about warrants is NOT correct?

• A. Warrants can be sold back to the issuing company for the nominal value of the share if no longer required by the bond holder.
• B. Warrants give the holder the right to buy ordinary shares in the company at a fixed price at a future date.
• C. Warrants can potentially be very expensive because they can involve the issue of shares at a discount in the future if exercised.
• D. Warrants are a debt sweetener attached to the bond to drive down the interest rate payable on the bond.

Answer: A

 

NEW QUESTION 43
Company S is planning to acquire Company T.
The shareholders in Company T will receive new shares in Company S in an all-share consideration.
Relevant information:

The shareholders in Company T want sufficient shares to receive a 25% premium on the pre-acquisition value of their shares, based on the pre-acquisition share price.
Which of the following share-for-share offers will achieve the desired result?

• A. 1 share in Company S for 1 share in Company T
• B. 1 share in Company S for 2 shares in Company T
• C. 2 shares in Company S for 1 share in Company T
• D. 10 shares in Company S for 4 shares in Company T

Answer: A

 

NEW QUESTION 44
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. Using the 10% discount rate is incorrect
• B. The salvage value has been included within the lease option
• C. The bank loan repayments should be included
• D. Tax relief on lease payments have not been lagged correctly
• E. Lease payments are timed incorrectly
• F. The project's operating cashflows should be included

Answer: A,B,D

 

NEW QUESTION 45
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 enable them to benefit from the future performance of the combined entity.
• B. It would allow them to realise their investment and make a capital gain.
• 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: A

 

NEW QUESTION 46
X exports goods to customers in a number of small countries Asia. At present, X invoices customers in X's home currency.
The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.
Which TWO of the following statement are correct?

• A. The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.
• B. The overseas customers may have difficulty obtaining X's name currency with which to make the purchases, so the Sales Director's proposal may increase sales.
• C. X may be able to sell the receipts forward.
• D. If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.
• E. X will know advance the amount of home currency it will receive for the export sales.

Answer: B,D

 

NEW QUESTION 47
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. Retained earnings
• B. Private placement of a bond
• C. Bank overdraft
• D. Rights issue

Answer: D

 

NEW QUESTION 48
AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.

• A. The cost of equity will decrease below 10%
• B. The WACC increase above 7.6
• C. The cost of debt remain unchanged at 4%
• D. The cost of equity will increase above 10%
• E. The cost of debt will increase above 4%
• F. The WACC will decrease below 7.6%

Answer: B,F

 

NEW QUESTION 49
Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $580 million.
The price it would have to pay for the equity of each company is as follows:

Only one of the target companies can be acquired and the consideration will be paid in cash.
The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:
Ignoring any premium paid on acquisition, which acquisition should the directors pursue?

• A. D
• B. B
• C. A
• D. C

Answer: D

 

NEW QUESTION 50
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