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?
Two listed companies in the same industry are joining together through a merger.
What are the likely outcomes that will occur after the merger has happened?
Select ALL that apply.
A company has identified potential profitable investments that would require a total of S50 million capital expenditure over the next two years The following information is relevant.
• The company has 100 million shares in issue and has a market capitalisation of S500 million
• It has a target debt to equity ratio of 40% based on market values This ratio is currently 30%
• Earnings for the current year are expected to be S1 00 million
• Its last dividend payment was $1 per share One of the company's objectives is to increase dividends by at least 10% each year
• The company has no cash reserves
Which of the following is the most suitable method of financing to meet the company's requirements?
A company has borrowings of S5 million on which it pays interest at 8%. It has an operating profit margin of 20%.
The company plans to increase borrowings by S2 million Interest on additional borrowings would be 10% and the operating profit margin would remain unchanged
A debt covenant attached to the new borrowings requires interest cover to be at least 4 times throughout the period of the borrowing
Interest cover is defined in the loan documentation as being based on operating profit
What is the minimum sales value required each year to avoid a breach of the interest cover covenant'
A company plans to raise $12 million to finance an expansion project using a rights issue.
Relevant data:
• Shares will be offered at a 20% discount to the present market price of $15.00 per share.
• There are currently 2 million shares in issue.
• The project is forecast to yield a positive NPV of $6 million.
What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?
Company A has a cash surplus.
The discount rate used for a typical project is the company's weighted average cost of capital of 10%.
No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?
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 ratefuture?
Company WWW is considering making a takeover bid for Company KKA Company KKA's current share price is $5.00
Company WWW is considering either
" A cash payment of $5.75 for each share in Company KKA
" A 5 year corporate bond with a market value of $90 in exchange for 15 shares in Company KKA
Calculate the highest percentage premium which Company KKA shareholders will receive.
Company A is a large well-established listed entertainment company and Company B is a small unlisted company specializing in providing online media streaming.
Company A has a gearing ratio of 60% (using book values) and interest cover of 2.
Company A is considering making an offer for Company B, either a cash offer financial by raising additional debt finance or a share-for-share exchange.
Which of the following is most likely to occur if Company A offers a share-for exchange rather than offering cash finance by raising debt?
A listed company has recently announced a profit warning.
The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.
Which form of efficient market is most likely to be indicated by this share price movement?
Which THREE of the following methods of business valuation would give a valuation of the equity of an entity, rather than the value of the whole entity?
A company is considering either directly exporting its product to customers in a foreign country or setting up a subsidiary in the foreign country to manufacture and supply customers in that country.
Details of each alternative method of supplying the foreign market are as follows:
There is an import tax on product entering the foreign country of 10% of sales value.
This import duty is a tax-allowable deduction in the company's domestic country.
The exchange rate is A$1.00 = B$1.10
Which alternative yields the highest total profit after taxation?
Company X plans to acquire Company Y.
Pre-acquisition information:
Post-acquisition information:
Total combined earnings are expected to increase by 10%
Total combined P/E multiple will remain at 10 times
Which of the following share-for-share exchanges will result in an increase of 10% in Company X's share price post-acquisition?
A company is wholly equity funded. It has the following relevant data:
• Dividend just paid $4 million
• Dividend growth rate is constant at 5%
• The risk free rate is 4%
• The market premium is 7%
• The company's equity beta factor is 1.2
Calculate the value of the company using the Dividend Growth Model.
Give your answer in $ million to 2 decimal places.
$ ? million
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
• Company A has 100 million shares in issue, with market price currently at $8.00 per share.
• Company T has 90 million shares in issue, with market price currently at $5.00 each share.
• Synergies valued at $60 million are expected to arise from the acquisition.
• The terms of the offer will be 2 shares in A for 3 shares in B.
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.
$ ? .
A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.
It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings. The company already has a commercial paper programme in place and has a good relationship with its bank.
Which of the following is likely to be the most cost effective method of borrowing the money?
Select whether the following statements are true or false with regard to Modigliani and Miller's dividend policy theory.
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 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:
Which of the following statements about companies seeking a stock market listing is correct?
A company's Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.
The directors are uncertain of the effects on key variables.
Which THREE of the following statements are true?
A company has convertible bonds in issue.
The following debt is apply (31 December 20X0):
• Conversion ratio- 20 shares for each $130 bond.
• Current share price - $4 50
• Expected annual growth in share price - 5%
Advise the bond Holder at which date the convers on would be worthwhile?
A listed company is planning a share repurchase.
The following data applies:
• There are 10 million shares in issue
• The share repurchase will involve buying back 20% of the shares at a price of $0.75
• The company is holding $2 million cash
• Earnings for the current year ended are $2 million
The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.
Advise the directors which of the following statements is correct?
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
• Estimated free cashflow in 1 year's time = $100,000
• Estimated growth in free cashflow after the first year = 5% each year indefinitely
• Appropriate cost of equity = 10%
The result produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
Company XXY operates in country X with the X$ as its currency. It is looking to acquire company ZZY which operates in country Z with the Z$ as its currency.
The assistant accountant at Company XXY has started to prepare an initial valuation of Company ZZY's equity for the first 3 years, however their valuation is incomplete. TBC' in the table below indicates that her calculations have yet to be completed.
The following information is relevant:
What is the correct figure (to the nearest million S) to include in year 3 as the present value in X$ million?
A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.
It is currently on deposit, earning negligible returns.
The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.
The majority of shareholders are individuals with small shareholdings.
Which THREE of the following are advantages of the company undertaking a share repurchase programme?
Which of the following is NOT an advantage of a share repurchase?
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 company is considering either exporting its product directly to customers in a foreign country or establishing a manufacturing subsidiary in that country.
The corporate tax rate in the company's own country is 20% and 25% tax depreciation allowances are available.
Which THREE of the following would be considered advantages of establishing the subsidiary in the foreign country?
The long-term prospects for inflation in the UK and the USA are 1% and 4% per annum respectively.
The GBP/USD spot rate is currently GBP/USD1.40
Using purchasing power parity theory, what GBP/USD spot rate would you expect to see in six months’ time?
A listed company is considering either a one-off special divided or a share repurchase scheme to reduce its surplus cash level.
Identify TWO advantages that a one-off special payment has over a share repurchase scheme.
A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
A company needs to raise $20 million to finance a project.
It has decided on a rights issue at a discount of 20% to its current market share price.
There are currently 20 million shares in issue with a nominal value of $1 and a market price of $5 per share.
Calculate the terms of the rights issue.
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently trade at $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
A company is planning a share repurchase programme with the following details:
• Repurchased shares will be immediately cancelled.
• The shares will be purchased at a premium to the market share price.
The current market share price is greater than the nominal value of the shares.
Which of the following statements about the impact of the share repurchase programme on the company's financial statements is correct?
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
• Profit before interest and tax for the current year is $500,000
• Long term debt of $300,000 at a fixed interest rate of 5%
• 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
Company WWW is identical in all operating and risk characteristics to Company ZZZ. but their capital structures differ. Company WWW and Company ZZZ both pay corporate income tax at 20%
Company WWW has a gearing ratio (debt: equity) of 1:3 Its pre-tax cost of debt is 6%.
Company ZZZ Is all-equity financed. Its cost of equity is 15%
What is the cost of equity tor Company WWW?
A large, listed company is planning a major project that should greatly improve its share price in the long term.
These plans require a significant capital cost that the company plans to finance by debt.
All of the debt options being considered are for the same duration of time.
Which of the following sources of debt finance is likely to be the most expensive for the company over the full term of the debt?
Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A. As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?
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.
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio
At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?
Three companies are quoted on the New York Stock Exchange. The following data applies:
Which of the following statements is TRUE?
Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $590 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 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 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 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 data. He is not confident that all this information is relevant to this decision.
Using only the relevant data, which of the following is correct?
ART manufactures traditional scooters. It has an equity beta of 1.4 and is financed entirely by equity. It plans to continue to be all-equity financed in future.
It is considering producing a range of electric scooters
GGG is a comparable quoted electric scooter manufacturer GGG has an equity beta of 2 4 reflecting its high level of gearing (the ratio of debt to equity is VI using market values).
The risk-free rate is 5%, and the market premium is 6%. The rate of corporation tax is 20%
What is the recommended discount rate that ART should use to assess the project to manufacture electric scooters?
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?
An unlisted company is attempting to value its equity using the dividend valuation model.
Relevant information is as follows:
• A dividend of $500,000 has just been paid.
• Dividend growth of 8% is expected for the foreseeable future.
• Earnings growth of 6% is expected for the foreseeable future.
• The cost of equity of a proxy listed company is 15%.
• The risk premium required due to the company being unlisted is 3%.
The calculation that has been performed is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is the fault with the calculation that has been performed?
The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.
The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
• Profit before interest and tax for the current year is $500,000
• Long term debt of $300,000 at a fixed interest rate of 5%
• 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
Company M is a geared company whose equity has a market value of $1,500 million and debt has a market value of S300 million. The company plans to issue $200 million of new shares and use the funds raised to pay off some of the debt
Company M currently has a cost of equity of 13% and a WACC of 10% It pays corporate tax at the rate of 30% Company B, an ungeared company operating in the same business sector as Company M, has a cost of equity of 12%
Assume Modigliani and Miller's theory of capital structure with tax applies
Which calculation below shows the correct approach to calculating the new WACC following the planned changes in capital structure?
A
B
C
D
RR has agreed to sell goods to XX for S20.000 XX will pay when the goods are delivered in 6 months time. RR's home currency is the £- The current exchange rate is 4.3 £/S. The projected inflation rate for the S is 2.8%, and for the E 4 6%.
When RR receives payment for its goods, what will the value be to the nearest pound?
A company is planning a new share issue.
The funds raised will be used to repay debt on which it is currently paying a high interest rate.
Operating profit and dividends are expected to remain unchanged in the near future.
If the share issue is implemented, which THREE of the following are most likely to increase?
On 31 October 20X3:
• A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March 20X4.
• The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March 20X4.
• The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
Company A operates in country A with the AS as its functional currency. Company A expects to receive BS500.000 in 6 months' time from a customer in Country B which uses the B$.
Company A intends to hedge the currency risk using a money market hedge
The following information is relevant:
What is the AS value of the BS expected receipt in 6 months' time under a money market hedge?
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?
Which of the following statements best describes a residual dividend policy?
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 company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount rate.
Details of the two alternatives are as follows:
Buy option:
• To be financed by a bank loan
• Tax depreciation allowances are available on a reducing-balance basis
• Assets depreciated on a straight-line basis
Lease option:
• Finance lease
• Maintenance to be paid by the lessee
• Tax relief available on interest payments and book depreciation
Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?
For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?
PYP is a listed courier company. It is looking to raise new finance to fit each of its delivery vans with new equipment to allow improved parcel tracking for customers The senior management team of PYP have decided on a 10-year secured bond to finance this investment-
Which TWO of the following variables are most likely to decrease the yield to maturity of the bond?
An unlisted company:
Which of the following methods would be the most appropriate to value this company’s equity?
Which of the following would be a reason for a company to adopt a low dividend pay-out policy?
A venture capitalist invests in a company by means of buying:
• 9 million shares for $2 a share and
• 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
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.
Company GDD plans to acquire Company HGG, an unlisted company which has been in business for 3 years.
Company HGG has incurred losses in its first 3 years but is expected to become highly profitable in the near future
There are no listed companies in the country operating in the same business field as Company HGG The future success of Company HGG's business and hence the future growth rate in earnings and dividends is difficult to determine
Company GDD is assessing the validity of using the dividend growth method to value Company HGG
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company HGG?
A company is considering whether to lease or buy an asset.
The following data applies:
• The bank will charge interest at 7.14% per annum
• The asset will cost $1 million
• Tax-allowable depreciation is available on a straight line basis over 5 years
• There is no residual value
• Corporate tax is paid at 30% in the year when the profit is earned
What is the NPV of the buy option?
Give your answer to the nearest $000.
$ ?
A company is owned by its five directors who want to sell the business.
Current profit after tax is $750,000.
The directors are currently paid minimal salaries, taking most of their incomes as dividends.
After the company is sold, directors' salaries will need to be increased by $50,000 each year in total.
A suitable Price/Earnings (P/E) ratio is 7, and the rate of corporate tax is 20%.
What is the value of the company using a P/E valuation?
Company ADE is an unlisted company; it needs to raise a significant amount of finance to fund future expansion. The directors are considering listing the company on the local stock exchange The following discussions have taken place between some of the directors:
Director A - We consider a public issue of bonds in the capital markets, we don't need to list to issue the bonds which will save time and money.
Director B - We should list on the Alternative Investment Market (AIM) and not the main market to avoid any regulatory requirements
Director C - We should remain unlisted; we can access an unlimited amount of equity finance through a rights issue
Director D - Listing will increase Company ADE's ability to raise new equity and debt finance in the future.
Director E - If we list, Company ADE will be a more likely target for a takeover than if we remain unlisted.
Which TWO of the directors' statements are correct?
Under traditional theory, an increase in a company's WACC would cause the value of the company to:
H Company has a fixed rate load at 10.0%, but wishes to swap to variable. It can borrow at LIBOR 8%.
The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask).
What net rate will HHH Company pay if it enters into the swap?
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 $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?
A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit margin of at least 10% each year.
Relevant data:
• The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose currency is the F$.
• All purchases are from Country G whose currency is the G$.
• The settlement of all transactions is in the currency of the customer or supplier.
Which of the following changes would be most likely to help the company achieve its objective?
A listed company has recently announced a profit warning.
The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.
Which form of efficient market is most likely to be indicated by this share price movement?
A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit margin of at least 10% each year.
Relevant data:
• The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose currency is the F$.
• All purchases are from Country G whose currency is the G$.
• The settlement of all transactions is in the currency of the customer or supplier.
Which of the following changes would be most likely to help the company achieve its objective?
When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes. Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
A private company was formed five years ago and is currently owned and managed by its five founders. The founders, who each own the same number of shares have generally co-operated effectively but there have also been a number of areas where they have disagreed
The company has grown significantly over this period by re-investing its earnings into new investments which have produced excellent returns
The founders are now considering an Initial Public Offering by listing 70% of the shares on the local stock exchange
Which THREE of the following statements about the advantages of a listing are valid?
The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.
The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:
A listed company has suffered a period of falling revenues and profit margins. It has been obliged to issue a profit warning to the market and its share price has fallen sharply. The company relies heavily on debt finance and is discussing with its banks possible refinancing options to assist with a restructuring programme.
Which THREE of the following are likely to be of MOST interest to the company's banks when they review the refinancing requests?
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?
JAG and ZEB are two listed companies. JAG is approximately 20 times the size of ZEB.
10 days ago JAG made a hostile bid for ZEB. offering a share exchange.
The bid price represents a 10% profit to the shareholders of ZEB at today's market prices to reflect the high levels of synergistic benefits that JAG expects to realise from the transaction.
Which of the following is the greatest future threat to the post-transaction value for JAG?
SUP is a large supermarket chain. It produces many 'own brand' goods in Country S where the parent company is located. These goods are sold in SUP's supermarkets in Country S as well as being sold at a 'transfer price' to SUP companies located in foreign countries for sale in the SUP supermarkets located in that country.
Which of the following factors is the most important for SUP from a lax planning and compliance viewpoint when setting prices for the 'own brand' goods sold to other group companies'?
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?
An all equity financed company plans an issue of new ordinary shares to the general public to raise finance for a new project
The following data applies:
• 10 million ordinary shares are currently in issue with a market value of S3 each share
• The new project will cost S2.88 million and is expected to give a positive NPV of S1 million
• The issue will be priced at a AaA discount to the current share price.
What gam or loss per share will accrue to the existing shareholders?
A company plans to cut its dividend but is concerned that the share price will fall. This demonstrates the _____________ effect
A company needs to raise $40 million to finance a project. It has decided on a right issue at a discount of 20% to its current market share price.
There are currently 20 million shares in issue with a nominal value of $1 and a market price of $10.00 per share.
The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.
The shareholder profile is a mix of institutional and individual small shareholders.
The board is considering either:
• A scrip dividend
• A zero dividend
Which THREE of the following would be considered disadvantages of a scrip dividend compared to a zero dividend?
A company in country T is considering either exporting its product directly to customers in country P or establishing a manufacturing subsidiary in country P.
The corporate tax rate in country T is 20% and 25% tax depreciation allowances are available
Which TIIRCC of the following would be considered advantages of establishing a subsidiary in country T?
Company AAB is located in country A whose currency is the AS It has a subsidiary, BBA, located m country B that has the BS as its currency AAB has asked BBA to pay BS40 million surplus funds to AAB to assist with a planned new capital investment in country A The exchange rate today is AS1 = BS3
Tax regimes
• Company BBA pays withholding tax of 25% on all cash remitted to the parent company
• Company AAB pays tax of 10% on at cash received from its subsidiary
How much will company AAB have available for investment after receiving the surplus funds from BBA?
Companies L. M N and O:
• are based in a country that uses the RS as its currency
• have an objective to grow operating profit year on year
• have the same total levels of revenue and cost
• trade with companies or individuals in the United States. All import and export trade with companies or individuals in the United States is priced in US$.
Typical import/export trade for each company in a year are as follows:
Which company's growth objective is most sensitive to a movement in the USS / RS exchange rate?
Company A plans to acquire Company B.
Both firms operate as wholesalers in the fashion industry, supplying a wide range of ladies' clothing shops.
Company A sources mainly from the UK, Company B imports most of its supplies from low-income overseas countries.
Significant synergies are expected in management costs and warehousing, and in economies of bulk purchasing.
Which of the following is likely to be the single most important issue facing Company A in post-merger integration?
A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.
It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings. The company already has a commercial paper programme in place and has a good relationship with its bank.
Which of the following is likely to be the most cost effective method of borrowing the money?
A company has in a 5% corporate bond in issue on which there are two loan covenants.
• Interest cover must not fall below 3 times
• Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
Company C has received an unwelcome takeover bid from Company P.
Company P is approximately twice the size of Company C based on market capitalisation.
Although the two companies have some common business interests, the main aim of the bid is diversification for Company P.
The offer from Company P is a share exchange of 2 shares in Company P for 3 shares in Company C.
There is a cash alternative of $5.50 for each Company C share.
Company C has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant. All prices are in $.
Which of the following would be the most appropriate action by Company C's directors following receipt of this hostile bid?
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 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.
The ex div share price of Company A’s shares is $.3.50
An investor in Company A currently holds 2,000 shares.
Company A plans to issue a script divided of 1 new shares for every 10 shares currently held.
After the scrip divided, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
Which THREE of the following would be most important if a hospital wishes to review the effectiveness of its services?
The two founding directors of an unlisted geared company want to establish its value as they are intending to approach a venture capitalist for additional funding.
The funding will be used to invest in a major new project which has very high growth potential. The directors intend to sell 10% of the company to the venture capitalist They have prepared the following current valuation of the company using the divided valuation model:
The following information is relevant.
• $60,000 is the most recent dividend paid.
• 4% is the average dividend growth over the last few years.
• 10% is an estimate of the company's cost of equity using the CAPM model with the industry average asset beta
Which THREE of the following are weaknesses of the valuation method used in these circumstances?
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 HHG?
On 31 October 20X3:
• A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March 20X4.
• The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March 20X4.
• The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).
How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?
A company has in a 5% corporate bond in issue on which there are two loan covenants.
• Interest cover must not fall below 3 times
• Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
Company AD is planning to acquire Company DC. It is evaluating two methods of structuring the terms of the bid, which will be ether a debt-funded cash offer or a share exchange
The following Information is relevant
• The two companies are of similar size and in related industries
• AB's gearing ratio measured as debt to debt plus equity, is currently 30% based on market values. This Is the company's optimum capital structure set to reflect the risk appetite of shareholders.
• The combined company is expected to generate savings and synergies
Which THREE of the following are advantages to AB's shareholders of a debt-funded cash offer compared with a share exchange?
A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).
Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:
• it will dilute their control
• the interest payments will be higher therefore reducing liquidity
• it will increase the gearing ratio therefore increasing financial risk
Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.
Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?
A company has a covenant on its 5% long term corporate bond.
• Covenant - The earnings must not fall below $7 million
The bond has a nominal value of $60 million.
It is currently trading at 80% of its nominal value.
The projected earnings before interest and taxation for next year are $11.5 million.
The company retains 80% of its earnings. It pays tax at 20%.
Advise the Board of Directors which of the following covenant conditions will apply next year?
A company is concerned that a high proportion of its debt portfolio consists of variable rate finance with an interest rate of LIBOR ' 1 .0%.
It is considering using an interest rate swap to reduce interest rate risk out is concerned about additional finance cost this might create.
A bank has quoted swap rates of 3% 3.5% against LIBOR.
A bank has quoted swap rates of 3% 3.5% against LIBOR.
Is an interest rate swap likely to be beneficial to the company at current LIBOR rates?
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 company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $1.50 per Kilowatt.
The company expects this to cause consumption to rise by 10% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
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?
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
• The entitiy borrowed $100 million at a variable rate of interest.
• In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
• The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge. The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?
VVV has a floating rate loan that it wishes to replace with a fixed rate. The cost of the existing loan is the risk-free rate + 3%. VW would have to pay a fixed rate of 7% on a fixed rate loan VVVs bank has found a potential counterparty for a swap arrangement.
The counterparty wishes to raise a variable rate loan It would pay the risk-free rate +1 % on a variable rate loan and 8% on a fixed rate.
The bank will require 10% of the savings from the swap and WV and the counterparty will share the remaining saving equally.
Calculate VWs effective rate of interest from this swap arrangement.
The Treasurer of Z intends to use interest rate options to set an interest rate cap on Z’s borrowings.
Which of the following statement is correct?
An unlisted company operates in a niche market, exploring the west coast of Africa for new oiI reservoirs.
The oil exploration program has been successful in recent years and t now has a substantial amount of oil reserves with a high level of certainty of being recoverable Under financial reporting regulations, oil still in the ground is not recognised as an asset unit is extracted.
The expense of the exploration program has used up all the company’s available cash resources.
The company has denied to list or a stock market and raise finds through an initial public offering to finance its drilling program.
Which of the following valuation methods in the appropriate to use in calculating an initial listing price for this company?
Company ABD and Company BCD operate in the same industry and each has a significant market share.
The directors of Company ABD have heard rumours in the market that Company BCD is planning to bid to takeover Company ABD. They do not believe the takeover would be in the best interests of the shareholders and are therefore keen to prevent the bid from going ahead.
Which THREE of the following defense strategies could be used by the directors of Company ABD at this point in time?
Extracts from a company's profit forecast for the next financial year is as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 2,000 million ordinary shares currently in issue and cancelling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.
Which THREE of the following offer the greatest potential for enhancing shareholder wealth?
D has US$10 million to invest over 12 months in either USS or GBP Its options are to invest in USS at the present USS interest rate of 10 18%. or to convert the USS to GBP at the spot rate GBP1 =US$1 61 and invest in GBP at an interest rate of 6.4%.
According to the interest rate parity theory, what will the one year forward rate be?
Give your answer to three decimal places.
A company has announced a rights issue of 1 new share for every 4 existing shares.
Relevant data:
• The current market price per share is $10.00.
• Rights are to be issued at a 20% discount to the current price.
• The rate of return on the new funds raised is expected to be 10%.
• The rate of return on existing funds is 5%.
What is the yield-adjusted theoretical ex-rights price?
Give your answer to two decimal places.
$ ?
It is now 1 January 20X0.
Company V, a private equity company, is considering the acquisition of 40% of the equity of Company A for a total amount of $15 million.
Company A has been established to develop a new type of engine which will be launched at the end of 20X1. Company A is forecasting that the new engine will result in free cash flows to equity of $2m in its first year of operation and that this will rise by 8% per year for the foreseeable future.
The new engine is the only commercial activity that Company A is involved in.
Company V intends to sell its stake in Company A when the new engine is launched.
Company A has a cost of equity of 12%.
Assuming that Company V receives an amount that reflects the present value of their shares in company A. what is the estimated annual rate of return to Company V from this investment? (To the nearest %)
A company's Board of Directors is assessing the likely impact of financing new projects by using either debt or equity finance.
The impact of using debt or equity finance on some key variables is uncertain.
Which THREE of the following statements are true?
Company A has made an offer to acquire Company Z.
Both companies are quoted and their current market share prices are:
• Company A - $4
• Company Z - $5
Shareholders in company Z have been given three alternative offers:
• Cash of $5.50 per share
• Share for share exchange on the basis of 3 for 2
• 10.5% long dated bond for every 20 shares
The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.
You are advising a Company Z shareholder on the three offers.
She requires a 15% premium if she is to accept the offer.
In providing your advice, which of the following statements is correct?
Company U has made a bid for the entire share capital of Company B.
Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.
Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?
Country X's short-term interest rates are slightly higher than its long-term rates. Which THREE of the following statements are correct?
A company plans to raise $12 million to finance an expansion project using a rights issue.
Relevant data:
• Shares will be offered at a 20% discount to the present market price of $15.00 per share.
• There are currently 2 million shares in issue.
• The project is forecast to yield a positive NPV of $6 million.
What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?
STU has relatively few tangible assets and is dependent for profits and growth on the high-value individuals it employs. Which of the following statements best explains why the net asset valuator method’s considered unstable for TU?
Company A plans to acquire Company B.
Both firms operate as wholesalers in the fashion industry, supplying a wide range of ladies' clothing shops.
Company A sources mainly from the UK, Company B imports most of its supplies from low-income overseas countries.
Significant synergies are expected in management costs and warehousing, and in economies of bulk purchasing.
Which of the following is likely to be the single most important issue facing Company A in post-merger integration?
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