Changed F3 Exam Questions

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?