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Question1: 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.
Question2: A company is planning to repurchase some of its shares. Relevant details are as follows:* 100 million shares in issue* Current share price $5* 5 million shares to be repurchased* 10% repurchase premium* Repurchased shares to be cancelledWhat would you expect the share price after the repurchase to be?Give your answer to two decimal places.$ ?
Question3: Companies A, B, C and D:* are based in a country that uses the K$ 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 eurozone. All import and export trade with companies or individuals in the eurozone is priced in EUR.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 EUR/K$ exchange rate?
Question4: A manufacturing company is based in Country L whose currency is the L$.One of the company's products is exported to Country M, a rapidly growing economy, whose currency is the M$.In the most recent financial year:* 100,000 units of the product were sold to customers in country M* The unit selling price was M$12The spot rate today is L$1 = M$5The company has an objective of growth in total sales value in L$ of 10% a year.If the L$ strengthens by 5% next year against the M$, what volume of sales of this product is needed next year to achieve the objective?
Question5: 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?
Question6: 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?
Question7: 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:
Question8: Company M's current profit before interest and taxation is $5.0 million.It has a long-term 10% corporate bond in issue with a nominal value of $10 million.The rate of corporate tax is 25%.It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.Its cost of equity is 10%.Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?
Question9: Providers of debt finance often insist on covenants being entered into when providing debt finance for companies.Agreement and adherence to the specific covenants is often a condition of the loan provided by the lender.Which THREE of the following statements are true in respect of covenants?
Question10: 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?
Question11: A company plans to acquire new machinery.It has two financing options; buy outright using a bank loan, or a finance lease.Which of the following is an advantage of a finance lease compared with a bank loan?
Question12: 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?
Question13: A listed company with a growing share price plans to finance a four-year research project with debt.The main criterion for the finance is to minimise the annual cashflow payments on the debt.The research will be sold at the end of the project.Which of the following would be the most suitable financing method for the company?
Question14: Which THREE of the following statements are correct?
Question15: 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.
Question16: 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?
Question17: 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:
Question18: The Board of Directors of a listed company is considering the company's dividend/retentions policy.The inflation rate in the economy is currently high and is expected to remain so for the foreseeable future.The board are unsure what impact the high level of inflation might have on the dividend policy.Which THREE of the following statements are true?
Question19: 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 millionThe 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?
Question20: A company's dividend policy is to pay out 50% of its earnings.Its most recent earnings per share was $0.50, and it has just paid a dividend per share of $0.25.Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:* Its cost of equity will immediately increase to 12% due to the increased finance risk.* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.Which of the following is the expected percentage change in the share price if the new investment is undertaken?
Question21: Company X is an established, unquoted company which provides IT advisory services.The company's results and cashflows are growing steadily and it has few direct competitors due to the very specialised nature of it's business. Dividends are predictable and paid annually.Company P is looking to buy 30% of company X's equity shares.Which TWO of the following methods are likely to be considered most suitable valuation methods for valuing company P's investment in Company X?
Question22: Which of the following statements about IFRS 7 Financial Instruments: Disclosures is true?
Question23: 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?
Question24: Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).The risk-free rate of return is 5% and the market portfolio is expected to return 10%.The rate of corporate income tax is 30%.What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?
Question25: 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?
Question26: A company has some 7% coupon bonds in issue and wishes to change its interest rate profile.It has decided to do this by entering into a plain coupon interest rate swap with it's bank.The bank has quoted a swap rate of: 6.0% - 6.5% fixed against LIBOR.What will the company's new interest rate profile be?
Question27: Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:Equity beta = 1.6Debt:equity ratio 40:60The rate of corporate income tax is 20%.The expected premium on the market portfolio is 7% and the risk-free rate is 5%.What is the estimated cost of equity for Company A?Give your answer to one decimal place.? %
Question28: The Board of Directors of a listed company wish to estimate a reasonable valuation of the entire share capital of the company in the event of a takeover bid.The company's current profit before taxation is $4.0 million.The rate of corporate tax is 25%.The average P/E multiple of listed companies in the same industry is 8 times current earnings.The P/E multiple of recent takeovers in the same industry have ranged from 9 times to 10 times current earnings.The average P/E multiple of the top 100 companies on the stock market is 15 times current earnings.Advise the Board of Directors which of the following is a reasonable estimate of a range of values of the entire share capital in the event of a bid being made for the whole company?
Question29: 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 millionCalculate the CIV for the company.
Question30: A company proposes to value itself based on the net present value of estimated future cash flows.Relevant data:* The cash flow for the next three years is expected to be £100 million each year* The cash flow after year 3 will grow at 2% to perpetuity* The cost of capital is 12%The value of the company to the nearest $ million is:
Question31: Which of the following statements is true of a spin-off (or demerger)?
Question32: 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
Question33: 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 of3% 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?
Question34: 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 - $5Shareholders 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 sharesThe bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.You are advising a Company Z shareholder on the three offers.She requires a 15% premium if she is to accept the offer.In providing your advice, which of the following statements is correct?
Question35: A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.It is currently on deposit, earning negligible returns.The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.The majority of shareholders are individuals with small shareholdings.Which THREE of the following are advantages of the company undertaking a share repurchase programme?
Question36: A company is considering the issue of a convertible bond compared to a straight bond issue (non- convertible bond).Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:* it will dilute their control* the interest payments will be higher therefore reducing liquidity* it will increase the gearing ratio therefore increasing financial risk Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?
Question37: A company based in Country D, whose currency is the D$, 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?
Question38: 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 $0.08 has just been paid* Dividend growth is expected to be 2%* Earnings growth is expected to be 4%* The cost of equity is 15%* The weighted average cost of capital is 13%Using the dividend growth model, what would be the expected change in share price?
Question39: A private company manufactures goods for export, the goods are priced in foreign currency B$.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?
Question40: On 1 January:* Company X has a value of $50 million* Company Y has a value of $20 million* Both companies are wholly equity financedCompany 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?
Question41: 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.
Question42: 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 basisLease option:* Finance lease* Maintenance to be paid by the lessee* Tax relief available on interest payments and book depreciationWhich THREE of the following are relevant cashflows in the lease-or-buy appraisal?
Question43: Company A is a large listed company, with a wide range of both institutional and private shareholders.It is planning a takeover offer for Company B.Company A has relatively low cash reserves and its gearing ratio of 40% is higher than most similar companies in its industry.Which TWO of the following would be the most feasible ways of Company A structuring an offer for Company B?
Question44: Company A is planning to acquire Company B.Company A's managers think they can improve the performance of Company B to the extent that its own P/E ratio should be applied to Company B's earnings.Relevant Data:What is the expected synergy if the acquisition goes ahead?Give your answer to the nearest $ million.$ ? million
Question45: Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.Which THREE of the following statements are assumptions that are required in order to support this proposition?
Question46: 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?
Question47: Which of the following explains an aim of integrated reporting in accordance with The International <IR> Framework as issued by the International Integrated Reporting Council?
Question48: A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.Companies with the lowest WACC in the industry have gearing of around 45% to 50%.Which of the following actions would result in the company achieving a more optimal capital structure?
Question49: 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?
Question50: A company has 6 million shares in issue. Each share has a market value of $4.00.$9 million is to be raised using a rights issue.Two directors disagree on the discount to be offered when the new shares are issued.* Director A proposes a discount of 25%* Director B proposes a discount of 30%Which THREE of the following statements are most likely to be correct?
Question51: A company wishes to raise new finance using a rights issue. The following data applies:* There are 10 million shares in issue with a market value of $4 each* The terms of the rights will be 1 new share for 4 existing shares held* After the rights issue, the theoretical ex-rights price (TERP) will be $3.80 Assuming all shareholders take up their rights, how much new finance will be raised ?Give your answer to one decimal place.$ ? million
Question52: Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:Which of the following is the most likely explanation of the different P/E ratios?
Question53: If a company's bonds are currently yielding 8% in the marketplace, why would the entity's cost of debt be lower than this?
Question54: 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 earnedWhat is the NPV of the buy option?Give your answer to the nearest $000.$ ?
Question55: Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is10%.Which TWO of the following statements are true?
Question56: A consultancy company is dependent for profits and growth on the high value individuals it employs.The company has relatively few tangible assets.Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.
Question57: A is a listed company. Its shares trade on a stock market exhibiting semi-strong form efficiency.Which of the following is most likely to increase the wealth of A's shareholders?