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NEW QUESTION # 142
A listed entertainment and media company produces and distributes films globally. The company invests heavily in intellectual property in order to create the scope for future film projects. The company has five separate distribution companies, each managed as a separate business unit The company is seeking to sell one of its business units in a management buy-out (MBO) to enable it to raise finance for proposed new investments The business unit managers have been in discussions with a bank and venture capitalists regarding the financing for the MBO The venture capitalists are only prepared to invest a mixture of debt and equity and have suggested the following:
The venture capitalists have stated that they expect a minimum return on their equity investment of 3Q°/o a year on a compound basis over the first 5 years of the MBO No dividends will be paid during this period.
Advise the MBO team of the total amount due to the venture capitalist over the 5-year period to satisfy their total minimum return?
- A. $155.14 million
- B. $120 14 million
- C. $111 39 million
- D. $146 39 million
Answer: C
NEW QUESTION # 143
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:
Which of the following is the best indication of the equity value of Company P?
- A. $80 million
- B. $24 million
- C. $48 million
- D. $40 million
Answer: B
NEW QUESTION # 144
A UK company enters into a 5 year borrowing with bank P at a floating rate of GBP Libor plus 3%
It simultaneously enters into an interest rate swap with bank Q at 4.5% fixed against GBP Libor plus 1.5%
What is the hedged borrowing rate, taking the borrowing and swap into account?
Give your answer to 1 decimal place.
- A. 7.5%
- B. 6.5%
Answer: A
NEW QUESTION # 145
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?
- A. Investors act in a rational manner.
- B. Investors do not always have access to perfect information.
- C. The capital markets are efficient markets.
- D. There is a multiplicity of corporate and personal income tax rates.
- E. There are no transaction costs involved in the issue of new shares (including rights issues).
Answer: A,C,E
Explanation:
Discursive_F0
NEW QUESTION # 146
Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is 10%.
Which TWO of the following statements are true?
- A. Company A's current low gearing ratio may require a rights issue rather than a debt issue to finance the new project.
- B. The issue price has to be at least 20% below the pre-rights share price.
- C. According to Modigliani and Miller's Theory of Capital Structure with tax, the rights issue will result in a lower cost of equity for Company A.
- D. The actual ex-rights price may be higher than the theoretical ex-rights price due to the value created from the project.
- E. The issue price of new shares should be set to guarantee the full take up of shares offered.
Answer: C,D
NEW QUESTION # 147
The competition authorities are investigating the takeover of Company Z by a larger company, Company
Y.
Both companies are food retailers.
The takeover terms involve using a part cash, part share exchange means of payment.
Company Z is resisting the bid, arguing that it undervalues its business, while lobbying extensively among politicians to sway public opinion against the bidder.
Which of the following actions by Company Y is most likely to persuade the competition authorities to approve the acquisition?
- A. Company Y agrees to dispose of specified outlets which geographically overlap those of Company Z.
- B. Company Y undertakes to pass on any cost savings to customers.
- C. Company Y increases the cash element of its bid offer.
- D. Company Y guarantees to preserve employment at its cental distribution depot.
Answer: A
NEW QUESTION # 148
Company W has received an unwelcome takeover bid from Company B. The offer is a share exchange of 3 shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W 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.
Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?
- A. Pay a one-off special dividend.
- B. Write to shareholders explaining fully why the company's share price is under valued.
- C. Refer the bid to the country's competition authorities.
- D. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
Answer: B
NEW QUESTION # 149
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 $30,000 MORE expensive than the finance lease.
- B. The bank loan is $70,000 LESS expensive than the finance lease.
- C. The bank loan is $120,000 LESS expensive than the finance lease.
- D. The bank loan is $20,000 LESS expensive than the finance lease.
Answer: B
NEW QUESTION # 150
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 $2.00 per Kilowatt.
The company expects this to cause consumption to rise by 15% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $8.75 million profit
- B. $43.00 million profit
- C. $164.00 million profit
- D. $126.50 million loss
Answer: C
NEW QUESTION # 151
A listed entertainment and media company produces and distributes films globally. The company invests heavily in intellectual property in order to create the scope for future film projects. The company has five separate distribution companies, each managed as a separate business unit The company is seeking to sell one of its business units in a management buy-out (MBO) to enable it to raise finance for proposed new investments
The business unit managers have been in discussions with a bank and venture capitalists regarding the financing for the MBO The venture capitalists are only prepared to invest a mixture of debt and equity and have suggested the following:
The venture capitalists have stated that they expect a minimum return on their equity investment of 39% a year on a compound basis over the first 5 years of the MBO No dividends will be paid during this period.
Advise the MBO team of the total amount due to the venture capitalist over the 5-year period to satisfy their total minimum return?
- A. $155.14 million
- B. $120 14 million
- C. $111 39 million
- D. $146 39 million
Answer: C
NEW QUESTION # 152
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. minimises the environmental impact of its business processes.
- B. creates value in the short, medium and long term.
- C. ensures that the conflicting needs of different stakeholder groups are met in an optimal manner.
- D. contributes positively to the economic well being of the environment in which it operates.
Answer: B
NEW QUESTION # 153
Under traditional theory, an increase in a company's WACC would cause the value of the company to:
- A. Increase
- B. Either increase or decrease
- C. Decrease
- D. Stay the same
Answer: C
NEW QUESTION # 154
Using the CAPM, the expected return for a company is 11%. The market return is 8% and the risk free rate is 2%.
What does the beta factor used in this calculation indicate about the risk of the company?
- A. It is not possible to tell from CAPM.
- B. It has greater risk than the average market risk.
- C. It has lower risk than the average market risk.
- D. It has the same risk as the average market risk.
Answer: B
NEW QUESTION # 155
Which THREE of the following statements are disadvantages of the net asset basis of valuation?
- A. The net book value of assets is merely a record of past transactions which complies with accounting conventions
- B. Intangible assets are often not shown in the company's financial statements.
- C. The net realisable value is usually different from the net book value shown in the financial statements
- D. The net book value of current assets is normally a reliable indicator of their realisable value
- E. The net book value of assets can be obtained from the financial statements
Answer: A,B,C
NEW QUESTION # 156
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?
- A. The cost of a collar is lower than the cost of a cap a one.
- B. The Treasurer will retain the benefit of movcTcnt3 in interest ratc3 below the floor limit.
- C. The Treasurer should buy an interested rate floor and sell an interested cap ta the same time
- D. The Treasurer will have to negotiate the options with Z's Dark
Answer: A
NEW QUESTION # 157
The Board of Directors of Company T is considering a rights issue to fund a new investment opportunity which has a zero NPV.
The Board of Directors wishes to explain to shareholders what the theoretical impact on their wealth will be as a result of different possible actions during the rights issue.
Which THREE of the following statements in respect of theoretical shareholder wealth are true?
- A. If shareholders partially exercise their rights and sell the remaining rights entitlement there will be no impact on their wealth.
- B. If the shareholders allow their rights to lapse (do nothing) there will be no impact on their wealth.
- C. If the shareholders only partially exercise their rights and allow the remainder to lapse there will be no impact on their wealth.
- D. If shareholders exercise their full rights there will be no impact on their wealth.
- E. If shareholders sell their entire rights entitlement there will be no impact on their wealth.
Answer: A,D,E
NEW QUESTION # 158
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?
- A. AS32, 532
- B. AS31, 790
- C. AS31, 482
- D. AS32, 051
Answer: D
NEW QUESTION # 159
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 $0.25.
Currently, dividends are forecast to grow at 2% each year in perpetuity and the cost of equity is 10.5%.
In order to grow its earnings and dividends, the company is considering undertaking a new investment funded entirely by debt finance. If the investment is undertaken:
* Its cost of equity will immediately increase to 12% due to the increased finance risk.
* Its earnings and dividends will immediately commence growing at 4% each year in perpetuity.
Which of the following is the expected percentage change in the share price if the new investment is undertaken?
- A. Increase = 10.5%
- B. Increase = 8.3%
- C. Decrease = 7.7%
- D. Increase = 2%
Answer: B
NEW QUESTION # 160
A private company manufactures goods for export, the goods are priced in foreign currency B$.
The company is partly owned by members of the founding family and partly by a venture capitalist who is helping to grow the business rapidly in preparation for a planned listing in three years' time.
The company therefore has significant long term exposure to the B$.
This exposure is hedged up to 24 months into the future based on highly probable forecast future revenue streams.
The company does not apply hedge accounting and this has led to high volatility in reported earnings.
Which of the following best explains why external consultants have recently advised the company to apply hedge accounting?
- A. To fully adopt IFRS in preparation for listing the company.
- B. To make it easier for the market to value the business when it is listed on the Stock Exchange.
- C. To provide a more appropriate earnings figure for use in calculating the annual dividend.
- D. To ensure that the venture capitalist receives regular annual returns on its investment.
Answer: B
NEW QUESTION # 161
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
- A.
- B.
- C.
- D.
Answer: A
NEW QUESTION # 162
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