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NEW QUESTION 18
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?
- A. The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
- B. The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
- C. The dividend cashflow used should have been $500,000 rather than $540,000.
- D. The cost of equity used in the calculation should have been 12% (15% subtract 3%).
Answer: A
NEW QUESTION 19
A company is in the process of issuing a 10 year $100 million bond and is considering using an interest rate swap to change the interest profile on some or all of the $100 million new finance.
The company has a target fixed versus floating rate debt profile of 1:1. Before issuing the bond its debt profile was as follows:
Which of the following is the most appropriate interest rate swap structure for the company?
- A. Pay fixed receive floating interest rate swap for $100 million.
- B. Receive fixed pay floating interest rate swap for $50 million.
- C. Pay fixed receive floating interest rate swap for $50 million.
- D. Receive fixed pay floating interest rate swap for $100 million.
Answer: B
NEW QUESTION 20
A company raised fixed rate bank finance together with an interest rate swap for the same term and same principal value to pay floating receive fixed rate interest on an annual basis.
Which THREE of the following statements are correct?
- A. LIBID (London Interbank Bid Rate) is normally used as the reference rate for determining interest due under the swap.
- B. The swap contract is normally a contract between a company and a bank.
- C. The company has effectively obtained floating rate debt.
- D. On the first day of this arrangement, the company receives the principal borrowed from the bank and pays this across to the swap counterparty.
- E. Under the swap, interest is exchanged every year.
Answer: B,C,E
NEW QUESTION 21
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.
- A. 325 million
- B. 531 million
- C. 228 million
- D. 289 million
Answer: C
NEW QUESTION 22
Which of the following statements best describes a residual dividend policy?
- A. Dividends are paid at a constant rate.
- B. Dividends are paid only after the on-going operational needs of the business have been met.
- C. All surplus earnings are invested back into the business.
- D. Dividends are paid only if no further positive NPV projects are available.
Answer: D
NEW QUESTION 23
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. Divided per share would be higher.
- B. Eamings per share would be higher.
- C. Geaning would be lower.
- D. There would be no dilution f of control.
Answer: C
NEW QUESTION 24
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
A)
B)
C)
D)
- A. Option D
- B. Option B
- C. Option A
- D. Option C
Answer: B
NEW QUESTION 25
A company enters into a floating rate borrowing with interest due every 12 months over the five year life of the borrowing.
At the same time, the company arranges an interest rate swap to swap the interest profile on the borrowing from floating to fixed rate.
These transactions are designated as a hedge for hedge accounting purposes under IAS 39 Financial Instruments: Recognition and Measurement.
Assuming the hedge is considered to be effective, how would the swap be accounted for 12 months later?
- A. The swap would be shown at fair value the statement of financial position and the change in value posted to other comprehensive income.
- B. The swap would be shown at nominal value in the statement of financial position and the change in value posted to profit or loss.
- C. The swap would be shown at fair value the statement of financial position and the change in value posted to profit or loss.
- D. The swap would be shown at nominal value in the statement of financial position and the change in value posted to other comprehensive income.
Answer: A
NEW QUESTION 26
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. Commercial paper
- B. Treasury Bills
- C. 6 month term loan
- D. Bank overdraft
Answer: A
NEW QUESTION 27
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?
- A. The bank loan is $30,000 MORE expensive than the finance lease.
- B. The bank loan is $20,000 LESS expensive than the finance lease.
- C. The bank loan is $70,000 LESS expensive than the finance lease.
- D. The bank loan is $120,000 LESS expensive than the finance lease.
Answer: C
NEW QUESTION 28
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. There are no transaction costs involved in the issue of new shares (including rights issues).
- C. Investors do not always have access to perfect information.
- D. There is a multiplicity of corporate and personal income tax rates.
- E. The capital markets are efficient markets.
Answer: A,B,E
Explanation:
Discursive_F0
NEW QUESTION 29
On 1 January:
* Company X has a value of $50 million
* Company Y has a value of $20 million
* Both companies are wholly equity financed
Company X plans to take over Company Y by means of a share exchange. Following the acquisition the post-tax cashflow of Company X for the foreseeable future is estimated to be $8 million each year. The post-acquisition cost of equity is expected to be 10%.
What is the best estimate of the value of the synergy that would arise from the acquisition?
- A. $60 million
- B. $100 million
- C. $30 million
- D. $10 million
Answer: D
NEW QUESTION 30
A listed company is planning to raise $21.6 million to finance a new project with a positive net present value of $5 million. The finance is to be raised via a rights issue at a 10% discount to the current share price. There are currently 100 million shares in issue, trading at $2.00 each.
Taking the new project into account, what would the theoretical ex-rights price be?
Give your answer to two decimal places.
Answer:
Explanation:
$ ?
2.02, 2.03
NEW QUESTION 31
Which THREE of the following are likely to be strategic reasons for a horizontal acquisition?
- A. To secure key parts of the value chain
- B. Acquisition of an undervalued company
- C. Reduction of competition
- D. To achieve economies of scale
- E. Reduction of risk by building a larger portfolio
Answer: B,C,D
NEW QUESTION 32
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?
- A. Achieving greater cultural diversity.
- B. Achieving more press coverage for the company.
- C. Elimination of existing competition.
- D. Creating new opportunities for employees.
- E. Acquiring Intellectual Property assets.
- F. Exploiting production synergies.
Answer: C,E,F
NEW QUESTION 33
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. No, because interest cost will increase with the interest rate swap in place.
- B. Yes, because it will have lower interest rate risk and interest cost remains the same.
- C. Yes, because interest cost will decrease with the interest rate swap in place.
- D. No, because it would be cheaper to repay variable rate finance aid enter into new fixed rate finance than to enter into an interest rate swap.
Answer: B
NEW QUESTION 34
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 $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to
9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
- A. Reduction of 1%
- B. Reduction of 5%
- C. Reduction of 0%
- D. Reduction of 7%
Answer: D
NEW QUESTION 35
Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate it pays. Z can borrow floating at Libor ' 1, and fixed at 10%.
Which of the following companies would be the most appropriate for Z to enter into a swap with?
- A. Company A - it can borrow floating L +1 ½ and fixed at 9.5%
- B. Company E - it can borrow floating at L +1 ½ and fixed at 12%
- C. Company C - it can borrow at L +1 ½ and fixed at 9%
- D. Company D - it can borrow at L +1 ½ and fixed at 10.5%
Answer: C
NEW QUESTION 36
Company X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whose currency is the B$.
Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.
Company A has the following forecast revenue:
The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.
If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of total revenue will:
- A. rise to 27.0%.
- B. rise to 30.3%.
- C. fall to 22.7%.
- D. fall to 23.3%.
Answer: D
NEW QUESTION 37
RST wishes to raise at least $40 million of new equity by issuing up to 10 million new equity shares at a minimum price of $3.00 under an offer for sale by tender. It receives the following tender offers:
What is the maximum amount that RST can raise by this share issue?
(Give your answer to the nearest $ million).
Answer:
Explanation:
49
NEW QUESTION 38
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.
Answer:
Explanation:
$ ? .
8.19, 8.18
NEW QUESTION 39
Company J is in negotiations to acquire Company K and believes it can turn around Company K's performance to match its own.
The following information is available for the two companies:
Select the maximum price for each share that Company J should place on Company K during negotiations.
- A. $3.2
- B. $3.0
- C. $1.7
- D. $2.0
Answer: B
NEW QUESTION 40
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