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F3 Exam Dumps - Financial Strategy

Question # 4

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.

 

$ ?  

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Question # 5

Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.

Relevant company data:

What is the best estimate of YYY's share price?

A.

$0.60

B.

$1.20

C.

$0.68

D.

$0.94

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Question # 6

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.

1 share in Company X for 2.75 shares in Company Y

B.

3 shares in Company X for 5 shares in Company Y

C.

2 shares in Company X for 1 shares in Company Y

D.

1 share in Company X for 2 shares in Company Y

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Question # 7

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 Treasurer should buy an interested rate floor and sell an interested cap ta the same time

B.

The Treasurer will retain the benefit of movements in interest rates below the floor limit.

C.

The cost of a collar is lower than the cost of a cap a one.

D.

The Treasurer will have to negotiate the options with Z's Dark

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Question # 8

A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values. 

The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.

 

On 31 December 20X1 the company was funded by:

•    Share capital of 4 million $1 shares trading at $4.0 per share.

•    Debt of $7 million floating rate borrowings.

 

The directors plan to raise $2 million additional borrowings in order to improve liquidity.  

They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.

 

Is the planned increase in borrowings expected to help the company meet its gearing objective?

A.

No, gearing would increase but the gearing objective would be met both before and after the announcement.

B.

No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.

C.

No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.

D.

Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.

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Question # 9

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.

fall to 23.3%.

B.

rise to 27.0%.

C.

rise to 30.3%.

D.

fall to 22.7%.

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Question # 10

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 nominal value in 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 other comprehensive income.

D.

The swap would be shown at fair value the statement of financial position and the change in value posted to profit or loss.

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Question # 11

Which THREE of the following are likely to be strategic reasons for a horizontal acquisition?

A.

Reduction of risk by building a larger portfolio

B.

Acquisition of an undervalued company

C.

To achieve economies of scale

D.

To secure key parts of the value chain

E.

Reduction of competition

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Question # 12

Company A is planning to acquire Company B by means of a cash offer. The directors of Company B are prepared to recommend acceptance if a bid price can be agreed. Estimates of the net present value (NPV) of future cash flows for the two companies and the combined group post acquisition have been prepared by Company A’s accountant. There are as follows:

What is the maximum price that Company A should offer for the shares in Company B?

Give your answer to the nearest $ million

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Question # 13

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.

Bank overdraft

B.

6 month term loan

C.

Treasury Bills

D.

Commercial paper

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Question # 14

Company AB was established 6 years ago by two individuals who each own 50% of the shares.

Each individual heads a separate division within the company, which now has annual turnover of GBP10 million and employs 40 people.

Some of the employees are very highly paid as they are important contributors to the company's profitability.

The owners of the company wish to realise the full value of their investment within the next 12 months.

 

Which TWO of the following options are most likely to be acceptable exit strategies to the two owners of the company?

A.

Initial Public Offering (IPO)

B.

Management Buyout

C.

Sale to a larger competitor

D.

Sale to a Private Equity Investor on an earn-out basis

E.

Spin off (or de-merger)

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Question # 15

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.

AS32, 051

D.

AS31, 482

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Question # 16

Which of the following best explains why the interest rate parity model is highly effective in practice?

A.

Governments actively manage their exchange rates so that parity holds

B.

Divergence from parity is impossible because exchange rates drive interest rates

C.

Any divergence from parity can be observed by the market and corrected by arbitrage

D.

Speculative forces drive the interest rates and exchange rates together to achieve parity.

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Question # 17

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 cost of equity used in the calculation should have been 12% (15% subtract 3%).

B.

The dividend cashflow used should have been $500,000 rather than $540,000.

C.

The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.

D.

The cost of equity used in the calculation should have been 15%; no adjustment was necessary.

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Question # 18

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.

The D$ strengthens against the E$ over time. 

B.

The F$ weakens against the D$ over time.

C.

The D$ strengthens against the G$ over time.

D.

The D$ weakens against the G$ over time.

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Question # 19

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.

31 December 20X2

B.

31 December 20X0

C.

31 December 20X3

D.

31 December 20X1

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Question # 20

An all-equity financed company currently generates total revenue of $50 million.

Its current profit before interest and taxation (PBIT) is $10 million. 

Due to difficult trading conditions, the company expects its total revenue to be constant next year, although some margins will reduce.

It forecasts next year's PBIT will fall to 18% on 40% of its revenue, but that the PBIT on the other 60% of its revenue will be unaffected.

The rate of corporate tax is 20%.

 

What is the forecast percentage reduction in next year's Earnings?

A.

Reduction of 0.8%

B.

Reduction of 2.0%

C.

Reduction of 4.0%

D.

Reduction of 0%

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Question # 21

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?

A.

Interest cover will fall; P/E ratio will fall.

B.

Interest cover will fall; P/E ratio will rise.

C.

Interest cover will rise; P/E ratio will rise.

D.

Interest cover will rise; P/E ratio will fall.

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Question # 22

LPM Company is based in Country C. whose currency is the CS

It has entered Into a contract to buy a machine in three months' time. The supplier is overseas and the payment is to be made in a different currency from the CS

The treasurer at LPM Company is considering using a money market hedge to manage the transaction risk associated with a payment.

The assumptions of interest rate parity apply

Which THREE of the following statements concerning the use of a money market hedge for this supplier payment are correct*?

A.

Any opportunity to benefit from future exchange rate movements is lost.

B.

It can be tailored to match the size of the payment

C.

It manages transaction risk

D.

It offers a significantly better outcome than a forward contract

E.

lt avoids the need to find immediate finance

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Question # 23

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?

A.

Reduces agency conflict

B.

Increases dividend payouts

C.

Helps access to wider sources of finance.

D.

Provides an exit route for the founders

E.

Increases the profile and reputation of the business.

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Question # 24

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 rate future?

A.

It can be tailored to the exact reeds of the company.

B.

It interest rates have gone down the price of the future will have fallen.

C.

It must be kept for ne whole duration of the contract

D.

The date is flexible and the position can be closed quickly and easily.

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Question # 25

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?

A.

$5.25 million

B.

$7.50 million

C.

$7.57 million

D.

$8.40 million

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Question # 26

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.

Not recognised in 20X3 as the forward contract is not settled until after the year end.

B.

Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.

C.

A $10,000 profit will be recognised within the Income Statement.

D.

A $10,000 profit will be recognised within other comprehensive income.

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Question # 27

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.

A.

11.4%

B.

12.3%

C.

9.3%

D.

10.1%

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Question # 28

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?

A.

A lower gearing ratio will result in an increase in the value of the company

B.

WW was approaching a debt covenant limit and it was therefore important to reduce gearing.

C.

A lower gearing ratio creates greater flexibility for WW in the future

D.

The shareholder was confusing the cost of capital with shareholder wealth

E.

Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders

F.

The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity

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Question # 29

Which of the following statements are true with regard to interest rate swaps?

Select ALL that apply.

A.

Some companies interest rate swap to deliberately increase their risks because they believe that they are better at predicting future interest rates than the market.

B.

Risk of default is high from the floating interest rate payer if interest rates rise.

C.

When interest rates are falling the risk of default by the fixed interest rate payer is low.

D.

An nicest rate swap is an internal hedging technique.

E.

An interest rate swap is an external hedging technique.

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Question # 30

A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$.

This year the company expects to generate Z$ 10 million profit after tax.

Tax Regime:

   • Corporate income tax rate in country Y is 50%

   • Corporate income tax rate in country Z is 20%

   • Full double tax relief is available

Assume an exchange rate of Y$ 1 = Z$ 5.

 

What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?

A.

Y$ 1.25 million

B.

Y$ 1.00 million

C.

Y$ 31.25 million

D.

Y$ 4.00 million

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Question # 31

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?

A.

Cash flow forecasts

B.

Current capital structure

C.

Trends in share price movements

D.

Shareholder profile

E.

Book value of assets

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Question # 32

Company A plans to acquire Company B in a 1-for-1 share exchange.

Pre-acquisition information is as follows:

 

 

Post-acquisition information is as follows:

  • Annual earnings are expected to increase by $4 million.
  • The P/E multiple of the combined company is expected to be 12 times.

 

If the acquisition proceeds, what is the expected percentage increase in the post acquisition share price of Company A?  

A.

50%

B.

 8%

C.

6%

D.

0%

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Question # 33

Which THREE of the following are benefits of integrated reporting?

A.

Improve the quality of information available to the providers of financial capital.

B.

Promote an understanding of the interdependencies of capitals. 

C.

Reduce the amount of work that is required to produce the report and accounts.

D.

Improve short term decision making.

E.

Support integrated decision-making. 

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Question # 34

An unlisted company.

• Is owned by the original founders and members of their families

• Pays annual dividends each year depending on the cash requirements of the dominant shareholders.

• Has earnings that are highly sensitive to underlying economic conditions.

• Is a small business in a large Industry where there are listed companies with comparable capital structures

Which of the following methods is likely to give the most accurate equity value for this unlisted company?

A.

Dividend valuation model.

B.

Net asset valuation

C.

P/E based valuation using the P/E of a similar company.

D.

Discounted cash flow analysis at WACC (based on cash flows after tax but before financing) plus the market value of debt.

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Question # 35

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?

A.

Investing in a 2 year bond returning 5% each year.

B.

Investing in the local money market at 4% each year.

C.

Maintaining the cash in a current account.

D.

Paying the surplus cash as a dividend at the earliest opportunity.

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Question # 36

A company is financed as follows:

   • 400 million $1 shares quoted at $3.00 each.

   • $800 million 5% bonds quoted at par.

The company plans to raise $200 million long term debt to finance a project with a net present value of $100 million.

The bank that is providing the debt is insisting on a maximum gearing level covenant.  

Gearing will be based on market values and calculated as debt/(debt + equity).

 

What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?

A.

43%

B.

44%

C.

45%

D.

46%

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Question # 37

Company F's current profit before interest and taxation is $5.0 million.

It has a 10% long-term corporate bond in issue with a nominal value of $10 million.

Corporate tax is paid at 25%.

The industry average P/E multiple is 10.

Company X has made an approach to acquire the entire share capital of Company F for $30 million.

Company X has announced that anticipated synergies (after interest and taxation) arising from its acquisition of Company F will be $1 million each year in perpetuity. 

 

Advise the Board of Directors of Company F if the bid should be accepted, based on the above information?

A.

Accept the bid because Company F is potentially worth $30 million to Company X.

B.

Reject the bid because Company F is potentially worth $40 million to Company X.

C.

Reject the bid because Company F is potentially worth $50 million to Company X.

D.

Reject the bid because Company F is potentially worth $60 million to Company X.

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Question # 38

Company W is a manufacturing company with three divisions, all of which are making profits:

• Division A which manufactures cars

• Division B which manufactures trucks

• Division C which manufactures agricultural machinery

Company W is facing severe competitive pressure in all of its markets, and is currently operating with a high level of gearing Company W's latest forecasts suggest that it needs to raise cash to avoid breaching loan covenants on its existing debt finance in 6 months' time

In a recent strategy review. Divisions A and B were identified as being the core divisions of Company W

The management of Division C is known to be interested in the possibility of a management buy-out. Company Z is known to be interested in making a takeover bid for Company W's truck manufacturing division

A rival to Company W has recently successfully demerged its business, this was well received by the Financial markets

Which of the following exit strategies will be most suitable for company W?

A.

Sale of Division B to Company Z

B.

Closure of Division

C.

Management buy-out of Division C

D.

Demerger of Division C

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Question # 39

Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.

The two companies operate in the same markets and have the same business risk.

Relevant data on the two companies is as follows:

  

Both companies are wholly equity financed and both pay corporate tax at 30%.

The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.

Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.

 

Give your answer to the nearest $million.

 

A.

3,150

B.

1,890

C.

4,500

D.

2,700

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Question # 40

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 7%

B.

Reduction of 5%

C.

Reduction of 1%

D.

Reduction of 0%

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Question # 41

A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?

A.

The shareholder can choose whether to take the cast or not.

B.

It increases the number of shares issue.

C.

It means that the company will be able to pay lower total dividends in the future.

D.

It returns cash to shareholders so that they can choose hew to spend It

E.

It will not create an expectation for future increased dividends.

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Question # 42

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 it would be cheaper to repay variable rate finance aid enter into new fixed rate finance than to enter into an interest rate swap.

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 interest cost will increase with the interest rate swap in place.

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Question # 43

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.

The convertible bond may not dilute control as the bond holder has an option to choose conversion.

B.

The coupon rate on the convertible bond will be lower than that on a non-convertible bond.

C.

When converted into shares, the company will receive a cash inflow which can be used for future investments.

D.

Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.

E.

Over the life of the bond, a convertible will be more expensive than a non-convertible.

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Question # 44

A government is currently considering the privatisation of the national airline. The shares are to be offered to the public via a fixed price Initial Public Offering (IPO).

Which THREE of the following statements are correct?

A.

An IPO is normally underwritten

B.

The government will receive significant financial resources from the sale of its shareholding in the national airline.

C.

The rational airline employees will no longer be public sector employees following the completion of the privatisation

D.

The use of a fixed price offer will ensure that the government raises the maximum amount of finance.

E.

The rational airline will receive significant financial resources as a direct result of the shares company shares in the IPO.

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Question # 45

The ex div share price of a company's shares is $2.20.

 

An investor in the company currently holds 1,000 shares.

 

The company plans to issue a scrip dividend of 1 new share for every 10 shares currently held.

 

After the scrip dividend, what will be the total wealth of the shareholder?

 

Give your answer to the nearest whole $.

 

 $ ?  .

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Question # 46

XYZ is a multi-national group with subsidiary AA in Country A and subsidiary BB in Country B. The capital structures of AA and BB are set up to take advantage of the lower tax rate in Country A Thin capitalisation rules in Country B will limit the ability for either AA or BB to claim tax relief on:

A.

interest earned by BB.

B.

interest earned by AA

C.

interest paid by BB

D.

interest paid by AA

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Question # 47

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:

A.

5% increase

B.

5% decrease

C.

35% increase

D.

35% decrease

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Question # 48

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.

Identifying and removing surplus staff.

B.

Understanding the management information system of the acquired firm.

C.

Discussions with representatives from key customer accounts.

D.

Discussions with anti-poverty campaigning groups.

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Question # 49

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?

A.

$7 million is recognised in profit or loss.

B.

$7 million is recognised in other comprehensive income.

C.

$2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.

D.

$5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.

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Question # 50

A company's Board of Directors is considering raising a long-term bank loan incorporating a number of covenants.

The Board members are unsure what loan covenants involve. 

 

Which THREE of the following statements regarding loan covenants are true?

A.

A positive loan covenant would require the company to undertake specific actions.

B.

A loan covenant has no contractually binding obligations.

C.

A restrictive covenant prohibits the company from conducting certain actions without the approval of the lending institution.

D.

A covenant gives the financial institution the right but not the obligation to convert debt into equity in a case of non-compliance. 

E.

A financial covenant usually requires the company to adhere to specific financial conditions or targets.

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