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F3 Exam Dumps - Financial Strategy

Question # 4

A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price.

The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$. 

 

When the company reports under IFRS 7 for the first time, the share price is most likely to:

A.

Increase due to greater clarity of information available on the extent of US$ risks and how they are managed.

B.

Stay the same since US$ risk can already be quantified from segmental analysis disclosures included elsewhere in the annual report.

C.

Decrease since investors place a lower value on higher risk businesses.

D.

Either increase or decrease depending on market reaction to new information on how financial risk is managed.

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Question # 5

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 # 6

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 has greater risk than the average market risk.

B.

It has lower risk than the average market risk.

C.

It has the same risk as the average market risk.

D.

It is not possible to tell from CAPM.

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Question # 7

A product costs USD10 when purchased in the USA. The same product costs USD12 when it is purchased in the UK and the price in GBP is convened to USD.

Which of the following statement concerning purchasing power parity is correct?

A.

Economic forces will bring the prices in the USA and UK into line.

B.

The exchange rate between the USD and GBP will change so that tie price differential on this product (and at other products) is eliminated.

C.

Economic forces should eliminate the price difference. but there could be market imperfections that permit it to persist.

D.

This type of price deferential is a reliable baas for predicting currency movements

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Question # 8

The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.

Their calculation is:

Value if the company‘s equity = $6 million x 10 =$60 million where.

  • $6 million is the company’s reported profit before interested and tax in the most recent accounting period and
  • 10 is the average price-earnings ratio for all listed companies

Which THREE of the following are weakness of this valuation?

A.

The equity result needs to be uplifted in recognition that this is an unlisted company.

B.

The price-earnings valuation method gives a value for the entire entity not Just a value of the equity.

C.

A forecast of sustainable profit should have been used instead of a historical figure

D.

Profit after tax should have been used in the calculation instead of profit before interest and tax.

E.

The price-earnings ratio should have been an average for companies in the same industry sector rather than alI listed companies

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Question # 9

The directors of a financial services company need to calculate a valuation of their company’s equity in preparation for an upcoming initial Public Offering (IPO) of shares. At a recent board meeting they discussed the various methods of business valuation.

The Chief Executive suggested using a Price-earing (P./E) method of valuation, but the finance Director argued that a valuation based on forecast cash flows to equity would be more appropriate.

Which THREE of the following are advantages of valuation based on forecast cash flows to equity, compared to a valuating using a price earnings methods?

A.

Using cash is theoretically superior to using profits in a valuation calculation.

B.

It give on estimate of the likely shareholder value that will be created.

C.

The calculations are much simpler.

D.

It incorporates the time value of money.

E.

It avoids the problem of having to forecast a sustainable level of future growth.

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Question # 10

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?

A.

$73.6 million

B.

$22.1 million

C.

$44.1 million

D.

$50.1 million

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Question # 11

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 # 12

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 # 13

Hospital X provides free healthcare to all members of the community, funded by the central Government.

Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.

 

In comparing the above two organisations and their objectives, which THREE of the following statements are correct?

A.

X is a not-for-profit organisation while Y is a for-profit organisation.

B.

X and Y have the same primary financial objective - to maximise shareholder wealth.

C.

The performance of X will be appraised primarily on the basis of value for money.

D.

Only Y is likely to have a mixture of financial and non-financial objectives.

E.

X and Y will have the same primary non financial objective - provision of quality of health care.

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Question # 14

A company is financed by debt and equity and pays corporate income tax at 20%.  

Its main objective is the maximisation of shareholder wealth.

It needs to raise $200 million to undertake a project with a positive NPV of $10 million.

 

The company is considering three options:

   • A rights issue.

   • A bond issue.

   • A combination of both at the current debt to equity ratio.

Estimations of the market values of debt and equity both before and after the adoption of the project have been calculated, based upon Modigliani and Miller's capital theory with tax, and are shown below:

 

 

 

Under Modigliani and Miller's capital theory with tax, what is the increase in shareholder wealth?

A.

$210 million if financed by equity

B.

$50 million if financed by debt

C.

$160 million if financed by a mixture of debt and equity

D.

$10 million irrespective of finance

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Question # 15

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?

A.

Company B has a greater profit this year than Company A.

B.

Company B has higher business risk than Company A.

C.

Company B has higher expected future growth than Company A.

D.

Company B has higher gearing than Company A.

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Question # 16

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.

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Question # 17

Select the category of risk for each of the descriptions below:

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Question # 18

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?

A.

20.5%

B.

21.2%

C.

22.0%

D.

17.0%

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Question # 19

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 # 20

A company s about to announce a new project that has a positive NPV.

If the market is semi-strong form efficient, which of the following statements is most Likely to be true?

The value of the company will.

A.

only change to incorporate historical information.

B.

Increase by the NPV of the project once the information has been announced

C.

already include the value of the project.

D.

increase only on completion of the project.

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Question # 21

Company M is a listed company in a highly technical service industry.

The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.

 

Relevant data about Company Q:

   • The company has seen consistent growth in earnings each year since it was founded 10 years ago.

   • It has relatively few non-current assets.

   • Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company's human capital exceeded the value of its tangible assets.

The directors and major shareholders of Company Q have indicated willingness to sell the company.

Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.

 

Which THREE of the following are the most likely benefits of the acquisition to Company M's shareholders?

A.

Access to technical expertise.

B.

Reduction of risk through diversification.

C.

Improved asset backing for borrowing due to the acquisition of intangible assets.

D.

Gain economies of scale.

E.

Improve earnings per share (EPS).

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Question # 22

TU has relatively few tangible assets and is dependent for profits and growth on the high-value individuals it employs. Which of the following statements best explains why the net asset valuator method’s considered unstable for TU?

A.

TU does not account for its tangible assets

B.

TU does not account for its intangible assets.

C.

TU accounts for its intangible assets at net realisable value.

D.

TU accounts for its intangible assets at historical value.

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Question # 23

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?

A.

Asset based using replacement cost

B.

Dividend based using DVM

C.

Cash based using free cash flow before interest

D.

P/E ratio method using IT industry average 

E.

Earnings yield method using a listed IT company as proxy

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Question # 24

X exports goods to customers in a number of small countries Asia. At present, X invoices customers in X's home currency.

The Sales Director has proposed that X should begin to invoice in the customers currency, and the Treasurers considering the implications of the proposal.

Which TWO of the following statement are correct?

A.

X may be able to sell the receipts forward.

B.

If the proposal is adopted, X will have a lower effective sales price per unit due to exchange rate fluctuations.

C.

X will know advance the amount of home currency it will receive for the export sales.

D.

The overseas customers may have difficulty obtaining X's name currency with which to make the purchases, so the Sales Director’s proposal may increase sales.

E.

The customer will tear the foreign exchange risk and will only buy from X if they are prepared to accept this.

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Question # 25

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?

A.

VARIABLE at LIBOR

B.

VARIABLE at LIBOR + 0.5%

C.

VARIABLE at LIBOR + 1.0%

D.

FIXED at 6.5%

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Question # 26

A listed company is planning a share repurchase. 

 

The following data applies:

   • There are 10 million shares in issue

   • The  share repurchase will involve buying back 20% of the shares at a price of $0.75

   • The company is holding $2 million cash

   • Earnings for the current year ended are $2 million

 

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

 

Advise the directors which of the following statements is correct?

A.

The cash balance will decrease by 75% and EPS will decrease by 25%.

B.

The cash balance will decrease by 75% and EPS will increase by 25%.

C.

The cash balance will decrease by 20% and the EPS will decrease by 25%.

D.

The cash balance will decrease by 20% and the EPS will increase by 25%.

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Question # 27

A company’s statement of financial position includes non-current assets which are leased, the tax regime follows the accounting treatment.

Which cash flows should be discounted when evaluating the cost of lease finance?

A.

Lease payments, implied interested and straight-line accounting deprediation.

B.

Lease payments and straight-line accounting depreciation.

C.

Lease payments and implied interest.

D.

Lease payments, tax relief on implied interest and tax relief on straight-line account depreciation.

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Question # 28

Company ABC is planning to bid for company DDD, an unlisted company in an unrelated industry sector to ABC.

 

The directors of ABC are considering a number of different valuation methods for DDD before making a bid.

 

Which of the following is the MOST appropriate method for ABC to use to value DDD?

A.

Using DDD's tangible assets.

B.

Applying an industry P/E ratio to DDD's forecast earnings.

C.

Discounting DDD's forecast cash flows using ABC's cost of equity.

D.

Applying Company ABC's P/E ratio to DDD's forecast earnings.

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Question # 29

Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:

Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.

What offer price should Company C’s select?

A.

$4.50

B.

$4.00

C.

$4.75

D.

$4.25

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Question # 30

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?

A.

Undertaking a rights issue of equity to repay some of its debt.

B.

Refinancing to replace some of its short term debt with long term debt.

C.

Increasing the level of dividend to return more cash to shareholders.

D.

Using retained cash to undertake a buyback of some of its equity.

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Question # 31

A company is currently all-equity financed.

The directors are planning to raise long term debt to finance a new project.

The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.

 

According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

A.

stay the same.

B.

decrease.

C.

increase.

D.

increase or decrease depending on the bond's coupon rate.

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Question # 32

A listed company is planning a share repurchase. 

 

The following data applies:

   • There are 10 million shares in issue

   • The  share repurchase will involve buying back 20% of the shares at a price of $0.75

   • The company is holding $2 million cash

   • Earnings for the current year ended are $2 million

 

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

 

Advise the directors which of the following statements is correct?

A.

The cash balance will decrease by 75% and EPS will decrease by 25%.

B.

The cash balance will decrease by 75% and EPS will increase by 25%.

C.

The cash balance will decrease by 20% and the EPS will decrease by 25%.

D.

The cash balance will decrease by 20% and the EPS will increase by 25%.

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Question # 33

A new company was set up two years ago using the personal financial resources of the founders.

These funds were used to acquire suitable premises.

The company has entered into a long-term lease on the premises which are not yet fully fitted out.

The founders are considering requesting loan finance from the company's bank to fund the purchase of custom-made advanced technology equipment.

No other companies are using this type of equipment.

The company expects to continue to be profitable for the forseeable future.

It re-invests some of its surplus cash in on-going essential research and development.

 

Which THREE of the following features are likely to be considered negatives by the bank when assessing the company's credit-worthiness?

A.

The equipment is advanced technology custom-made equipment. 

B.

The company will continue to remain profitable and to generate net cash.

C.

The company premises are on a long-term lease but are not yet fully fitted out.

D.

The founders invested their personal financial resources in the company.

E.

Essential on-going research and development expenditure is required.

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Question # 34

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 # 35

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 of 3% 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?

A.

The issue of bonds might limit the availability of debt finance in the future.

B.

The recent fall in the share price makes a rights issue more attractive to the company.

C.

The rights issue will lead to less pressure on the operating cash flows of the programme.

D.

The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.

E.

The administrative costs of a rights issue will be lower.

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Question # 36

A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below $2 million.

The company has 100 million shares in issue.

Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.

The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.

Next year's earnings before interest and taxation are projected to be $11.25 million.

The rate of corporate tax is 20%.

 

If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?

A.

Covenant is not breached as retained earnings = $2.40 million.

B.

Covenant is not breached as retained earnings = $2.10 million.

C.

Covenant is breached as retained earnings = $1.92 million.

D.

The covenant is not breached as retained earnings = $4.68 million.

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Question # 37

A company has:

   • 10 million $1 ordinary shares in issue 

   • A current share price of $5.00 a share

   • A WACC of 15%

The company holds $10 million in cash. No interest is earned on this cash.

It will invest this in a project with an expected NPV of $4 million.

 

In a semi-strong efficient stock market, which of the following is the most likely share price immediately after the announcement of the new investment?

A.

$5.40 

B.

$6.40

C.

$6.80

D.

$5.30

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Question # 38

A company has announced a rights issue of 1 new share for every 4 existing shares. 

 

Relevant data:

   • The current market price per share is $10.00.

   • Rights are to be issued at a 20% discount to the current price.

   • The rate of return on the new funds raised is expected to be 10%.

   • The rate of return on existing funds is 5%.

What is the yield-adjusted theoretical ex-rights price?

 

Give your answer to two decimal places.

 

$ ?  

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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.

$1.7

B.

$2.0

C.

$3.0

D.

$3.2

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Question # 40

Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?

A.

Reduce customer complaints

B.

Increase customer service quality

C.

Reduce production time

D.

Improve staff morale

E.

Reduce raw material wastage

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Question # 41

A listed publishing company owns a subsidiary company whose business activity is training.

It wishes to dispose of the subsidiary company.

 

The following information is available:

  

The board of the publishing company believe that the value of the subsidiary company, and hence the value of the equity invested in it, can be determined by calculating the present value of the subsidiary's free cashflows.

 

Which of the following is the most appropriate discount rate to use when determining the enterprise value of the company?

A.

A WACC that reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.

B.

A cost of equity that reflects the asset beta of a listed company that provides training activities. 

C.

A WACC that reflects the gearing of the subsidiary company and the asset beta of a listed company that provides training activities.

D.

A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company. 

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Question # 42

A company's Board of Directors wishes to determine a range of values for its equity.

The following information is available:

Estimated net asset values (total asset less total liabilities including borrowings):

   • Net book value = $20 million

   • Net realisable value = $25 million

   • Free cash flows to equity = $3.5 million each year indefinitely, post-tax.

   • Cost of equity = 10%

   • Weighted Average Cost of Capital = 7%

Advise the Board on reasonable minimum and maximum values for the equity.

A.

Minimum value  = $25.0 million, and maximum value = $35.0 million

B.

Minimum value = $25.0 million, and maximum value = $50.0 million

C.

Minimum value = $20.0 million, and maximum value = $35.0 million

D.

Minimum value = $20.0 million, and maximum value = $50.0 million

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Question # 43

A company has a loss-making division that it has decided to divest in order to raise cash for other parts of the business.

The losses stem from a combination of a lack of capital investment and poor divisional management.

The loss-making division would require new capital investment of at least $20 million in order to replace worn out and obsolete assets.

If this investment was carried out, the present value of the future cashflows, excluding the investment expenditure, is expected to be $15 million.

 

Which TWO of the following divestment methods are most likely to be suitable for the company?

A.

Management buy-out

B.

De-merger

C.

Trade sale

D.

Liquidation

E.

Spin-off

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Question # 44

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 # 45

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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