A listed companyÂ isÂ planning to raise $21.6 million to finance a new project with a positive netÂ presentÂ value of $5 million. Â The finance is to be raised viaÂ aÂ rights issue at a 10% discount to the current share price. Â There areÂ currently 100Â million shares in issue, trading at $2.00 each.
Taking the new project into account,Â what would theÂ theoreticalÂ ex-rights price be?
Give your answer toÂ two decimal places.
$Â ? Â
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?
Company X plans to acquire Company Y.
Total combined earnings are expected to increase by 10%
Total combinedÂ 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?
The Treasurer of Z intends to use interest rate options to set an interest rate cap on Zâ€™s borrowings.
Which of the following statement is correct?
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.Â
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:
â€¢Â Â Â Share capital of 4 million $1 shares trading at $4.0 per share.
â€¢Â Â Â Debt of $7 million floating rate borrowings.
TheÂ directors plan to raiseÂ $2 millionÂ additionalÂ borrowingsÂ in orderÂ toÂ improve liquidity. Â
They expect this toÂ reassure investorsÂ about the company's liquidity position and result in aÂ riseÂ in the share price to $4.2 per share.
Is the planned increase in borrowingsÂ expected to help the company meet its gearing objective?
CompanyÂ X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whoseÂ currency is the B$.
CompanyÂ 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 BÂ as a percentage of total revenue will:
A company enters into a floating rate borrowing with interest due every 12Â months over the five year life of the borrowing.Â
At the same time, the company arranges an interest rate swap to swap the interest profile on the borrowing from floating to fixed rate.Â
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 forÂ 12Â months later?Â
Which THREEÂ of the following are likely to be strategic reasons for a horizontal acquisition?
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 Aâ€™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
A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.
It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings. The company already has a commercial paper programme in place and has a good relationship with its bank.
Which of the following is likely to be the most cost effective method of borrowing the money?
Company AB was established 6 years ago by two individuals who each own 50% of the shares.
Each individual heads a separate division within the company, which now has annual turnover of GBP10 million and employs 40 people.
Some of the employees are very highly paid as they are important contributors to the company's profitability.
The owners of the company wish to realise the full value of their investment within the next 12 months.
Which TWO of the following options are mostÂ likely to be acceptable exit strategies to the two owners of the company?
Company A operates in country A with the AS as its functional currency. Company A expects to receive BS500.000 in 6 months' time from a customer in Country B which uses the B$.
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?
Which of the following best explains why the interest rate parity model is highly effective in practice?
An unlisted company is attempting to value its equity using the dividend valuationÂ model.
Relevant information is as follows:
Â Â Â â€¢ A dividend ofÂ $500,000 has just been paid.
Â Â Â â€¢ Dividend growth of 8% is expected for the foreseeable future.
Â Â Â â€¢ Earnings growth of 6% is expected for the foreseeable future.
Â Â Â â€¢ The cost of equity of a proxy listed company is 15%.
Â Â Â â€¢ The risk premium required due toÂ the companyÂ being unlisted is 3%.
The calculationÂ that has been performedÂ is as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is theÂ faultÂ with the calculation that has been performed?
A company based inÂ Country D, whose currency is the D$, has an objective of maintaining an operating profit margin of at least 10% each year.Â
Â Â Â â€¢ The companyÂ makes sales to Country E whose currency is the E$. It also makes sales to Country F whose currency is the F$.Â
Â Â Â â€¢ All purchases are from Country G whose currency is the G$.
Â Â Â â€¢ The settlement of all transactions is in the currency of the customer or supplier.
WhichÂ of the following changes wouldÂ be most likely to help the company achieve its objective?
A company has convertible bonds in issue.
The following debt is apply (31 December 20X0):
â€¢ Conversion ratio- 20 shares for each $130 bond.
â€¢ Current share price - $4 50
â€¢ Expected annual growth in share price - 5%
Advise the bond Holder at which date the convers on would be worthwhile?
An all-equity financed companyÂ currently generates total revenue of $50 million.
Its currentÂ profit before interest and taxation (PBIT)Â is $10 million.Â
Due toÂ difficult trading conditions, the companyÂ expects its total revenueÂ to be constant next year, althoughÂ someÂ margins will reduce.
It forecastsÂ next year's PBIT will fall to 18% on 40% of its revenue, but that theÂ PBIT on theÂ other 60% ofÂ itsÂ revenue will be unaffected.
TheÂ rate ofÂ corporate taxÂ is 20%.
What isÂ theÂ forecastÂ percentageÂ reduction inÂ next year'sÂ Earnings?
A company wishes to raise additionalÂ debtÂ finance and isÂ assessingÂ the impact thisÂ will have on key ratios.Â
The following data currently applies:
Â Â Â â€¢ Profit before interest and tax for the current yearÂ is $500,000
Â Â Â â€¢ Long term debt of $300,000 at a fixed interest rate of 5%
Â Â Â â€¢ 250,000 sharesÂ in issueÂ with a share price of $8
The companyÂ plansÂ to borrow an additional $200,000 on the first day of the yearÂ to invest in new project whichÂ willÂ improve annualÂ profit before interest and tax by $24,000.
The additionalÂ debtÂ would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but theÂ share price will increase to $8.50 after the investment.
TheÂ rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
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 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?
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?
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% eachÂ year.
In the year ending 31 December 20X2 itÂ financed a project byÂ issuing a bondÂ with a $1 million nominal value and a coupon rate of 7%.
TheÂ company paysÂ corporate income taxÂ atÂ 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?
On 31 October 20X3:
Â Â Â â€¢ AÂ companyÂ expectedÂ toÂ agreeÂ a foreign currencyÂ transactionÂ inÂ JanuaryÂ 20X4 for settlement on 31 March 20X4. Â
Â Â Â â€¢ The companyÂ hedgedÂ the currency riskÂ usingÂ a forwardÂ contractÂ at nil costÂ for settlementÂ onÂ 31Â March 20X4.
Â Â Â â€¢ The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.
On 31 December 20X3, theÂ financialÂ year end, theÂ fair value of the forward contractÂ wasÂ $10,000 (asset).
How shouldÂ the increase in the fair valueÂ of the forward contractÂ be treated within the financial statements for the year ended 31 December 20X3?
The following information relates toÂ Company A's current capital structure:
Company A is considering aÂ change inÂ the capital structureÂ thatÂ willÂ increaseÂ gearing to 30:70 (Debt:Equity).Â
The riskÂ -free rate is 3% and the return on the marketÂ portfolio is expected to beÂ 10%.
TheÂ rate of corporateÂ taxÂ isÂ 25%
Using theÂ CapitalÂ AssetÂ PricingÂ Model, calculate theÂ cost of equity resulting fromÂ the proposed change to the capital structure.
WW is a quoted manufacturing company. The Finance Director has addressed the shareholders during WW's annual general meeting-She has told the shareholders that WW raised equity during the year and used the funds to repay a large loan that was maturing, thereby reducing WW's gearing ratio
At the conclusion of the Finance Director's speech one of the shareholders complained that it had been foolish for WW to have used equity to repay debt The shareholder argued that the Modigliani and Miller model (with tax) offers proof that debt is cheaper than equity when companies pay tax on their profits.
Which THREE arguments could the Finance Director have used in response to the shareholder?
Which of the following statements are true with regard to interest rate swaps?
Select ALL that apply.
A company is based in Country Y whoseÂ functionalÂ currency isÂ Y$. It has an investment in CountryÂ ZÂ whoseÂ functionalÂ currency isÂ Z$.
This year the company expects to generateÂ Z$Â 10 million profit after tax.
Â Â Â â€¢ Corporate income taxÂ rate in country YÂ is 50%
Â Â Â â€¢ Corporate income tax rate in country Z is 20%
Â Â Â â€¢ Full double tax relief is available
Assume an exchange rate ofÂ Y$Â 1 = Z$ 5.
What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?
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 followingÂ are likely to be ofÂ MOST interest to the company's banks when they review the refinancing requests?
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:
If the acquisition proceeds, whatÂ is theÂ expected percentage increase inÂ the post acquisitionÂ share priceÂ of Company A? Â
Which THREE of the following are benefits of integrated reporting?
An unlisted company.
â€¢ Is owned by the original founders and members of their families
â€¢ Pays annual dividends each year depending on the cash requirements of the dominant shareholders.
â€¢ Has earnings that are highly sensitive to underlying economic conditions.
â€¢ 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?
Company A has a cash surplus.
The discount rate used forÂ a typical project is the company's weighted average cost of capital of 10%.
No investment projects willÂ beÂ availableÂ for at least 2 years.
Which of the following is currentlyÂ most likely to increase shareholder wealth in respect of the surplus cash?
A company is financed as follows:
Â Â Â â€¢ 400 million $1 shares quoted at $3.00 each.
Â Â Â â€¢ $800Â million 5% bonds quoted at par.
The companyÂ plansÂ to raiseÂ $200 millionÂ long term debtÂ to finance a project with aÂ net present value of $100Â million.
The bankÂ that is providing the debtÂ is insisting on a maximum gearing level covenant. Â
Gearing will beÂ based on market values andÂ 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?
Company F's currentÂ profitÂ before interest and taxationÂ isÂ $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.Â
Advise the Board of Directors of Company F if the bid should be accepted, based on the above information?
Company W is a manufacturing company with three divisions, all of which are making profits:
â€¢ Division A which manufactures cars
â€¢ Division B which manufactures trucks
â€¢ 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?
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 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 tradeÂ 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 increaseÂ next yearÂ to 6% andÂ it's Price/Earnings (P/E) ratioÂ to move to 9.5 times by the end of next year.
What percentageÂ reduction in the share priceÂ will occurÂ by the end of next year ifÂ theÂ interest rate increaseÂ and theÂ P/EÂ movementÂ both occur?
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 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 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:
Â Â Â â€¢ it will diluteÂ their control
Â Â Â â€¢ the interest payments will be higher therefore reducing liquidity
Â Â Â â€¢ it will increase the gearing ratio therefore increasing financial risk
Director B disagrees, and is preparing a board paper to promote theÂ issue of the convertible bondÂ rather thanÂ a non-convertible.
Advise the Director BÂ which THREE of the following statements should be included in his board paper to promote theÂ issue of the convertible bond?
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?
The ex div share price ofÂ a company's shares is $2.20.
An investor in the company currently holds 1,000 shares.
TheÂ company plans to issue a scrip dividend of 1 new share for every 10 shares currently held.
After the scrip dividend, what will beÂ the total wealth of the shareholder?
Give your answer to the nearest whole $.
Â $Â ? Â .
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:
Company JÂ plansÂ to acquire Company K, an unlisted company whose equityÂ isÂ toÂ beÂ valued using aÂ P/EÂ ratio approach.Â
A listed company has beenÂ identifiedÂ which isÂ veryÂ similar to Company K and which can be used as a proxy.
However, the growth prospects of Company K are higher thanÂ those ofÂ the proxy.
The Directors of Company J are aware that certain adjustments will be necessary to the proxyÂ company's P/EÂ ratioÂ in orderÂ to obtain a more reliable valuation. Â
The following adjustments have been agreed:
Â Â Â â€¢ 20% due to Company K being unlisted.
Â Â Â â€¢ 15% to allow for the growth rate difference.
The total adjustment to the proxy p/e ratio is:
Company A plans to acquire Company B.
Both firms operateÂ as wholesalers inÂ 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?
An entityÂ prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
Â Â Â â€¢ The entitiyÂ borrowed $100 million at a variable rate of interest.
Â Â Â â€¢ In order to protect itself against the variability of its interest cashflows, the entityÂ entered into a pay-fixed-receive-variable interest swap with annual settlements.Â The fair value of the swap on this dateÂ was zero.
30 June 20X2
Â Â Â â€¢ The entityÂ 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 entityÂ decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge.Â 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 company's Board of Directors is consideringÂ raisingÂ a long-term bank loan incorporatingÂ a number of covenants.
TheÂ Board members are unsure what loan covenants involve.Â
WhichÂ THREEÂ of the following statementsÂ regardingÂ loan covenants are true?