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NEW QUESTION # 244
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION # 245
A company is considering hedging the interest rate risk on a 3-year floating rate borrowing linked to the
12-month risk-free rate.
If the 12-month risk-free rate for the next three years is 2%, 3% and 4%, which of the following alternatives would result in the lowest average finance cost for the company over the three years?
- A. Enter into an interest rate cap at an annual premium of 0.533% and a cap of 3%,
- B. Enter into a zero-cost collar with a floor of 2.9% and a ceiling of 4%.
- C. Do not hedge.
- D. Enter into an interest rate swap at 3.1% fixed against 12-month risk-free rate.
Answer: C
NEW QUESTION # 246
A financial services company reported the following results in its most recent accounting period:
The company has an objective to achieve 5% earnings growth each year. The directors are discussing how this objective might be achieved next year.
Revenues have been flat over the last couple of years as the company has faced difficult trading conditions. Revenue is expected to stay constant in the coming year and so the directors are focussing efforts on reducing costs in an attempt to achieve earnings growth next year.
Interest costs will not change because the company's borrowings are subject to a fixed rate of interest.
What operating profit margin will the company have to achieve next year in order to just achieve its 5% earnings growth objective'?
- A. 55.8%
- B. 58.5%
- C. 60.0%
- D. 58.0%
Answer: D
NEW QUESTION # 247
Company A plans to acquire Company B, an unlisted company which has been in business for 3 years.
It has incurred losses in its first 3 years but is expected to become highly profitable in the near future.
No listed companies in the country operate the same business field as Company B, a unique new high- risk business process.
The future success of the process and hence the future growth rate in earnings and dividends is difficult to determine.
Company A is assessing the validity of using the dividend growth method to value Company B.
Which THREE of the following are weaknesses of using the dividend growth model to value an unlisted company such as Company B?
- A. The dividend growth model does not take the time value of money into consideration.
- B. The future projected dividend stream is used as the basis for the valuation.
- C. The future growth rate in earnings and dividends will be difficult to accurately determine.
- D. The cost of capital will be difficult to estimate.
- E. The company has been unprofitable to date and hence, there is no established dividend payment pattern.
Answer: C,D,E
NEW QUESTION # 248
AA is considering changing its capital structure. The following information is currently relevant to AA:
The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.
- A. The WACC increase above 7.6
- B. The cost of equity will decrease below 10%
- C. The cost of debt remain unchanged at 4%
- D. The WACC will decrease below 7.6%
- E. The cost of equity will increase above 10%
- F. The cost of debt will increase above 4%
Answer: A,D
NEW QUESTION # 249
A company generates and distributes electricity and gas to households and businesses.
Forecast results for the next financial year are as follows:
The Industry Regulator has announced a new price cap of $2.00 per Kilowatt.
The company expects this to cause consumption to rise by 15% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $8.75 million profit
- B. $126.50 million loss
- C. $164.00 million profit
- D. $43.00 million profit
Answer: C
NEW QUESTION # 250
Company RRR is a well-established, unlisted, road freight company.
In recent years RRR has come under pressure to improve its customer service and has had some success in doing this However, the cost of improved service levels has resulted in it making small losses in its latest financial year. This is the first time RRR has not been profitable.
RRR uses a 'residual' dividend policy and has paid dividends twice in the last 10 years.
Which of the following methods would be most appropriate for valuing RRR?
- A. Valuing the tangible assets and intangible assets of RRR.
- B. The P/E method, adjusting the P/E of a listed company downwards to reflect RRR's unlisted status.
- C. The dividend valuation model.
- D. The earnings yield method, adjusting the earnings yield of a listed company downwards to reflect RRR's unlisted status.
Answer: A
NEW QUESTION # 251
Which of the following statements about the tax impact on debt finance is correct?
- A. Interest on debt is deducted from pre-tax profits.
- B. Interest on debt is deducted from post-tax profits.
- C. Preference share dividends attract tax relief in the same way as debenture interest.
- D. Debt instruments issued with fixed and floating charges do not attract tax relief on interest paid.
Answer: A
NEW QUESTION # 252
A national rail operating company has made an offer to acquire a smaller competitor.
Which of the following pieces of information would be of most concern to the competition authorities?
- A. The board informed a major institutional shareholder about the proposed acquisition before informing other shareholders.
- B. After the acquisition, the board proposes to increase prices on some routes not serviced by other rail operators.
- C. After the acquisition, the board proposes to withdraw some of the less profitable services.
- D. The acquisition is likely to result in significant redundancies of staff currently working for the smaller rail operator.
Answer: B
NEW QUESTION # 253
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 150 million shares in issue, with market price currently at $7.00 per share.
* Company T has 120 million shares in issue,. with market price currently at $6.00 each share.
* Synergies valued at $50 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in T.
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.
- A. 7.24
- B. 8.24
Answer: B
Explanation:
NEW QUESTION # 254
CI IJ has decided to move its production plant to overseas country X. This would make the product cheaper to produce. The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Answer:
Explanation:
NEW QUESTION # 255
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes. Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
- A. A listed international logistics firm.
- B. A company in a similar market to Company A.
- C. A pottery factory in the Middle East.
- D. A company that produces accessories.
Answer: A
NEW QUESTION # 256
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION # 257
An unlisted company wishes to obtain an estimated value for its shares in anticipation of a private sale of a large parcel of shares.
Relevant data for the unlisted company:
* It has a residual dividend policy.
* It has earnings that are highly sensitive to underlying economic conditions.
* It is a small business in a large industry where there are listed companies but there are none with a similar capital structure.
The company intends to base valuations on the cost of equity of a proxy company after adjusting for any differences in capital structure where appropriate.
Which of the following methods is likely to give the most accurate equity value for this unlisted company?
- A. P/E based valuation using the P/E of a similar listed company in the same industry.
- B. Discounted cash flow analysis at WACC based on free cash flow to equity.
- C. Dividend valuation model.
- D. Net asset valuation.
Answer: C
NEW QUESTION # 258
Company S is planning to acquire Company T.
The shareholders in Company T will receive new shares in Company S in an all-share consideration.
Relevant information:
The shareholders in Company T want sufficient shares to receive a 25% premium on the pre-acquisition value of their shares, based on the pre-acquisition share price.
Which of the following share-for-share offers will achieve the desired result?
- A. 1 share in Company S for 1 share in Company T
- B. 2 shares in Company S for 1 share in Company T
- C. 1 share in Company S for 2 shares in Company T
- D. 10 shares in Company S for 4 shares in Company T
Answer: A
NEW QUESTION # 259
A company with a market capitalisation of S50million is considering raising $1 million debt to fund a new
10-year capital investment protect
The value of this issue is considered to be small in comparison to the company's market capitalisation The company is considering whether to raise the debt finance by either a "bond private placing' or a 'public bond issue.
Which THREE of the following statements are correct?
- A. The company's credit rating will be a key element in determining the interest rate payable and the potential success of either the public bond issue or the bond private placing
- B. An initial public bond issue will be administratively complex and relatively expensive for the relatively small amount of debt being raised whereas a bond private placing will be relatively less complex
- C. An average investor is made aware of a potential initial public bond issue whereas the average investor is only made aware of a bond private placing after it has occurred.
- D. An initial public bond issue does not need to be underwritten whereas a bond private placing must be underwritten.
- E. An initial public bond issue can be arranged relatively quickly whereas a bond private placing can take up to a year to arrange.
Answer: B,E
NEW QUESTION # 260
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