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NEW QUESTION 136
A company raised fixed rate bank finance together with an interest rate swap for the same term and same principal value to pay floating receive fixed rate interest on an annual basis.
Which THREE of the following statements are correct?
- A. On the first day of this arrangement, the company receives the principal borrowed from the bank and pays this across to the swap counterparty.
- B. The swap contract is normally a contract between a company and a bank.
- C. Under the swap, interest is exchanged every year.
- D. LIBID (London Interbank Bid Rate) is normally used as the reference rate for determining interest due under the swap.
- E. The company has effectively obtained floating rate debt.
Answer: B,C,E
NEW QUESTION 137
A company wishes to raise new finance using a rights issue to invest in a new project offering an IRR of
10%
The following data applies:
* There are currently 1 million shares in issue at a current market value of $4 each.
* The terms of the rights issue will be $3.50 for 1 new share for 5 existing shares.
* The company's WACC is currently 8%.
What is the yield-adjusted theoretical ex-rights price (TERP)?
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
4.06, 4.060
NEW QUESTION 138
A company's latest accounts show profit after tax of $20.0 million, after deducting interest of $5.0 million. The company expects earnings to grow at 5% per annum indefinitely.
The company has estimated its cost of equity at 12%, which is included in the company WACC of 10%.
Assuming that profit after tax is equivalent to cash flows, what is the value of the equity capital?
Give your answer to the nearest $ million.
$ ? million
Answer:
Explanation:
300,
300000000
NEW QUESTION 139
A company's Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.
The directors are uncertain of the effects on key variables.
Which THREE of the following statements are true?
- A. Equity finance will reduce the overall financial risk.
- B. Retained earnings has no cost, and is therefore the cheapest form of equity finance.
- C. Equity finance will increase pressure to pay a higher total future dividend.
- D. Debt finance is always preferable to equity finance.
- E. The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.
- F. Debt finance will increase the cost of equity.
Answer: A,C,F
NEW QUESTION 140
A company wishes to raise new finance using a rights issue. The following data applies:
* There are 10 million shares in issue with a market value of $4 each
* The terms of the rights will be 1 new share for 4 existing shares held
* After the rights issue, the theoretical ex-rights price (TERP) will be $3.80 Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
Answer:
Explanation:
$ ? million
7.5, 7.50
NEW QUESTION 141
A company is considering taking out $10.000,000 of floating rate bank borrowings to finance a new project.
The current rate available to the company on floating rate barrowings is 8%. The borrowings contain a covenant based on an interested cover of 5 times.
The project is expected to generate the following results:
At what interest rate on the floating rate borrowings is the bank covenant first breached?
- A. 9.4%
- B. 11.0%
- C. 8.0%
- D. 10.0%
Answer: B
NEW QUESTION 142
A venture capitalist invests in a company by means of buying
* 6 million shares for $3 a share and
* 7% bonds with a nominal value of $2 million, repayable at par in 3 years' time
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment
The company has 8 million shares in issue
What is the minimum total equity value for the company in 3 years' time required to satisfy the venture capitalist's expected return?
Give your answer to the nearest $ million
- A. 0
- B. 1
Answer: B
NEW QUESTION 143
A company plans to raise S15 million to finance an expansion project using a rights issue Relevant data
* Shares will be offered at a 20% discount to the present market price of S12 50 per share
* There are currently 3 million shares in issue
* The project is forecast to yield a positive NPV of $9 million
What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?
- A. $9.50
- B. $11 25
- C. $13.67
- D. $11.67
Answer: D
NEW QUESTION 144
A company has:
* $7 million market value of equity
* $5 million market value of debt
* WACC of 9.375%
* Corporate income tax rate of 15%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?
- A. 8.79%
- B. 10.00%
- C. 14.52%
- D. 10.27%
Answer: B
NEW QUESTION 145
A listed company in a high technology industry has decided to value its intellectual capital using the Calculated Intangible Value method (CIV).
Relevant data for the company:
* Pays corporate income tax at 30%
* Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%
* The value spread has been calculated as $26 million
Calculate the CIV for the company.
- A. 325 million
- B. 531 million
- C. 289 million
- D. 228 million
Answer: D
NEW QUESTION 146
Company A plans to diversify by a cash acquisition of Company B an unlisted company in another country (Country B) which operates in a different industrial sector
Company A already manufactures its product in Country B and has a loan denominated in Country B's currency
Company A regularly suffers foreign exchange losses due to volatility in the exchange rate between the two countries' currencies in recent years.
Which THREE of the following appear to be be valid justifications of this diversification decision?
- A. The diversification into another product market will lower business risk
- B. The diversification will give Company A greater protection from translation risk
- C. The diversification will give Company A protection from political risk
- D. The diversification will enable Company A to enjoy production scale economies
- E. The diversification will give Company A greater protection from transaction risk.
Answer: B,C,E
NEW QUESTION 147
A company is considering a divestment via either a management buyout (MBO) or sale to a private equity purchaser. Which of the following is an argument in favour of the MBO from the viewpoint of the original company?
- A. Higher price due to synergistic benefits.
- B. Improved relationships with management buyout team in the event of a sale to the private equity purchaser.
- C. Better co-operation post divestment.
- D. Enhanced big data opportunities.
Answer: C
NEW QUESTION 148
Listed Company A has prepared a valuation of an unlisted company. Company B. to achieve vertical integration Company A is intending to acquire a controlling interest in the equity of Company B and therefore wants to value only the equity of Company B.
The assistant accountant of Company A has prepared the following valuation of Company B's equity using the dividend valuation model (DVM):
Where:
* S2 million is Company B's most recent dividend
* 5% is Company B's average dividend growth rate over the last 5 years
* 10% is a cost of equity calculated using the capital asset pricing model (CAPM), based on the industry average beta factor
Which THREE of the following are valid criticisms of the valuation of Company B's equity prepared by the assistant accountant?
- A. The 5% growth rate may not reflect the future growth of Company B.
- B. The beta factor used may not reflect Company B's financial risk.
- C. The DVM calculation should use Company A's cost of equity rather than Company B's cost of equity
- D. It is better to use the present value of earnings rather than present value of dividends to value a controlling interest
- E. An unlisted company cannot use the capital asset pricing model to calculate its cost of equity
Answer: A,B,C
NEW QUESTION 149
A company aims to increase profit before interest and tax (PBIT) each year.
The company reports in A$ but has significant export sales priced in B$.
All other transactions are priced in A$.
In 20X1, the company reported:
In 20X2, the only changes expected are:
* An increase in export prices of 10%, but no change to units sold.
* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5)
Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?
- A. Yes, PBIT would increase by A$ 150 million.
- B. No, PBIT would fall by A$ 48 million.
- C. Yes, PBIT would increase by A$ 48 million.
- D. No, PBIT would fall by A$ 150 million.
Answer: B
NEW QUESTION 150
A large multi-divisional company in the food processing and distribution business is conducting a strategic review. The divisions all compete in the same market.
The sale of one of its underperforming food processing divisions to the divisional management team is currently being considered. The purchase by the divisional management team will require venture capital finance.
Which THREE of the following are likely to influence the multi-divisional company's decision on whether or not to sell the under-performing division to the management team?
- A. The specific conditions imposed on the management team by the venture capital provider.
- B. The quality of the management team and its ability to manage the divested division successfully.
- C. The divisional management team has skills and experience that are important for the future successful operation of other divisions.
- D. The divisional management team has detailed confidential information about the operation of the other divisions.
- E. The ability of the management team to raise the finance required to complete the purchase of the division at a reasonable price.
Answer: C,D,E
NEW QUESTION 151
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently trade at $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to
9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
- A. Reduction of 1%
- B. Reduction of 5%
- C. Reduction of 0%
- D. Reduction of 7%
Answer: D
NEW QUESTION 152
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. Discounted cash flow analysis at WACC based on free cash flow to equity.
- B. Dividend valuation model.
- C. P/E based valuation using the P/E of a similar listed company in the same industry.
- D. Net asset valuation.
Answer: B
NEW QUESTION 153
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