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NEW QUESTION 71
A company intends to sell one of its business units, Company R by a management buyout (MBO).
A selling price of $100 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal:
The VCC requires a minimum return on its equity investment in the MBO of 30% a year on a compound basis over 5 years.
What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.
Answer:
Explanation:
$ ? million
111.4, 111, 111.0, 111.1, 111.2, 111.3, 111.5, 111.6, 111.7
NEW QUESTION 72
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. 228 million
- C. 289 million
- D. 531 million
Answer: B
NEW QUESTION 73
Which TIIRCC of the following are most likely to reduce the long term credit rating co a company?
- A. The issue of new shares where the funds raised are invested in expanding into a new nigh risk market.
- B. The issue of a new bond where the funds raised are invested in a project that has an NPV of nil.
- C. The issue of new shares where the funds raised are invested in a project that has an NPV of nil.
- D. Loss of a major customer that contributed 30% of sales revenue.
- E. Disposal of a loss-making division where the funds raised will be used to pay a special dividend to shareholders.
Answer: B,D,E
NEW QUESTION 74
A company is planning a share repurchase programme with the following details:
* Repurchased shares will be immediately cancelled.
* The shares will be purchased at a premium to the market share price.
The current market share price is greater than the nominal value of the shares.
Which of the following statements about the impact of the share repurchase programme on the company's financial statements is correct?
- A. The share capital figure would reduce by the nominal value of the shares purchased.
- B. The premium to the market value would be charged to the Income Statement.
- C. The total value of the equity in its Statement of Financial Position would remain unchanged.
- D. The premium to the nominal value would be charged to retained earnings.
Answer: A
NEW QUESTION 75
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 intangible assets.
- B. TU accounts for its intangible assets at net realisable value.
- C. TU accounts for its intangible assets at historical value.
- D. TU does not account for its tangible assets
Answer: A
NEW QUESTION 76
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 77
MAN is a manufacturing company that is based in country M and sells almost exclusively to customers in country M, priced in the local currency, M$.
MAN wishes to expand the business by acquiring a company that manufactures similar products but has a more global customer base. It is particularly interested in selling to customers in country P, which uses currency P$ but recognises that the P$ is generally quite volatile against the M$.
Country P uses the same language as country M, has free entry of labour from country M, no exchange controls or withholding tax and a favourable double tax treaty.
Which of the following companies would be most suitable takeover candidates for MAN to investigate further?
- A. A company based in country M with a global customer base including country P.
- B. A company based in country P with a global customer base including country P.
- C. A company based in country M with a shared interest in selling in country P.
- D. A company based in country P with a large proportion of customers in country M.
Answer: B
NEW QUESTION 78
An entity prepares financial statements to 31 December each year. The following data applies:
1 December 20X0
* The entity purchased some inventory for $400,000.
* In order to protect the inventory against adverse changes in fair value the entity entered into a futures contract to sell the inventory for a fixed price on 31 January 20X1.
* The entity designated this contract as a fair value hedge of the value of the inventory.
31 December 20X0
* The inventory had a fair value of $480,000 and the futures contract had a fair value of $75,000 (a financial liability).
What will be the impact on the statement of profit or loss and other comprehensive income for the year ended
31 December 20X0 in respect of the change in the value of the inventory and the futures contract?
- A. A net gain of $5,000 will be recognised in other comprehensive income.
- B. A loss of $75,000 will be recognised in profit or loss.
- C. A net gain of $5,000 will be recognised in profit or loss.
- D. A loss of $75,000 will be recognised in other comprehensive income.
Answer: C
NEW QUESTION 79
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%
Answer: A
NEW QUESTION 80
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 dat a. 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 $20,000 LESS expensive than the finance lease.
- B. The bank loan is $70,000 LESS expensive than the finance lease.
- C. The bank loan is $120,000 LESS expensive than the finance lease.
- D. The bank loan is $30,000 MORE expensive than the finance lease.
Answer: B
NEW QUESTION 81
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.
Answer: A
NEW QUESTION 82
An aerospace company is planning to diversify into car manufacturing.
Relevant data:
What is the the cost of equity to be used in the WACC for the project appraisal?
Give your answer in percentage, as a whole number.
? %
Answer:
Explanation:
19
NEW QUESTION 83
A Venture Capital Fund currently holds a significant shareholding in a large private company as a result of funding a recent management buyout. It plans to exit this investment in 5 years time at a significant profit.
Which THREE of the following exit mechanisms are most likely to be preferred by the Venture Capital Fund?
- A. The management team has an option to buy the Venture Capital Fund's shares for their nominal value which can be exercised in 5 years time.
- B. The Venture Capital Fund has a legal entitlement to sell its shareholding to any third party investor if the company has not obtained a stock market listing within 5 years.
- C. The private company obtains a stock market listing on a recognised exchange within the next 5 years.
- D. The Venture Capital Fund has an option to sell its shareholding to the company at twice its original cost which can be exercised in 5 years time.
- E. The management team agrees to buy back the Venture Capital Funds shareholding in 5 years time at its original cost.
Answer: B,C,D
NEW QUESTION 84
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 20X1
- B. 31 December 20X0
- C. 31 December 20X3
- D. 31 December 20X2
Answer: C
NEW QUESTION 85
Company B is an all equity financed company with a cost of equity of 10%.
It is considering issuing bonds in order to achieve a gearing level of 20% debt and 80% equity.
These bonds will pay a coupon rate of 5% and have an interest yield of 6%.
Company B pays corporate tax at the rate of 25%.
According to Modigliani and Miller's theory of capital structure with tax, what will be Company B's new cost of equity?
A)
B)
C)
D)
- A. Option D
- B. Option A
- C. Option C
- D. Option B
Answer: D
NEW QUESTION 86
At the last financial year end, 31 December 20X1, a company reported:
The corporate income tax rate is 30% and the bank borrowings are subject to an interest cover covenant of 4 times.
The results are presently comfortably within the interest cover covenant as they show interest cover of 8.3 times. The company plans to invest in a new product line which is not expected to affect profit in the first year but will require additional borrowings of $20 million at an annual interest rate of 10%.
What is the likely impact on the existing interest cover covenant?
- A. Interest cover would reduce to 3 times and the covenant would be breached.
- B. Interest cover would reduce to 3 times and the covenant would NOT be breached.
- C. Interest cover would reduce to 5 times and the covenant would be breached.
- D. Interest cover would reduce to 5 times and the covenant would NOT be breached.
Answer: D
NEW QUESTION 87
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
- A. It interest rates have gone down the price of the future will have fallen.
- B. It must be kept for ne whole duration of the contract
- C. It can be tailored to the exact reeds of the company.
- D. The date is flexible and the position can be closed quickly and easily.
Answer: B
NEW QUESTION 88
A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.
Which THREE of the following actions could be taken by the company?
- A. The company could seek alternative sources of finding, such as a reduction in the annual dividend payment, to finance the project.
- B. The directors could proceed will the project because their primary duly is maximise shared older wealth, even if that conflicts with lenders' interest.
- C. The directors could meet with key shareholder to discuss whether they wish the project proceed despite the breach of the covenant
- D. The project could proceed if the cash inflows from the project will enable some of the debt to be repaid before the end of the financial year and so the breach of covenant may never be detected
- E. The project could be foregone if it cannot be funded without breaching the covenant
- F. The company could approach its existing Lenders to negotiate a relaxation of :he conditions imposed by the covenant.
Answer: A,E,F
NEW QUESTION 89
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. $4.25
- B. $4.75
- C. $4.50
- D. $4.00
Answer: C
NEW QUESTION 90
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