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NEW QUESTION 16
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% 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 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
Answer:
Explanation:
$ million.
34, 35, 34000000, 35000000
NEW QUESTION 17
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?
- A. Reduces agency conflict
- B. Provides an exit route for the founders
- C. Increases the profile and reputation of the business.
- D. Helps access to wider sources of finance.
- E. Increases dividend payouts
Answer: B,C,D
NEW QUESTION 18
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. $5.30
- B. $6.40
- C. $6.80
- D. $5.40
Answer: D
NEW QUESTION 19
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity 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 entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge.
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. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
- B. $7 million is recognised in other comprehensive income.
- C. $7 million is recognised in profit or loss.
- D. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
Answer: A
NEW QUESTION 20
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:
Which of the following is the best indication of the equity value of Company P?
- A. $48 million
- B. $80 million
- C. $40 million
- D. $24 million
Answer: D
NEW QUESTION 21
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriate cost of equity = 10%
The result produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
- A. $2,000,000
- B. $2,100,000
- C. $950,000
- D. $1,050,000
Answer: C
NEW QUESTION 22
A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price.
The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$.
When the company reports under IFRS 7 for the first time, the share price is most likely to:
- A. Decrease since investors place a lower value on higher risk businesses.
- B. Stay the same since US$ risk can already be quantified from segmental analysis disclosures included elsewhere in the annual report.
- C. Either increase or decrease depending on market reaction to new information on how financial risk is managed.
- D. Increase due to greater clarity of information available on the extent of US$ risks and how they are managed.
Answer: C
NEW QUESTION 23
Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company A.
As a consequence. Company As share price has risen over the past few weeks while Company B's share price has fallen.
Which THREE of the following statements are most likely to be correct?
- A. Company A's gearing will increase following a share exchange.
- B. Based on current share price movements, a share exchange would mean Company A has to issue fewer shares to acquire Company B than it would have done a few weeks ago
- C. The method of finance chosen will not affect the post-acquisition earning per share of the combined business
- D. Company A's weighted average cost of capital will fall if financing is with debt
- E. Company B's shareholders will be able to participate in the future growth of the combined business if it is a share exchange
Answer: B,D
NEW QUESTION 24
A company plans to raise finance for a new project.
It is considering either the issue of a redeemable cumulative preference share or a Eurobond.
Advise the directors which of the following statements would justify the issue of preference shares over a bond?
- A. If profits are poor, dividends do not have to be paid on the preference share - however, interest would need to be paid on the Eurobond.
- B. The issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.
- C. Preference shares are not secured against the assets of the business - however, the Eurobond would be.
- D. The company can claim tax relief on the dividend paid on the preference share at a higher rate than the interest paid on the Eurobond.
Answer: A
NEW QUESTION 25
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 cost of equity that reflects the asset beta of a listed company that provides training activities.
- B. A WACC that the reflects the gearing of the publishing company and the equity beta factor of the publishing company.
- 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 reflects the gearing of the publishing company and the asset beta of a listed company that provides training activities.
Answer: D
NEW QUESTION 26
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.
Answer:
Explanation:
8.24
NEW QUESTION 27
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. $4.25
- C. $4.75
- D. $4.00
Answer: A
NEW QUESTION 28
A company has stable earnings of S2 million and its shares are currently trading on a price earnings multiple {PIE) of 10 times. It has10 million shares in issue.
The company is raising S4 million debt finance to fund an expansion of its existing business which is forecast to increase annual earnings straight away by 25% and then remain at that level for the foreseeable future. The corporation tax rate is 20%. It is expected that the P/E will reduce to 8 times over the next year.
What is the most likely change in shareholder wealth resulting from this plan?
- A. No change in shareholder wealth.
- B. Shareholder wealth will increase by $5 million
- C. Shareholder wealth will increase by $3.2 million.
- D. Shareholder wealth will increase by $4 million.
Answer: D
NEW QUESTION 29
Company W is a manufacturing company with three divisions, all of which are making profits:
* Division A which manufactures cars
* Division B which manufactures trucks
* 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?
- A. Demerger of Division C
- B. Closure of Division
- C. Sale of Division B to Company Z
- D. Management buy-out of Division C
Answer: D
NEW QUESTION 30
Company Z has identified four potential acquisition targets: companies A, B, C and D.
Company Z has a current equity market value of $590 million.
The price it would have to pay for the equity of each company is as follows:
Only one of the target companies can be acquired and the consideration will be paid in cash.
The following estimations of the new combined value of Company Z have been prepared for each acquisition before deduction of the cash consideration:
Ignoring any premium paid on acquisition, which acquisition should the directors pursue?
- A. B
- B. A
- C. C
- D. D
Answer: D
NEW QUESTION 31
Which THREE of the following remain unchanged over the life of a 10 year fixed rate bond?
- A. The nominal value
- B. The amount payable on maturity
- C. The yield
- D. The market value
- E. The coupon rate
Answer: A,B,E
NEW QUESTION 32
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.
$ ? million
Answer:
Explanation:
111.4, 111,
111.0, 111.1, 111.2,
111.3, 111.5, 111.6,
111.7
NEW QUESTION 33
A company has borrowings of S5 million on which it pays interest at 8%. It has an operating profit margin of 20%.
The company plans to increase borrowings by S2 million Interest on additional borrowings would be 10% and the operating profit margin would remain unchanged
A debt covenant attached to the new borrowings requires interest cover to be at least 4 times throughout the period of the borrowing
Interest cover is defined in the loan documentation as being based on operating profit
What is the minimum sales value required each year to avoid a breach of the interest cover covenant'
- A. S3.00 million
- B. S2.88 million
- C. TS2.40 million
- D. S12.00 million
Answer: C
NEW QUESTION 34
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% 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 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
- A. 34, 36, 34000000, 35000000
- B. 34, 35, 34000000, 35000000
Answer: B
NEW QUESTION 35
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 36
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