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NEW QUESTION # 119
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?

• A. A lower gearing ratio creates greater flexibility for WW in the future
• B. WW was approaching a debt covenant limit and it was therefore important to reduce gearing.
• C. The shareholder was confusing the cost of capital with shareholder wealth
• D. The Modigliani and Miller model would only be valid in practice if WW's shareholders were aware of the model and believed in its validity
• E. A lower gearing ratio will result in an increase in the value of the company
• F. Reducing the gearing ratio has reduced the financial risk of WW which will benefit shareholders

Answer: B,E,F

NEW QUESTION # 120
Company AD is planning to acquire Company DC. It is evaluating two methods of structuring the terms of the bid, which will be ether a debt-funded cash offer or a share exchange The following Information is relevant
* The two companies are of similar size and in related industries
* AB's gearing ratio measured as debt to debt plus equity, is currently 30% based on market values. This Is the company's optimum capital structure set to reflect the risk appetite of shareholders.
* The combined company is expected to generate savings and synergies
Which THREE of the following are advantages to AB's shareholders of a debt-funded cash offer compared with a share exchange?

• A. EPS Mil Increase
• B. More of the synergistic benefits of the acquisition will accrue to AB's current shareholders.
• C. WACC will increase f credit worthless falls too low, further increasing the returns to shareholders.
• D. Gearing will increase.
• E. Shareholder control will remain with AB's current shareholders

Answer: A,B,E

NEW QUESTION # 121
Company A is planning to acquire Company B at a price of $ 65 million by means of a cash bid.
Company A is confident that the merged entity can achieve the same price earnings ratio as that of Company A.

What does Company A expect the value of the merged entity to be post acquisition?

• A. $122.5 million
• B. $187.5 million
• C. $207.0 million
• D. $156.0 million

Answer: A

NEW QUESTION # 122
A company is planning to repurchase some of its shares. Relevant details are as follows:
* 100 million shares in issue
* Current share price $5
* 5 million shares to be repurchased
* 10% repurchase premium
* Repurchased shares to be cancelled
What would you expect the share price after the repurchase to be?
Give your answer to two decimal places.

Answer:

Explanation:
$ ?
4.97, 4.98

NEW QUESTION # 123
A company is owned by its five directors who want to sell the business.
Current profit after tax is $750,000.
The directors are currently paid minimal salaries, taking most of their incomes as dividends.
After the company is sold, directors' salaries will need to be increased by $50,000 each year in total.
A suitable Price/Earnings (P/E) ratio is 7, and the rate of corporate tax is 20%.
What is the value of the company using a P/E valuation?

• A. $4,900,000
• B. $5,530,000
• C. $4,970,000
• D. $5,250,000

Answer: C

NEW QUESTION # 124
A UK based company is considering investing GBP1 ,000,000 in a project it the USA. It is anticipated that the project will yield net cash inflows of USD580.000 each year for the next three years. These surplus cash flows will be remitted to the UK at the end of each year.
Currently GBP1.00 is worth USD1.30.
The expected inflation rates in the two countries ever the next four years are 2% in the UK and 4% in the USA.
Applying the purchasing power parity theory, which of the following represents the expected remittance at the end of year three, in GBP whole the nearest whole GBP)?

• A. GBP568,846
• B. GBP546,547
• C. GBP472,916
• D. GBP450,906

Answer: D

NEW QUESTION # 125
Company W has received an unwelcome takeover bid from Company B. The offer is a share exchange of 3 shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W has substantial cash balances which the directors were planning to use to fund an acquisition. These plans have not been announced to the market.
The following share price information is relevant.

Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?

• A. Write to shareholders explaining fully why the company's share price is under valued.
• B. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
• C. Pay a one-off special dividend.
• D. Refer the bid to the country's competition authorities.

Answer: A

NEW QUESTION # 126
B has a S3 million loan outstanding on which the interested rate is reset every 6 months for the following 6 month and the interested is payable at the end of that 6 month period. The next 6 monthly reset period starts in 3 months and the treasurer of B thinks interested rates are likely to raise between and then.
Current 6-month rates are 6.4% and the treasurer can get a rate of 6.9% for a 6-month forward rate agreement (FRA) starting in 3 months time. By transacting an TRA the treasurer can lock in a rate today of 6.9%.
If interested rates are 7.5% in 3 months' time, what will the net amount payable be?
Give your answer to the nearest thousand dollars.

• A. 0
• B. 1

Answer: A

Explanation:

NEW QUESTION # 127
Company ACC. an ungeared car manufacturer has launched a takeover bid of Company BDD. a key competitor operating in the same industry Company BDD has high gearing Company ACC has a large surplus cash balance and believes that the acquisition is an opportunity to enhance shareholder wealth through the realisation of synergistic benefits. Which THREE of the following would most likely be synergistic benefits to Company ACC of purchasing Company BDD9 I

• A. Cost savings in production due to economies of scale
• B. Reduction in staff costs due to the removal of duplicated roles.
• C. Enhanced profit due to reduced competition
• D. Reduction in financial risk due to diversification
• E. Decreased cost of debt

Answer: A,B,E

NEW QUESTION # 128
An all equity financed company plans an issue of new ordinary shares to the general public to raise finance for a new project
The following data applies:
* 10 million ordinary shares are currently in issue with a market value of S3 each share
* The new project will cost S2.88 million and is expected to give a positive NPV of S1 million
* The issue will be priced at a AaA discount to the current share price.
What gam or loss per share will accrue to the existing shareholders?

• A. Gain of 0.18
• B. Loss of $0.08
• C. Gain of $0.08
• D. Loss of $0.18

Answer: C

NEW QUESTION # 129
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. 8.0%
• B. 9.4%
• C. 11.0%
• D. 10.0%

Answer: C

NEW QUESTION # 130
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. 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.
• B. 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.
• C. Preference shares are not secured against the assets of the business - however, the Eurobond would be.
• D. The issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.

Answer: B

NEW QUESTION # 131
Company ABC's management has noticed that Company BCD has quickly built up a 20% stake by buying shares in Company ABC and are concerned that this is the start of a hostile bid.
This build-up of shares triggers the poison pill provision which automatically converts the rights to buy future preference shares previously issued to existing shareholders in Company ABC to full ordinary shares
What is the most likely impact of the triggering of a poison pill strategy at this stage in the bidding process?

• A. The threat of a hostile takeover is reduced because Company ABC becomes more expensive to buy.
• B. It is too late for a poison pill strategy to have any impact on a hostile takeover because Company BCD has already built up a significant stake in Company ABC.
• C. Company BCD loses value on its shareholding and has to sell at a loss before losing more value
• D. Company ABC becomes less attractive due to a fall in value of the shares as a result of the discount.

Answer: A

NEW QUESTION # 132
B has a S3 million loan outstanding on which the interested rate is reset every 6 months for the following 6 month and the interested is payable at the end of that 6 month period. The next 6 monthly reset period starts in
3 months and the treasurer of B thinks interested rates are likely to raise between and then.
Current 6-month rates are 6.4% and the treasurer can get a rate of 6.9% for a 6-month forward rate agreement (FRA) starting in 3 months time. By transacting an TRA the treasurer can lock in a rate today of 6.9%.
If interested rates are 7.5% in 3 months' time, what will the net amount payable be?
Give your answer to the nearest thousand dollars.

Answer:

Explanation:
104

NEW QUESTION # 133
A company is preparing an integrated report according to the International <IR> Framework as issued by the International Integrated Reporting Council.
Which THREE of the following should be included in the report?

• A. A detailed analysis of the organisation's business model.
• B. The challenges and uncertainties that the organisation is likely to encounter in pursuing its strategy.
• C. A comparison of the key elements of its financial statements with those of its main competitor.
• D. An explanation of how the organisation's governance structure supports its ability to create value in the short, medium and long term.
• E. A summary of the key issues discussed by directors in main board meetings.

Answer: A,B,D

NEW QUESTION # 134
Select the most appropriate divided for each of the following statements:

Answer:

Explanation:

NEW QUESTION # 135
Company A is based in country A with the AS as its functional currency. It expects to receive BS20 million from Company B in settlement of an export invoice.
The current exchange rate is A$1 =B$2 and the daily standard deviation of this exchange rate = 0 5% What is the one-day 95% VaR in AS?

• A. A$50,000
• B. A$822,500
• C. A$164,500
• D. A$82,250

Answer: D

NEW QUESTION # 136
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. Sale of Division B to Company Z
• B. Management buy-out of Division C
• C. Demerger of Division C
• D. Closure of Division

Answer: B

NEW QUESTION # 137
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 # 138
A company is currently all-equity financed.
The directors are planning to raise long term debt to finance a new project.
The debt:equity ratio after the bond issue would be 30:60 based on estimated market values.
According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:

• A. decrease.
• B. increase or decrease depending on the bond's coupon rate.
• C. increase.
• D. stay the same.

Answer: C

NEW QUESTION # 139
A company needs to raise $20 million to finance a project.
It has decided on a rights issue at a discount of 20% to its current market share price.
There are currently 20 million shares in issue with a nominal value of $1 and a market price of $5 per share.

Calculate the terms of the rights issue.

• A. 1 new share for every 20 existing shares
• B. 1 new share for every 5 existing shares
• C. 1 new share for every 4 existing shares
• D. 1 new share for every 25 existing shares

Answer: C

NEW QUESTION # 140
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 # 141
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