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NEW QUESTION 145
A company has a covenant on its 5% long-term bond, stipulating that its retained earnings must not fall below
$2 million.
The company has 100 million shares in issue.
Its most recent dividend was $0.045 per share. It has committed to grow the dividend per share by 4% each year.
The nominal value of the bond is $60 million. It is currently trading at 80% of its nominal value.
Next year's earnings before interest and taxation are projected to be $11.25 million.
The rate of corporate tax is 20%.
If the company increases the dividend by 4%, advise the Board of Directors if the level of retained earnings will comply with the covenant?
- A. Covenant is not breached as retained earnings = $2.40 million.
- B. Covenant is breached as retained earnings = $1.92 million.
- C. Covenant is not breached as retained earnings = $2.10 million.
- D. The covenant is not breached as retained earnings = $4.68 million.
Answer: B
NEW QUESTION 146
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 100 million shares in issue, with market price currently at $8.00 per share.
* Company T has 90 million shares in issue,. with market price currently at $5.00 each share.
* Synergies valued at $60 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in B.
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:
$ ? .
8.19, 8.18
NEW QUESTION 147
A listed company has recently announced a profit warning.
The company's share price fell 20% on the day of the announcement but had been fairly static in the weeks leading up to the announcement.
Which form of efficient market is most likely to be indicated by this share price movement?
- A. Weak form
- B. Random walk
- C. Strong form
- D. Semi-strong form
Answer: D
NEW QUESTION 148
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. Decreased cost of debt
- B. Cost savings in production due to economies of scale
- C. Reduction in staff costs due to the removal of duplicated roles.
- D. Reduction in financial risk due to diversification
- E. Enhanced profit due to reduced competition
Answer: A,B,C
NEW QUESTION 149
A listed company plans to raise $350 million to finance a major expansion programme.
The cash flow projections for the programme are subject to considerable variability.
Brief details of the programme have been public knowledge for a few weeks.
The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond.
The following data is relevant:
The company's share price has fallen by 5% over the past 3 months compared with a fall in the market of 3% over the same period.
The directors favour the bond option.
However, the Chief Accountant has provided arguments for a rights issue.
Which TWO of the following arguments in favour of a right issue are correct?
- A. The administrative costs of a rights issue will be lower.
- B. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.
- C. The recent fall in the share price makes a rights issue more attractive to the company.
- D. The issue of bonds might limit the availability of debt finance in the future.
- E. The rights issue will lead to less pressure on the operating cash flows of the programme.
Answer: D,E
NEW QUESTION 150
The directors of the following four entities have been discussing dividend policy:
Which of these four entities is most likely to have a residual dividend policy?
- A. B
- B. A
- C. C
- D. D
Answer: A
NEW QUESTION 151
A company's gearing is well below its optimal level and therefore it is considering implementing a share re-purchase programme.
This programme will be funded from the proceeds of a planned new long-term bond issue.
Its financial projections show no change to next year's expected earnings.
As a result, the company plans to pay the same total dividend in future years.
If the share re-purchase is implemented, which THREE of the following measures are most likely to decrease?
- A. The cost of equity
- B. The interest cover
- C. The gearing, based on book value (debt / (debt + equity))
- D. Next year's dividend per share
- E. The number of shares in issue
- F. The Weighted Average Cost of Capital
Answer: B,E,F
NEW QUESTION 152
Company J is in negotiations to acquire Company K and believes it can turn around Company K's performance to match its own.
The following information is available for the two companies:
Select the maximum price for each share that Company J should place on Company K during negotiations.
- A. $3.2
- B. $3.0
- C. $1.7
- D. $2.0
Answer: B
NEW QUESTION 153
A company intends to sell one of its business units. Company W, by a management buyout (MBO). A selling price of S200 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 35% a year on a compound basis over 5 years. What is the minimum total equity value of Company W in 5 years time in order to meet the VCC's required return? Give your answer to one decimal place.
- A. 0
- B. 1
Answer: A
NEW QUESTION 154
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 loss of $75,000 will be recognised in profit or loss.
- B. A net gain of $5,000 will be recognised in profit or loss.
- C. A net gain of $5,000 will be recognised in other comprehensive income.
- D. A loss of $75,000 will be recognised in other comprehensive income.
Answer: B
NEW QUESTION 155
Company C is a listed company. It is currently considering the acquisition of Company D.
The original founder of Company C currently owns 52% of the shares.
Alternative forms of consideration for Company D being considered are as follows:
* Cash payment, financed by new borrowing
* issue of new shares in Company C
Which of the following is an advantage of a cash offer over a share-for exchange from the viewpoint of the original founder of Company C?
- A. A cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not.
- B. A share for share exchange would result in a significant change in control of Company C whereas a cash offer would not.
- C. A share-for-share exchange would require the approval shareholders in Company C but a cash offer would not.
- D. A share-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.
Answer: B
NEW QUESTION 156
Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:
Which of the following is the most likely explanation of the different P/E ratios?
- A. Company B has a greater profit this year than Company A.
- B. Company B has higher expected future growth than Company A.
- C. Company B has higher gearing than Company A.
- D. Company B has higher business risk than Company A.
Answer: B
NEW QUESTION 157
Which TIIRCC of the following are most likely to reduce the long term credit rating co a company?
- A. Disposal of a loss-making division where the funds raised will be used to pay a special dividend to shareholders.
- B. The issue of new shares where the funds raised are invested in expanding into a new nigh risk market.
- C. Loss of a major customer that contributed 30% of sales revenue.
- D. The issue of a new bond where the funds raised are invested in a project that has an NPV of nil.
- E. The issue of new shares where the funds raised are invested in a project that has an NPV of nil.
Answer: A,C,D
NEW QUESTION 158
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. $164.00 million profit
- B. $8.75 million profit
- C. $43.00 million profit
- D. $126.50 million loss
Answer: A
NEW QUESTION 159
Which three of the following are most likely be primary objectives for a newly established, unincorporated entity in the service sector?
- A. Maintaining sufficient liquidity in the business to avoid overtrading
- B. Increasing Revenue
- C. Reaching an optimum capital structure
- D. Increasing the dividend payment year on year
- E. Providing consistently high levels service quality
Answer: A,B,C
NEW QUESTION 160
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 5 existing shares
- B. 1 new share for every 4 existing shares
- C. 1 new share for every 20 existing shares
- D. 1 new share for every 25 existing shares
Answer: B
NEW QUESTION 161
Z wishes to borrow at a floating rate and has been told that it can use swaps to reduce the effective interest rate it pays. Z can borrow floating at Libor ' 1, and fixed at 10%.
Which of the following companies would be the most appropriate for Z to enter into a swap with?
- A. Company C - it can borrow at L +1 1/2 and fixed at 9%
- B. Company A - it can borrow floating L +1 1/2 and fixed at 9.5%
- C. Company D - it can borrow at L +1 1/2 and fixed at 10.5%
- D. Company E - it can borrow floating at L +1 1/2 and fixed at 12%
Answer: A
NEW QUESTION 162
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 $1.50 per Kilowatt.
The company expects this to cause consumption to rise by 10% but costs would remained unaltered.
The price cap is expected to cause the company's net profit to fall to:
- A. $47.5 million profit
- B. $20.0 million profit
- C. $35.0 million loss
- D. $27.5 million profit
Answer: A
NEW QUESTION 163
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. 11.0%
- B. 10.0%
- C. 9.4%
- D. 8.0%
Answer: A
NEW QUESTION 164
Which THREE of the following statements are true of a money market hedge?
- A. They are easy to set up.
- B. They may be a little more flexible in comparison to a forward contract.
- C. They offer roughly the same outcome as a forward contract.
- D. They leave the company exposed to currency risks.
- E. They are more complex than forward contracts.
Answer: C,D,E
NEW QUESTION 165
Company A plans to acquire Company B in a 1-for-1 share exchange.
Pre-acquisition information is as follows:
Post-acquisition information is as follows:
* Annual earnings are expected to increase by $4 million.
* The P/E multiple of the combined company is expected to be 12 times.
If the acquisition proceeds, what is the expected percentage increase in the post acquisition share price of Company A?
- A. 50%
- B. 8%
- C. 6%
- D. 0%
Answer: D
NEW QUESTION 166
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.
Answer:
Explanation:
$ ? million
300, 300000000
NEW QUESTION 167
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