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NEW QUESTION 102
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. Debt finance is always preferable to equity finance.
- B. Debt finance will increase the cost of equity.
- C. Equity finance will reduce the overall financial risk.
- D. The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.
- E. Retained earnings has no cost, and is therefore the cheapest form of equity finance.
- F. Equity finance will increase pressure to pay a higher total future dividend.
Answer: B,C,F
NEW QUESTION 103
Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product's success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 - 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?
- A. Discounted free cash flow using the company's forecast growth rates.
- B. Today's share price x number of shares in issue + retained earnings.
- C. Today's share price x number of shares in issue.
- D. P/E valuation based on the company's long term P/E and earnings for the year ended 31 December
20X1.
Answer: C
NEW QUESTION 104
Company A is proposing a rights issue to finance a new investment. Its current debt to equity ratio is 10%.
Which TWO of the following statements are true?
- A. The issue price has to be at least 20% below the pre-rights share price.
- B. According to Modigliani and Miller's Theory of Capital Structure with tax, the rights issue will result in a lower cost of equity for Company A.
- C. The actual ex-rights price may be higher than the theoretical ex-rights price due to the value created from the project.
- D. The issue price of new shares should be set to guarantee the full take up of shares offered.
- E. Company A's current low gearing ratio may require a rights issue rather than a debt issue to finance the new project.
Answer: B,C
NEW QUESTION 105
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 4 existing shares
- B. 1 new share for every 20 existing shares
- C. 1 new share for every 5 existing shares
- D. 1 new share for every 25 existing shares
Answer: A
Explanation:
Calc_Set2
NEW QUESTION 106
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. P/E based valuation using the P/E of a similar listed company in the same industry.
- B. Net asset valuation.
- C. Dividend valuation model.
- D. Discounted cash flow analysis at WACC based on free cash flow to equity.
Answer: C
NEW QUESTION 107
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 nominal value would be charged to retained earnings.
- C. The total value of the equity in its Statement of Financial Position would remain unchanged.
- D. The premium to the market value would be charged to the Income Statement.
Answer: A
NEW QUESTION 108
Company Y plans to diversify into an activity where Company X has an equity beta of 1.6, a debt beta of zero and gearing of 50% (debt/debt plus equity).
The risk-free rate of return is 5% and the market portfolio is expected to return 10%.
The rate of corporate income tax is 30%.
What would be the risk-adjusted cost of equity if Company Y has 60% equity and 40% debt?
- A. 9.1%
- B. 13%
- C. 11.6%
- D. 11.9%
Answer: D
NEW QUESTION 109
A company is planning to issue a 5 year $100 million bond at a fixed rate of 6%.
It is also considering whether or not to enter into a 10 year $100 million swap to receive 5% fixed and pay Libor + 1% once a year.
The company predicts that Libor will be 4% over the life of the 5 years.
What is the impact of the swap on the company's annual interest cost assuming that the Libor prediction is correct?
- A. Remain the same.
- B. Increase by 1%.
- C. Fall by 2%.
- D. Fall by 1%.
Answer: A
NEW QUESTION 110
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
- A. Interest cover will rise; P/E ratio will rise.
- B. Interest cover will rise; P/E ratio will fall.
- C. Interest cover will fall; P/E ratio will fall.
- D. Interest cover will fall; P/E ratio will rise.
Answer: D
NEW QUESTION 111
Which THREE of the following would be most important if a hospital wishes to review the effectiveness of its services?
- A. Average waiting times for treatment.
- B. Revenue generated from car park charges.
- C. Staff costs compared to previous years.
- D. Patient satisfaction ratings.
- E. The proportion of surgical procedures that are deemed to be successful.
Answer: A,D,E
NEW QUESTION 112
The table below shows the forecast for a company's next financial year:
The forecast incorporates the following assumptions:
* 25% of operating costs are variable
* Debt finance comprises a $400 million fixed rate loan at 5%
* Corporate income tax is paid at 25%
The company plans to do the following next year from the forecast earnings on the assumption that earnings will be equivalent to free cash flow:
* Pay a total dividend of $20 million
* Invest $40 million in new projects
What is the maximum % reduction in operating activity that could occur next year before the company's dividend and investment plans are affected?
Give your answer to the nearest 0.1%.
Answer:
Explanation:
4.8, 4.7, 4.9, 5.0, 4.6, 4.80, 4.70, 4.90, 5.00, 4.60%
NEW QUESTION 113
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 114
Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?
- A. Investors act in a rational manner.
- B. There are no transaction costs involved in the issue of new shares (including rights issues).
- C. Investors do not always have access to perfect information.
- D. There is a multiplicity of corporate and personal income tax rates.
- E. The capital markets are efficient markets.
Answer: A,B,E
Explanation:
Explanation
Discursive_F0
NEW QUESTION 115
An unlisted company which is owned and managed by its original founders has accumulated excess cash following many years of profitable trading.
The Board of Directors is comprised of the four original founders who each hold 25% of the equity share capital.
Which THREE of the following will be significant considerations when deciding on the company's dividend policy?
- A. The dividend policy of listed companies in the same industry.
- B. The adequacy of the pension funds of the original founders.
- C. Income tax rates and the personal tax liabilities of the shareholders.
- D. The cash requirements of the shareholders in the foreseeable future.
- E. The impact of the dividend policy on the company's share price.
Answer: B,C,D
NEW QUESTION 116
Company A is unlisted and all-equity financed. It is trying to estimate its cost of equity.
The following information relates to another company, Company B, which operates in the same industry as Company A and has similar business risk:
Equity beta = 1.6
Debt:equity ratio 40:60
The rate of corporate income tax is 20%.
The expected premium on the market portfolio is 7% and the risk-free rate is 5%.
What is the estimated cost of equity for Company A?
Give your answer to one decimal place.
? %
Answer:
Explanation:
12.3, 12.30
NEW QUESTION 117
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