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NEW QUESTION 126
A listed company in a high growth industry, where innovation is a key driver of success has always operated a residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research and development.
The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition, they suggested that the company should use more debt finance.
If the suggested change is made to the financial policies, which THREE of the following statements are true?
- A. The company's financial risk will increase due to its increased use of debt finance.
- B. Retained earnings have a lower cost than debt finance.
- C. There may be a change to the shareholder profile due to 'the clientele effect'.
- D. It may give a signal to the market that the company is entering a period of stable growth.
- E. The directors will not have to take shareholder dividend preferences into consideration in future.
Answer: A,C,D
NEW QUESTION 127
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. $126.50 million loss
- C. $8.75 million profit
- D. $43.00 million profit
Answer: A
NEW QUESTION 128
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
A)
B)
C)
D)
- A. Option D
- B. Option B
- C. Option A
- D. Option C
Answer: C
NEW QUESTION 129
Company A is planning to acquire Company B.
Company A's managers think they can improve the performance of Company B to the extent that its own P/E ratio should be applied to Company B's earnings.
Relevant Data:
What is the expected synergy if the acquisition goes ahead?
Give your answer to the nearest $ million.
$ ? million
Answer:
Explanation:
8, 8000000
NEW QUESTION 130
For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?
- A. Supply chain risk
- B. Commodity risk
- C. Currency risk
- D. Credit risk
- E. Interest rate risk
- F. Liquidity risk
Answer: B,C,E
NEW QUESTION 131
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 25 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 5 existing shares
Answer: B
Explanation:
Explanation
Calc_Set2
NEW QUESTION 132
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. Pay a one-off special dividend.
- B. Write to shareholders explaining fully why the company's share price is under valued.
- C. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
- D. Refer the bid to the country's competition authorities.
Answer: B
NEW QUESTION 133
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by
5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION 134
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
Answer:
Explanation:
22.8
NEW QUESTION 135
Which THREE of the following statements are correct?
- A. The beta of a company's shares reflects systematic risk.
- B. The security market line (SML) shows the relationship between systematic risk and return.
- C. A portfolio can be diversified by increasing the number of securities in different industries held in the portfolio.
- D. Systematic risk can be eliminated in a diversified portfolio.
- E. A beta of 1 indicates that the investment is risk free.
Answer: A,B,C
NEW QUESTION 136
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 137
Company T is a listed company in the retail sector.
Its current profit before interest and taxation is $5 million.
This level of profit is forecast to be maintainable in future.
Company T has a 10% corporate bond in issue with a nominal value of $10 million.
This currently trades at 90% of its nominal value.
Corporate tax is paid at 20%.
The following information is available:
Which of the following is a reasonable expectation of the equity value in the event of an attempted takeover?
- A. $32.0 million
- B. $50.2 million
- C. $65.0 million
- D. $41.6 million
Answer: D
NEW QUESTION 138
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:
Which THREE of the following items are errors within the appraisal?
- A. The salvage value has been included within the lease option
- B. Using the 10% discount rate is incorrect
- C. Lease payments are timed incorrectly
- D. The project's operating cashflows should be included
- E. Tax relief on lease payments have not been lagged correctly
- F. The bank loan repayments should be included
Answer: A,B,E
NEW QUESTION 139
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. 10.0%
- B. 11.0%
- C. 8.0%
- D. 9.4%
Answer: B
NEW QUESTION 140
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 141
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by 5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION 142
A company raised fixed rate bank finance together with an interest rate swap for the same term and same principal value to pay floating receive fixed rate interest on an annual basis.
Which THREE of the following statements are correct?
- A. The company has effectively obtained floating rate debt.
- B. The swap contract is normally a contract between a company and a bank.
- C. On the first day of this arrangement, the company receives the principal borrowed from the bank and pays this across to the swap counterparty.
- D. LIBID (London Interbank Bid Rate) is normally used as the reference rate for determining interest due under the swap.
- E. Under the swap, interest is exchanged every year.
Answer: A,B,E
NEW QUESTION 143
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 144
A company is undertaking a lease-or-buy evaluation, using the post-tax cost of bank borrowing as the discount rate.
Details of the two alternatives are as follows:
Buy option:
* To be financed by a bank loan
* Tax depreciation allowances are available on a reducing-balance basis
* Assets depreciated on a straight-line basis
Lease option:
* Finance lease
* Maintenance to be paid by the lessee
* Tax relief available on interest payments and book depreciation
Which THREE of the following are relevant cashflows in the lease-or-buy appraisal?
- A. Maintenance payments
- B. Lease payments
- C. Bank loan payments
- D. Tax relief on the book depreciation
- E. Tax relief on tax depreciation allowances
Answer: B,D,E
NEW QUESTION 145
A company is wholly equity funded. It has the following relevant data:
* Dividend just paid $4 million
* Dividend growth rate is constant at 5%
* The risk free rate is 4%
* The market premium is 7%
* The company's equity beta factor is 1.2
Calculate the value of the company using the Dividend Growth Model.
Give your answer in $ million to 2 decimal places.
$ ? million
Answer:
Explanation:
56.76, 56.75
NEW QUESTION 146
Company M plans to bid for Company J. Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
$ ? million
Answer:
Explanation:
8
NEW QUESTION 147
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 adequacy of the pension funds of the original founders.
- B. The cash requirements of the shareholders in the foreseeable future.
- C. The dividend policy of listed companies in the same industry.
- D. The impact of the dividend policy on the company's share price.
- E. Income tax rates and the personal tax liabilities of the shareholders.
Answer: A,B,E
NEW QUESTION 148
Which THREE of the following are considered in detail in IFRS 7 Financial Instruments: Disclosures?
- A. Liquidity risk
- B. Market risk
- C. Credit risk
- D. Business risk
- E. Enterprise risk
Answer: A,B,C
NEW QUESTION 149
Company R is a major food retailer. It wishes to acquire Company S, a food manufacturer.
Company S currently supplies many stores owned by Company R with food products that it manufactures.
Company S is of similar size to Company R but has a lower credit rating.
Which of the following is most likely to be a synergistic benefit to R on purchasing S?
- A. Reduced competition resulting in the ability to raise retail selling prices for food products.
- B. Lower cost of borrowing due to the acquistion of a company with a different credit rating.
- C. Savings due to a reduction in purchase costs and more control over the value chain.
- D. Cost savings due to reducing the range of products manufactured by Company S.
Answer: C
NEW QUESTION 150
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. Preference shares are not secured against the assets of the business - however, the Eurobond would be.
- 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. 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.
- D. The issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.
Answer: B
NEW QUESTION 151
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