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Financial Strategy Question and Answers

Financial Strategy

Last Update Feb 26, 2024
Total Questions : 435

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Questions 1

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?

Options:

A.  

Savings due to a reduction in purchase costs and more control over the value chain.

B.  

Cost savings due to reducing the range of products manufactured by Company S.

C.  

Lower cost of borrowing due to the acquistion of a company with a different credit rating.

D.  

Reduced competition resulting in the ability to raise retail selling prices for food products.

Discussion 0
Questions 2

A company wishes to raise new finance using a rights issue. The following data applies:

   • There are 10 million shares in issue with a market value of $4 each

   • The terms of the rights will be 1 new share for 4 existing shares held

   • After the rights issue, the theoretical ex-rights price (TERP) will be $3.80

Assuming all shareholders take up their rights, how much new finance will be raised ?

 

Give your answer to one decimal place.

 

$  ?   million

Options:

Discussion 0
Questions 3

A government is currently considering the privatisation of the national airline. The shares are to be offered to the public via a fixed price Initial Public Offering (IPO).

Which THREE of the following statements are correct?

Options:

A.  

An IPO is normally underwritten

B.  

The government will receive significant financial resources from the sale of its shareholding in the national airline.

C.  

The rational airline employees will no longer be public sector employees following the completion of the privatisation

D.  

The use of a fixed price offer will ensure that the government raises the maximum amount of finance.

E.  

The rational airline will receive significant financial resources as a direct result of the shares company shares in the IPO.

Discussion 0
Questions 4

A company in country T is considering either exporting its product directly to customers in country P or establishing a manufacturing subsidiary in country P.

The corporate tax rate in country T is 20% and 25% tax depreciation allowances are available

Which TIIRCC of the following would be considered advantages of establishing a subsidiary in country T?

Options:

A.  

The corporate tsx rate in country P is 40%.

B.  

There are restrictions on companies wishing to remit profit from country P

C.  

Year 1 tax depreciation allowances of 100% are available in country P.

D.  

There is a double tax treaty between country T and country P.

E.  

There are high customs cuties payable of products entering country P.

Discussion 0
Questions 5

A profit-seeking company intends to acquire another company for a variety of reasons, primarily to enhance shareholder wealth.

Which THREE of the following offer the greatest potential for enhancing shareholder wealth?

Options:

A.  

Achieving more press coverage for the company.

B.  

Creating new opportunities for employees.

C.  

Achieving greater cultural diversity.

D.  

Acquiring Intellectual Property assets.

E.  

Exploiting production synergies.

F.  

Elimination of existing competition.

Discussion 0
Questions 6

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?

Options:

A.  

A share for share exchange would result in a significant change in control of Company C whereas a cash offer would not.

B.  

A share-for-share exchange would require the approval shareholders in Company C but a cash offer would not.

C.  

A share-for-share exchange would require the approval of the Competition Authorities but a cash offer would not.

D.  

A cash offer would result in a lower gearing ratio therefore reduce the weighted overage cost of capital whereas a cash offer would not.

Discussion 0
Questions 7

H Company has a fixed rate load at 10.0%, but wishes to swap to variable. It can borrow at LIBOR 8%.

The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask).

What net rate will H Company pay if it enters into the swap?

Options:

A.  

LIBOR +6.5%

B.  

LIBOR +8%

C.  

LIBOR +6.9%

D.  

LIBOR +3.1%

Discussion 0
Questions 8

Company A has made an offer to take over all the shares in Company B on the following terms:

   • For every 20 shares currently held, Company B's shareholders will receive $100 bond with a coupon rate of 3%

   • The bond will be repaid in 10 years' time at its par value of $100.

   • The current yield on 10 year bonds of similar risk is 6%.

What is the effective offer price per share being made to Company B's shareholders?

Options:

A.  

$6.43

B.  

$4.50

C.  

$3.89

D.  

$6.89

Discussion 0
Questions 9

Company M is a listed company in a highly technical service industry.

The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.

 

Relevant data about Company Q:

   • The company has seen consistent growth in earnings each year since it was founded 10 years ago.

   • It has relatively few non-current assets.

   • Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company's human capital exceeded the value of its tangible assets.

The directors and major shareholders of Company Q have indicated willingness to sell the company.

Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.

 

Which THREE of the following are the most likely benefits of the acquisition to Company M's shareholders?

Options:

A.  

Access to technical expertise.

B.  

Reduction of risk through diversification.

C.  

Improved asset backing for borrowing due to the acquisition of intangible assets.

D.  

Gain economies of scale.

E.  

Improve earnings per share (EPS).

Discussion 0
Questions 10

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?

Options:

A.  

Dividend valuation model.

B.  

Discounted cash flow analysis at WACC based on free cash flow to equity. 

C.  

Net asset valuation.

D.  

P/E based valuation using the P/E of a similar listed company in the same industry.

Discussion 0
Questions 11

F Co. is a large private company, the founder holds 60% of the company's share capital and her 2 children each hold 20% of the share capital.

The company requires a large amount of long-term finance to pursue expansion opportunities, the finance is required within the next 3 months. The family has agreed that an Initial Public Offering (IPO) should not be pursued at this time, because it would take up to 12 months to arrange.

The existing shareholders are currently considering raising the required finance from an established Venture Capitalist in the form of debt and equity. The Venture Capitalist has agreed to provide the required finance provided it can earn a return on investment of 25% per year. In addition, the Venture Capitalist requires 60% of the equity capital, a directorship in the company and a veto on all expenditure of a capital or revenue nature above a specified limit.

From the perspective of the family, which of the following are advantages of raising the required finance from the Venture Capitalist?

Select all that apply.

Options:

A.  

The cost of the finance under the Venture Capital investment.

B.  

The changes in shareholding as a result of the Venture Capital investment.

C.  

The veto on expenditure above a specified level of a revenue or capital nature.

D.  

The speed with which the finance can be obtained.

E.  

The experience of the Venture Capitalist with growing businesses.

Discussion 0
Questions 12

A listed company is planning a share repurchase. 

 

The following data applies:

   • There are 10 million shares in issue

   • The  share repurchase will involve buying back 20% of the shares at a price of $0.75

   • The company is holding $2 million cash

   • Earnings for the current year ended are $2 million

 

The Directors are concerned about the impact that this repurchase programme will have on the company's cash balance and current year earnings per share (EPS) ratio.

 

Advise the directors which of the following statements is correct?

Options:

A.  

The cash balance will decrease by 75% and EPS will decrease by 25%.

B.  

The cash balance will decrease by 75% and EPS will increase by 25%.

C.  

The cash balance will decrease by 20% and the EPS will decrease by 25%.

D.  

The cash balance will decrease by 20% and the EPS will increase by 25%.

Discussion 0
Questions 13

A is a listed company. Its shares trade on a stock market exhibiting semi-strong form efficiency.

 

Which of the following is most likely to increase the wealth of A's shareholders?

Options:

A.  

Announcing that a project will be undertaken generating a positive net present value.

B.  

Announcing that the final dividend will remain unchanged from the previous 3 years.

C.  

Announcing that a non-current asset will be revalued in the statement of financial position.

D.  

Announcing that inventory will be impaired.

Discussion 0
Questions 14

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.

Options:

Discussion 0
Questions 15

Company AB was established 6 years ago by two individuals who each own 50% of the shares.

Each individual heads a separate division within the company, which now has annual turnover of GBP10 million and employs 40 people.

Some of the employees are very highly paid as they are important contributors to the company's profitability.

The owners of the company wish to realise the full value of their investment within the next 12 months.

 

Which TWO of the following options are most likely to be acceptable exit strategies to the two owners of the company?

Options:

A.  

Initial Public Offering (IPO)

B.  

Management Buyout

C.  

Sale to a larger competitor

D.  

Sale to a Private Equity Investor on an earn-out basis

E.  

Spin off (or de-merger)

Discussion 0
Questions 16

A wholly equity financed company has the following objectives:

1. Increase in profit before interest and tax by at least 10% per year.

2. Maintain a dividend payout ratio of 40% of earnings per year.

 

Relevant data:

   • There are 2 million shares in issue.

   • Profit before interest and tax in the last financial year was $5 million.

   • The corporate income tax rate is 30%.

At the beginning of the current financial year, the company raised long term debt of $2 million at 10% interest each year. 

 

Calculate the dividend per share that will be announced this year assuming the company achieves its objective of increasing profit before interest and tax by 10%.

Options:

A.  

$0.74

B.  

$0.67

C.  

$1.11

D.  

$1.01

Discussion 0
Questions 17

A listed company plans to raise new capital which will be required for future investment projects. The company has a gearing ratio of 50%, which is just below the company's target ratio.

The directors are comparing the benefits and drawbacks of each of the following two alternative sources of finance;

• Unsecured bank borrowings.

• Convertible bonds.

Which of the following statements is correct?

Options:

A.  

If the share price does not increase sufficiently for conversion to take place the company will have more expensive debt with a convertible bond than with unsecured borrowings.

B.  

Additional finance will be raised upon conversion of the convertible bond but not with unsecured borrowings.

C.  

The coupon rate of a convertible bond is likely to be lower than for unsecured borrowings.

D.  

If the convertible bond holders eventually convert to shares the company's gearing ratio will rise whereas it will be unaffected if finance is with unsecured borrowings.

Discussion 0
Questions 18

The following information relates to Company A's current capital structure:

  

Company A is considering a change in the capital structure that will increase gearing to 30:70 (Debt:Equity). 

 

The risk -free rate is 3% and the return on the market portfolio is expected to be 10%.

The rate of corporate tax is 25%

 

Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.

Options:

A.  

11.4%

B.  

12.3%

C.  

9.3%

D.  

10.1%

Discussion 0
Questions 19

A company proposes to value itself based on the net present value of estimated future cash flows.

 

Relevant data:

   • The cash flow for the next three years is expected to be £100 million each year

   • The cash flow after year 3 will grow at 2% to perpetuity

   • The cost of capital is 12%

The value of the company to the nearest $ million is:

Options:

A.  

$966 million

B.  

$1,260 million

C.  

$889 million

D.  

$834 million

Discussion 0
Questions 20

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?

Options:

A.  

The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.

B.  

Retained earnings has no cost, and is therefore the cheapest form of equity finance.

C.  

Debt finance is always preferable to equity finance.

D.  

Debt finance will increase the cost of equity.

E.  

Equity finance will reduce the overall financial risk.

F.  

Equity finance will increase pressure to pay a higher total future dividend.

Discussion 0
Questions 21

A company is deciding whether to offer a scrip dividend or a cash dividend to its shareholders. 

Although the company has excellent long-term growth prospects, it is experiencing short-term profit and cash flow problems.

 

Which of the following statements is most likely to be a reason for choosing the scrip dividend?

Options:

A.  

It is a way of raising additional finance to promote future growth.

B.  

It is a way of increasing earnings per share.

C.  

It is a way of encouraging shareholders to allow cash to be retained in the business.

D.  

It is a way of increasing dividend per share.

Discussion 0
Questions 22

On 31 October 20X3:

   • A company expected to agree a foreign currency transaction in January 20X4 for settlement on 31 March 20X4.  

   • The company hedged the currency risk using a forward contract at nil cost for settlement on 31 March 20X4.

   • The transaction was correctly treated as a cash flow hedge in accordance with IAS 39 Financial Instruments: Recognition and Measurement.

On 31 December 20X3, the financial year end, the fair value of the forward contract was $10,000 (asset).

 

How should the increase in the fair value of the forward contract be treated within the financial statements for the year ended 31 December 20X3?

Options:

A.  

Not recognised in 20X3 as the forward contract is not settled until after the year end.

B.  

Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.

C.  

A $10,000 profit will be recognised within the Income Statement.

D.  

A $10,000 profit will be recognised within other comprehensive income.

Discussion 0
Questions 23

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?

Options:

A.  

The company has effectively obtained floating rate debt.

B.  

On the first day of this arrangement, the company receives the principal borrowed from the bank and pays this across to the swap counterparty.

C.  

LIBID (London Interbank Bid Rate) is normally used as the reference rate for determining interest due under the swap.

D.  

Under the swap, interest is exchanged every year.

E.  

The swap contract is normally a contract between a company and a bank.

Discussion 0
Questions 24

Company A plans to diversify by a cash acquisition of Company B an unlisted company in another country (Country B) which operates in a different industrial sector

Company A already manufactures its product in Country B and has a loan denominated in Country B's currency

Company A regularly suffers foreign exchange losses due to volatility in the exchange rate between the two countries' currencies in recent years.

Which THREE of the following appear to be be valid justifications of this diversification decision?

Options:

A.  

The diversification will give Company A protection from political risk

B.  

The diversification into another product market will lower business risk

C.  

The diversification will give Company A greater protection from transaction risk.

D.  

The diversification will give Company A greater protection from translation risk

E.  

The diversification will enable Company A to enjoy production scale economies

Discussion 0
Questions 25

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?

Options:

A.  

The issue of bonds might limit the availability of debt finance in the future.

B.  

The recent fall in the share price makes a rights issue more attractive to the company.

C.  

The rights issue will lead to less pressure on the operating cash flows of the programme.

D.  

The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies.

E.  

The administrative costs of a rights issue will be lower.

Discussion 0
Questions 26

Company A needs to raise AS500 mi lion to invest in a new project and is considering using a pub ic issue of bonds to finance the investment.

Which THREE of the following statements-relating to this bond issue are true?

Options:

A.  

A company must be listed before it can issue bones.

B.  

The largest issuer of bond i3 the government.

C.  

Purchasing bonds in the capital markets enables entities to borrow large amounts of finance.

D.  

The bond market is unregulated making it easier to raise finance

E.  

Bonds issues in the corporate debt market are underwritten.

Discussion 0
Questions 27

Which THREE of the following statements are true of a money market hedge?

Options:

A.  

They offer roughly the same outcome as a forward contract.

B.  

They leave the company exposed to currency risks.

C.  

They may be a little more flexible in comparison to a forward contract.

D.  

They are more complex than forward contracts.

E.  

They are easy to set up.

Discussion 0
Questions 28

Which TIIRCC of the following are most likely to reduce the long term credit rating co a company?

Options:

A.  

The issue of new shares where the funds raised are invested in a project that has an NPV of nil.

B.  

The issue of a new bond where the funds raised are invested in a project that has an NPV of nil.

C.  

The issue of new shares where the funds raised are invested in expanding into a new nigh risk market.

D.  

Loss of a major customer that contributed 30% of sales revenue.

E.  

Disposal of a loss-making division where the funds raised will be used to pay a special dividend to shareholders.

Discussion 0
Questions 29

A company gas a large cash balance but its directors have been unable to identify any positive NPV projects to invest in. Which THREE of the following are advantages of a share repurchase, compared with a one-off large dividend?

Options:

A.  

The shareholder can choose whether to take the cast or not.

B.  

It increases the number of shares issue.

C.  

It means that the company will be able to pay lower total dividends in the future.

D.  

It returns cash to shareholders so that they can choose hew to spend It

E.  

It will not create an expectation for future increased dividends.

Discussion 0
Questions 30

A company is considering the issue of a convertible bond compared to a straight bond issue (non-convertible bond).

Director A is concerned that issuing a convertible bond will upset the shareholders for the following reasons:

   • it will dilute their control

   • the interest payments will be higher therefore reducing liquidity

   • it will increase the gearing ratio therefore increasing financial risk

Director B disagrees, and is preparing a board paper to promote the issue of the convertible bond rather than a non-convertible.

 

Advise the Director B which THREE of the following statements should be included in his board paper to promote the issue of the convertible bond?

Options:

A.  

The convertible bond may not dilute control as the bond holder has an option to choose conversion.

B.  

The coupon rate on the convertible bond will be lower than that on a non-convertible bond.

C.  

When converted into shares, the company will receive a cash inflow which can be used for future investments.

D.  

Issuing a convertible bond will have a more favourable impact on the gearing ratio than a non-convertible bond.

E.  

Over the life of the bond, a convertible will be more expensive than a non-convertible.

Discussion 0
Questions 31

A consultancy company is dependent for profits and growth on the high value individuals it employs.

The company has relatively few tangible assets.

 

Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.

Options:

A.  

It does not account for the intangible assets.

B.  

It accounts for the intangible assets at historical value.

C.  

It accounts for intangible assets at net realisable value.

D.  

It does not account for tangible assets.

Discussion 0
Questions 32

A company is valuing its equity prior to an initial public offering (IPO). 

 

Relevant data:

   • Earnings per share $1.00

   • WACC is 8% and the cost of equity is 12%

   • Dividend payout ratio 40%

   • Dividend growth rate 2% in perpetuity

 

The current share price using the Dividend Valuation Model is closest to:

Options:

A.  

$4.08

B.  

$6.12

C.  

$6.80

D.  

$4.00

Discussion 0
Questions 33

TTT pic is a listed company. The following information is relevant:

TTT pic's board is considering issuing new 6% irredeemable debt to re-purchase equity. This is expected to change TTT pic's debt to equity mix to 40: 60 by market value. The corporate tax rate is 20%.

What will be TTT pic's WACC following this change in capital structure?

Options:

A.  

11.66%

B.  

12.67%

C.  

13.43%

D.  

11.09%

Discussion 0
Questions 34

NNN is a company financed by both equity and debt. The directors of NNN wish to calculate a valuation of the company's equity and at a recent board meeting discussed various methods of business valuation.

Which THREE of the following are appropriate methods for the directors of NNN to use in this instance?

Options:

A.  

Total earnings multiplied by a suitable price-earnings ratio.

B.  

Cash flow to all investors discounted at WACC less the value of debt.

C.  

Cash flow to all investors discounted at WAC

C.  

D.  

Cash flow to equity discounted at the cost of equity less the value of debt.

E.  

Cash flow to equity discounted at the cost of equity.

Discussion 0
Questions 35

Which THREE of the following are the most likely exit routes that apply to a venture capitalist?

Options:

A.  

Flotation via a stock market listing

B.  

Trade sale to another company

C.  

Selling back to the original owners

D.  

Liquidation of the company

E.  

Raising long term debt from the company

Discussion 0
Questions 36

A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.

It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings. The company already has a commercial paper programme in place and has a good relationship with its bank.

 

Which of the following is likely to be the most cost effective method of borrowing the money?

Options:

A.  

Bank overdraft

B.  

6 month term loan

C.  

Treasury Bills

D.  

Commercial paper

Discussion 0
Questions 37

A company's gearing (measured as debt/(debt + equity)) is currently 60% and it is investigating whether an optimal gearing structure exists within the industry.

It has analysed the capital structure of similar companies in the industry and it would appear that there is evidence supporting the traditional theory of capital structure.

Companies with the lowest WACC in the industry have gearing of around 45% to 50%.

 

Which of the following actions would result in the company achieving a more optimal capital structure?

Options:

A.  

Undertaking a rights issue of equity to repay some of its debt.

B.  

Refinancing to replace some of its short term debt with long term debt.

C.  

Increasing the level of dividend to return more cash to shareholders.

D.  

Using retained cash to undertake a buyback of some of its equity.

Discussion 0
Questions 38

Company HJK is planning to bid for listed company BNM

Financial data for BNM for the financial year ended 31 December 20X1:

HJK is not forecasting any growth in these figures for the foreseeable future

Profit and cost data above should be assumed to be equivalent to cash flow data when answenng this question

Which THREE of the following approaches would be most appropriate for HJK to use to value the equity of BNM?

Options:

A.  

Cash flows of S24 million discounted at the cost of equity

B.  

Share price x number of shares in issue plus retained profits

C.  

Cash flows of S14 million discounted at the cost of equity

D.  

Share price x number of shares in issue

E.  

Cash flows of $30 million (= S40 million net of tax at 25%) discounted at WACC minus the value of debt

Discussion 0
Questions 39

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?

Options:

A.  

A

B.  

B

C.  

C

D.  

D

Discussion 0
Questions 40

A company's Board of Directors is assessing the likely impact of financing new projects by using either debt or equity finance.

The impact of using debt or equity finance on some key variables is uncertain.

 

Which THREE of the following statements are true?

Options:

A.  

The use of equity finance reduces the company's overall financial risk.

B.  

The use of equity finance will create pressure for increases in dividend per share in the future.

C.  

The use of debt finance will always result in an increase in earnings per share.

D.  

Retained earnings is the cheapest form of equity finance.

E.  

The use of debt finance increases the cost of equity.

F.  

The use of debt finance is always preferable to equity finance.

Discussion 0
Questions 41

AA is considering changing its capital structure. The following information is currently relevant to AA:

The gearing rating raising the new debt finance will be 50%.

Which THREE of the following statement about the impact of AA’s change in capital structure are true under Modigliani and Miler’s capital structure theory with tax.

Options:

A.  

The cost of debt will increase above 4%

B.  

The WACC will decrease below 7.6%

C.  

The cost of equity will increase above 10%

D.  

The cost of equity will decrease below 10%

E.  

The WACC increase above 7.6

F.  

The cost of debt remain unchanged at 4%

Discussion 0
Questions 42

Company A is subject to a takeover bid from Company B, both companies operate in the same industry and each of them demand a significant market share Company B h3S made an of an of $5 per share to the shareholders of Company A.

The directors of Company A do not believe the takeover would be in the best interests of the stakeholders and other stakeholders of Company A due to the following reruns

1. Company B has recently taken ever several ether companies resulting in them breaking up the company and se ling on the assets.

2 The directors of Company A believe the offer of $5 per snare undervalues tie company

The directors of Company A are therefore keen to prevent the bid from going ahead

Which THREE of the following defence strategies could be used by the directors of Company Air this situation?

Options:

A.  

Offer the company to an alternative While Knight bidder.

B.  

Appeal to their own shareholders that the company should not be broken up because i: has strong growth prospects.

C.  

Refer the bid to the Competition Authorizes because of the risk of a large number of employee redundancies if Company B's Did were to be successful

D.  

Inform shareholders of the potential current value of the non-current assets including intangibles, to show that their true value is higher than the bid value.

E.  

Give existing shareholders the right to buy bonds in the future.

Discussion 0
Questions 43

A financial services company reported the following results in its most recent accounting period:

The company has an objective to achieve 5% earnings growth each year. The directors are discussing how this objective might be achieved next year.

Revenues have been flat over the last couple of years as the company has faced difficult trading conditions. Revenue is expected to stay constant in the coming year and so the directors are focussing efforts on reducing costs in an attempt to achieve earnings growth next year.

Interest costs will not change because the company's borrowings are subject to a fixed rate of interest.

What operating profit margin will the company have to achieve next year in order to just achieve its 5% earnings growth objective'?

Options:

A.  

55.8%

B.  

60.0%

C.  

58.0%

D.  

58.5%

Discussion 0
Questions 44

Company A operates in country A with the AS as its functional currency. Company A expects to receive BS500.000 in 6 months' time from a customer in Country B which uses the B$.

Company A intends to hedge the currency risk using a money market hedge

The following information is relevant:

What is the AS value of the BS expected receipt in 6 months' time under a money market hedge?

Options:

A.  

AS32, 532

B.  

AS31, 790

C.  

AS32, 051

D.  

AS31, 482

Discussion 0
Questions 45

A consultancy company is dependent for profits and growth on the high value individuals it employs.

The company has relatively few tangible assets.

 

Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.

Options:

A.  

It does not account for the intangible assets.

B.  

It accounts for the intangible assets at historical value.

C.  

It accounts for intangible assets at net realisable value.

D.  

It does not account for tangible assets.

Discussion 0
Questions 46

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?

Options:

A.  

$7 million is recognised in profit or loss.

B.  

$7 million is recognised in other comprehensive income.

C.  

$2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.

D.  

$5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.

Discussion 0
Questions 47

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?

Options:

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 issue of the preference share would reduce the company's gearing - however, the Eurobond would increase it.

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.

Discussion 0
Questions 48

A company is financed as follows:

   • 400 million $1 shares quoted at $3.00 each.

   • $800 million 5% bonds quoted at par.

The company plans to raise $200 million long term debt to finance a project with a net present value of $100 million.

The bank that is providing the debt is insisting on a maximum gearing level covenant.  

Gearing will be based on market values and calculated as debt/(debt + equity).

 

What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?

Options:

A.  

43%

B.  

44%

C.  

45%

D.  

46%

Discussion 0
Questions 49

A national rail operating company has made an offer to acquire a smaller competitor.

Which of the following pieces of information would be of most concern to the competition authorities?

Options:

A.  

After the acquisition, the board proposes to increase prices on some routes not serviced by other rail operators.

B.  

After the acquisition, the board proposes to withdraw some of the less profitable services.

C.  

The board informed a major institutional shareholder about the proposed acquisition before informing other shareholders.

D.  

The acquisition is likely to result in significant redundancies of staff currently working for the smaller rail operator.

Discussion 0
Questions 50

A listed company is planning to raise $21.6 million to finance a new project with a positive net present value of $5 million.  The finance is to be raised via a rights issue at a 10% discount to the current share price.  There are currently 100 million shares in issue, trading at $2.00 each.

 

Taking the new project into account,  what would the theoretical ex-rights price be?

 

Give your answer to two decimal places.

 

$ ?  

Options:

Discussion 0
Questions 51

Company X plans to acquire Company Y.

 

Pre-acquisition information:

 

 

Post-acquisition information:

Total combined earnings are expected to increase by 10%

Total combined P/E multiple will remain at 10 times

 

Which of the following share-for-share exchanges will result in an increase of 10% in Company X's share price post-acquisition?

Options:

A.  

1 share in Company X for 2.75 shares in Company Y

B.  

3 shares in Company X for 5 shares in Company Y

C.  

2 shares in Company X for 1 shares in Company Y

D.  

1 share in Company X for 2 shares in Company Y

Discussion 0
Questions 52

Which of the following statements about IFRS 7 Financial Instruments: Disclosures is true?

Options:

A.  

IFRS 7 only applies to entities that are designated as financial institutions by a regulatory authority.

B.  

IFRS 7 requires disclosures to be given for each separate class of financial instruments.

C.  

The main requirement of IFRS 7 is for qualitative disclosures relating to financial instruments and market risks.

D.  

IFRS 7 requires sensitivity analysis in relation to credit risk.

Discussion 0
Questions 53

Company H is considering the valuation of an unlisted company which it hopes to acquire.

It has obtained the target company's financial statements.

Company H has been advised that the book value of net assets as shown in the financial statements of the target company does not provide a reliable indicator of their true value.

 

Advise the Board of Directors which of the following THREE statements are disadvantages of the net asset basis of valuation?

Options:

A.  

The net book value of assets is merely a record of past transactions which complies with accounting conventions.

B.  

The net book value of assets can be obtained from the financial statements. 

C.  

Intangible assets are often not shown in the company's financial statements.

D.  

The net realisable value is usually different from the net book value shown in the financial statements.  

E.  

The net book value of current assets is normally a reliable indicator of their realisable value.

Discussion 0
Questions 54

Listed company R is in the process of making a cash offer for the equity of unlisted company S. 

 

Company R has a market capitalisation of $200 million and a price/earnings ratio of 10.

 

Company S has a market capitalisation of $50 million and earnings of $7 million.

 

Company R intends to offer $60 million and expects to be able to realise synergistic benefits of $20 million by combining the two businesses.  This estimate excludes the estimated $8 million cost of integrating the two businesses.

 

Which of the following figures need to be used when calculating the value of the combined entity in $ millions?

Options:

A.  

8, 20, 50, 60, 200 

B.  

8, 20, 50, 200

C.  

20, 50, 60, 200

D.  

7, 10, 20, 50, 200

Discussion 0
Questions 55

A listed company in the retail sector has accumulated excess cash.

In recent years, it has experienced uncertainly with forecasting the required level of cash for capital expenditure due to unpredictable economic cycles.

Its excess cash is on deposit earning negligible returns.

The Board of Directors is considering the company's dividend policy, and the need to retain cash in the company.

 

Which THREE of the following are advantages of retaining excess cash in the company? 

Options:

A.  

Retaining excess cash may make the company vulnerable to hostile takeover. 

B.  

The excess cash is earning a negligible return. 

C.  

The company will be in a position to respond promptly to unexpected investment opportunities.

D.  

Liquidity problems are less likely to be experienced if there is a downturn in business.

E.  

The market may interpret the return of excess cash as a sign of weak growth prospects.

Discussion 0
Questions 56

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.

 

$  ?   million 

Options:

Discussion 0
Questions 57

An unlisted company is attempting to value its equity using the dividend valuation model.

Relevant information is as follows:

   • A dividend of $500,000 has just been paid.

   • Dividend growth of 8% is expected for the foreseeable future.

   • Earnings growth of 6% is expected for the foreseeable future.

   • The cost of equity of a proxy listed company is 15%.

   • The risk premium required due to the company being unlisted is 3%.

The calculation that has been performed is as follows:

Equity value = $540,000 / (0.18 - 0.08) = $5,400,000

What is the fault with the calculation that has been performed?

Options:

A.  

The cost of equity used in the calculation should have been 12% (15% subtract 3%).

B.  

The dividend cashflow used should have been $500,000 rather than $540,000.

C.  

The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.

D.  

The cost of equity used in the calculation should have been 15%; no adjustment was necessary.

Discussion 0
Questions 58

Hospital X provides free healthcare to all members of the community, funded by the central Government.

Hospital Y provides healthcare which has to be paid for by the individual patients. It is a listed company, owned by a large number of shareholders.

 In comparing the above two organisations and their objectives, which THREE of the following statements are correct?

Options:

A.  

X is a not-for-profit organisation while Y is a for-profit organisation.

B.  

X and Y have the same primary financial objective - to maximise shareholder wealth.

C.  

The performance of X will be appraised primarily on the basis of value for money.

D.  

Only Y is likely to have a mixture of financial and non-financial objectives.

E.  

X and Y will have the same primary non financial objective - provision of quality of health care.

Discussion 0