Exact2Pass
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 $75,000 (a financial liability).
What will be the impact on the statement of profit or loss and other comprehensive income for the year ended 31 December 20X0 in respect of the change in the value of the inventory and the futures contract?
A manufacturing company based in Country R. where the currency is the R$, has an objective of maintaining an operating profit margin of at least 10% each year
Relevant data:
• The company makes sales to Country S whose currency is the SS It also makes sales to Country T whose currency is the T$ " All purchases are from Country U whose currency is the US.
• The settlement of an transactions is in the currency of the customer or supplier
Which of the following changes would be most likely to help the company achieve its objective?
A company has a financial objective of maintaining a gearing ratio of between 30% and 40%, where gearing is defined as debt/equity at market values.
The company has been affected by a recent economic downturn leading to a shortage of liquidity and a fall in the share price during 20X1.
On 31 December 20X1 the company was funded by:
• Share capital of 4 million $1 shares trading at $4.0 per share.
• Debt of $7 million floating rate borrowings.
The directors plan to raise $2 million additional borrowings in order to improve liquidity.
They expect this to reassure investors about the company's liquidity position and result in a rise in the share price to $4.2 per share.
Is the planned increase in borrowings expected to help the company meet its gearing objective?
A company plans to raise $12 million to finance an expansion project using a rights issue.
Relevant data:
• Shares will be offered at a 20% discount to the present market price of $15.00 per share.
• There are currently 2 million shares in issue.
• The project is forecast to yield a positive NPV of $6 million.
What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?
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?
A company currently has a 5.25% fixed rate loan but it wishes to change the interest style of the loan to variable by using an interest rate swap directly with the bank.
The bank has quoted the following swap rate:
* 4.50% - 455% in exchange for Libor
Libor is currently 4%.
If the company enters into the swap and Libor remains at 4%. what will the company's interest cost be?
The ex div share price of Company A’s shares is $.3.50
An investor in Company A currently holds 2,000 shares.
Company A plans to issue a script divided of 1 new shares for every 10 shares currently held.
After the scrip divided, what will be the total wealth of the shareholder?
Give your answer to the nearest whole $.
A company has identified potential profitable investments that would require a total of S50 million capital expenditure over the next two years The following information is relevant.
• The company has 100 million shares in issue and has a market capitalisation of S500 million
• It has a target debt to equity ratio of 40% based on market values This ratio is currently 30%
• Earnings for the current year are expected to be S1 00 million
• Its last dividend payment was $1 per share One of the company's objectives is to increase dividends by at least 10% each year
• The company has no cash reserves
Which of the following is the most suitable method of financing to meet the company's requirements?
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
A manufacturing company is based in Country L whose currency is the L$.
One of the company's products is exported to Country M, a rapidly growing economy, whose currency is the M$.
In the most recent financial year:
• 100,000 units of the product were sold to customers in country M
• The unit selling price was M$12
The spot rate today is L$1 = M$5
The company has an objective of growth in total sales value in L$ of 10% a year.
If the L$ strengthens by 5% next year against the M$, what volume of sales of this product is needed next year to achieve the objective?
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:
Which of the following is the best indication of the equity value of Company P?
Company AAB is located in Country A with the A$ as its functional currency It plans to grow by acquisition and has identified Company BBA as a potential takeover candidate Company BBA is located in Country B with the BS as its functional currency.
The directors of Company AAB are concerned about foreign currency risk if the acquisition goes ahead
Which of the following will be most effective in reducing Company AAB's exposure to translation risk if the acquisition is successful1?
A company has borrowings of S5 million on which it pays interest at 8%. It has an operating profit margin of 20%.
The company plans to increase borrowings by S2 million Interest on additional borrowings would be 10% and the operating profit margin would remain unchanged
A debt covenant attached to the new borrowings requires interest cover to be at least 4 times throughout the period of the borrowing
Interest cover is defined in the loan documentation as being based on operating profit
What is the minimum sales value required each year to avoid a breach of the interest cover covenant'
A large, quoted company that is all-equity financed is planning to acquire a smaller unquoted company that is also all-equity financed.
The acquiring company's directors are using the dividend valuation model to value the target company before making an offer.
Relevant data for the target company:
• Dividends paid in the last financial year $2 million
• Book value of net assets $15 million
• Shares in issue 1 million
The acquiring company's cost of capital is 10%.
Its directors believe they can improve the target company's performance in the long term.
They estimate there will be no growth in the first year of the acquisition but from year 2 onwards there will be a 4% growth each year in perpetuity.
What is the maximum price the acquiring company should offer for each of the shares in the target company?
Companies L. M N and O:
• are based in a country that uses the RS as its currency
• have an objective to grow operating profit year on year
• have the same total levels of revenue and cost
• trade with companies or individuals in the United States. All import and export trade with companies or individuals in the United States is priced in US$.
Typical import/export trade for each company in a year are as follows:
Which company's growth objective is most sensitive to a movement in the USS / RS exchange rate?
Holding cash in excess of business requirements rather than returning the cash to shareholders is most likely to result in lower:
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?
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.
$ ?
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 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 company has undertaken a transaction with its shareholders which has had the following impact on its financial statements:
• Retained earnings has decreased
• Share capital has increased
• Earnings per share has decreased
• The book value of equity is unchanged
The company has undertaken a:
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.
LPM Company is based in Country C. whose currency is the CS
It has entered Into a contract to buy a machine in three months' time. The supplier is overseas and the payment is to be made in a different currency from the CS
The treasurer at LPM Company is considering using a money market hedge to manage the transaction risk associated with a payment.
The assumptions of interest rate parity apply
Which THREE of the following statements concerning the use of a money market hedge for this supplier payment are correct?
Company R is a well-established, unlisted, road freight company.
In recent years R has come under pressure to improve its customer service and has had some cusses in doing this However, the cost of improved service levels has resulted In it marketing small losses in its latest financial year. This is the forest time R has not been profitable.
R uses a’ residual divided policy ad has paid dividends twice in the last 10 years.
Which of the following methods would be most appropriate for valuating R?
A listed company is planning a share repurchase.
Research into different offer prices has given the following data with regards acceptance by the shareholders at different prices:
What price should be offered to shareholders if the retained earnings of the company are to remain unchanged?
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?
Two listed companies in the same industry are joining together through a merger.
What are the likely outcomes that will occur after the merger has happened?
Select ALL that apply.
Company A is based in Country A where the functional currency is the A$. Currently all sales are to domestic customers in Country A. However, the company is planning to expand internationally by acquiring Company B, a distribution company in Country B, to enable it to sell goods worldwide The functional currency of Country B is the BS
Company A will invoice its international customers in their local currency.
Wage increases in Country B are forecast to be modest, due to high unemployment levels, but overall inflation in Country B is forecast to be significantly higher than in Country A
Which TWO of the following statements about the economic risk of the acquisition of Company B are true?
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?
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?
Company A has a cash surplus.
The discount rate used for a typical project is the company's weighted average cost of capital of 10%.
No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?
Company A is a large listed company, with a wide range of both institutional and private shareholders.
It is planning a takeover offer for Company B.
Company A has relatively low cash reserves and its gearing ratio of 40% is higher than most similar companies in its industry.
Which TWO of the following would be the most feasible ways of Company A structuring an offer for Company B?
A company has in a 5% corporate bond in issue on which there are two loan covenants.
• Interest cover must not fall below 3 times
• Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
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 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.
A company is in the process of issuing a 10 year $100 million bond and is considering using an interest rate swap to change the interest profile on some or all of the $100 million new finance.
The company has a target fixed versus floating rate debt profile of 1:1. Before issuing the bond its debt profile was as follows:
Which of the following is the most appropriate interest rate swap structure for the company?
Company A operates in country A and uses currency AS. It is looking to acquire Company B which operates in country B and uses currency B$. The following information is relevant:
The assistant accountant at Company A has prepared the following valuation of company B's equity, however there are some errors in his calculations.
Value of Company B's equity = 14.16 + 16.03 + 17.67 = AS47.86 million
Company B has BS5 million of debt finance.
Which of the following THREE statements are true?
A company has:
• 10 million $1 ordinary shares in issue
• A current share price of $5.00 a share
• A WACC of 15%
The company holds $10 million in cash. No interest is earned on this cash.
It will invest this in a project with an expected NPV of $4 million.
In a semi-strong efficient stock market, which of the following is the most likely share price immediately after the announcement of the new investment?
Company X is an established, unquoted company which provides IT advisory services.
The company's results and cashflows are growing steadily and it has few direct competitors due to the very specialised nature of it's business. Dividends are predictable and paid annually.
Company P is looking to buy 30% of company X's equity shares.
Which TWO of the following methods are likely to be considered most suitable valuation methods for valuing company P's investment in Company X?
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
A listed company is planning a share repurchase.
The following data applies
• There are 20 million shares in issue
• The share repurchase will involve buying back 10% of the shares at a price of $1.20
• The company is holding $4.8 million cash
• Earnings for the current year ended are $3.6 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?
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 listed company follows a policy of paying a constant dividend. The following information is available:
• Issued share capital (nominal value $0.50) $60 million
• Current market capitalisation $480 million
The shareholders are requesting an increased dividend this year as earnings have been growing. However, the directors wish to retain as much cash as possible to fund new investments. They therefore plan to announce a 1-for-10 scrip dividend to replace the usual cash dividend.
Assuming no other influence on share price, what is the expected share price following the scrip dividend?
Give your answer to 2 decimal places.
$ ?
A company wishes to raise new finance using a rights issue. The following data applies:
• There are 20 million shares in issue with a market value of $6 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 $5.75
Assuming all shareholders take up their rights, how much new finance will be raised ?
Give your answer to one decimal place.
$ ? million
Using the CAPM, the expected return for a company is 10%. The market return is 7% and the risk free rate is 1%.
What does the beta factor used in this calculation indicate about the risk of the company?
A company plans to acquire new machinery.
It has two financing options; buy outright using a bank loan, or a finance lease.
Which of the following is an advantage of a finance lease compared with a bank loan?
A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$.
This year the company expects to generate Z$ 10 million profit after tax.
Tax Regime:
• Corporate income tax rate in country Y is 50%
• Corporate income tax rate in country Z is 20%
• Full double tax relief is available
Assume an exchange rate of Y$ 1 = Z$ 5.
What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?
A company is currently all-equity financed with a cost of equity of 8%.
It plans to raise debt with a pre-tax cost of 4% in order to buy back equity shares.
After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.
The corporate income tax rate is 30%.
Which of the following represents the company's cost of equity after the buy-back according to Modigliani and Miller's Theory of Capital Structure with taxes?
Company X is based in Country A, whose currency is the A$.
It trades with customers in Country B, whose currency is the B$.
Company X aims to maintain its revenue from exports to Country B at 25% of total revenue.
Company A has the following forecast revenue:
The forecast revenue from Country B has assumed an exchange rate of A$1/B$2, that is A$1 = B$2.
If the B$ depreciates against the A$ by 10%, the ratio of revenue generated from Country B as a percentage of total revenue will:
HHH Company has a fixed rate loan at 10.0%, but wishes to swap to variable. It can borrow at the risk-free rate +8%. The bank is currently quoting swap rates of 3.1% (bid) and 3.5% (ask). What net rate will HHH Company pay if it enters into the swap?
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?
When valuing an unlisted company, a P/E ratio for a similar listed company may be used but adjustments to the P/E ratio may be necessary.
Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use?
A listed entertainment and media company produces and distributes films globally. The company invests heavily in intellectual property in order to create the scope for future film projects. The company has five separate distribution companies, each managed as a separate business unit The company is seeking to sell one of its business units in a management buy-out (MBO) to enable it to raise finance for proposed new investments
The business unit managers have been in discussions with a bank and venture capitalists regarding the financing for the MBO The venture capitalists are only prepared to invest a mixture of debt and equity and have suggested the following:
The venture capitalists have stated that they expect a minimum return on their equity investment of 3Q°/o a year on a compound basis over the first 5 years of the MBO No dividends will be paid during this period.
Advise the MBO team of the total amount due to the venture capitalist over the 5-year period to satisfy their total minimum return?
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:
SUP is a large supermarket chain. It produces many 'own brand' goods in Country S where the parent company is located. These goods are sold in SUP's supermarkets in Country S as well as being sold at a 'transfer price' to SUP companies located in foreign countries for sale in the SUP supermarkets located in that country.
Which of the following factors is the most important for SUP from a lax planning and compliance viewpoint when setting prices for the 'own brand' goods sold to other group companies'?
Company RRR is a well-established, unlisted, road freight company.
In recent years RRR has come under pressure to improve its customer service and has had some success in doing this However, the cost of improved service levels has resulted in it making small losses in its latest financial year. This is the first time RRR has not been profitable.
RRR uses a 'residual' dividend policy and has paid dividends twice in the last 10 years.
Which of the following methods would be most appropriate for valuing RRR?
A company has an opportunity to invest in a positive net present value project, but the project would require debt finance that would push the company's gearing ever a limit imposed by a debt covenant on an existing loan.
Which THREE of the following actions could be taken by the company?
A Venture Capital Fund currently holds a significant shareholding in a large private company as a result of funding a recent management buyout. It plans to exit this investment in 5 years time at a significant profit.
Which THREE of the following exit mechanisms are most likely to be preferred by the Venture Capital Fund?
On 1 January:
• Company X has a value of $50 million
• Company Y has a value of $20 million
• Both companies are wholly equity financed
Company X plans to take over Company Y by means of a share exchange. Following the acquisition the post-tax cashflow of Company X for the foreseeable future is estimated to be $8 million each year. The post-acquisition cost of equity is expected to be 10%.
What is the best estimate of the value of the synergy that would arise from the acquisition?
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?
A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.
It is currently on deposit, earning negligible returns.
The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.
The majority of shareholders are individuals with small shareholdings.
Which THREE of the following are advantages of the company undertaking a share repurchase programme?
A company is currently all-equity financed with a cost of equity of 9%.
It plans to raise debt with a pre-tax cost of 3% in order to buy back equity shares.
After the buy-back, the debt-to-equity ratio at market values will be 1 to 2.
The corporate income tax rate is 25%.
Which of the following represents the company's cost of equity after the buy-back according to Modigliani and Miller's Theory of Capital Structure with taxes?
PPA owns $500,000 of shares in Company ABB. Company ABB has a daily volatility of 2% of its share price
Calculate the 12-day value at risk that shows the most PPA can expect to lose during a 12-day period (PPA wishes to be 90% certain that the actual loss in any month will be less than your predicted figure)
Give your answer to the nearest thousand dollars.
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?
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?
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?
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?
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?
An unlisted company has the following data:
A listed company in the same industry has a P/E of 11.
The value of the unlisted company based on the P/E of this listed company is:
Give your answer to the nearest whole number.
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 40:60 based on estimated market values.
According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:
Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?
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?
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?
The directors of a financial services company need to calculate a valuation of their company’s equity in preparation for an upcoming initial Public Offering (IPO) of shares. At a recent board meeting they discussed the various methods of business valuation.
The Chief Executive suggested using a Price-earing (P./E) method of valuation, but the finance Director argued that a valuation based on forecast cash flows to equity would be more appropriate.
Which THREE of the following are advantages of valuation based on forecast cash flows to equity, compared to a valuating using a price earnings methods?
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
A company based in Country D, whose currency is the D$, has an objective of maintaining an operating profit margin of at least 10% each year.
Relevant data:
• The company makes sales to Country E whose currency is the E$. It also makes sales to Country F whose currency is the F$.
• All purchases are from Country G whose currency is the G$.
• The settlement of all transactions is in the currency of the customer or supplier.
Which of the following changes would be most likely to help the company achieve its objective?
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?
A company has convertible bonds in issue.
The following debt is apply (31 December 20X0):
• Conversion ratio- 20 shares for each $130 bond.
• Current share price - $4 50
• Expected annual growth in share price - 5%
Advise the bond Holder at which date the convers on would be worthwhile?
A company plans to raise S15 million to finance an expansion project using a rights issue Relevant data
• Shares will be offered at a 20% discount to the present market price of S12 50 per share
• There are currently 3 million shares in issue
• The project is forecast to yield a positive NPV of $9 million
What is the yield-adjusted Theoretical Ex-Rights Price following the announcement of the rights issue?
A company's Board of Directors is considering raising a long-term bank loan incorporating a number of covenants.
The Board members are unsure what loan covenants involve.
Which THREE of the following statements regarding loan covenants are true?
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 company has borrowings of S5 million on which it pays interest at 8%. It has an operating profit margin of 20%.
The company plans to increase borrowings by S2 million Interest on additional borrowings would be 10% and the operating profit margin would remain unchanged
A debt covenant attached to the new borrowings requires interest cover to be at least 4 times throughout the period of the borrowing
Interest cover is defined in the loan documentation as being based on operating profit
What is the minimum sales value required each year to avoid a breach of the interest cover covenant'
Company M is a geared company whose equity has a market value of $1,500 million and debt has a market value of S300 million. The company plans to issue $200 million of new shares and use the funds raised to pay off some of the debt
Company M currently has a cost of equity of 13% and a WACC of 10% It pays corporate tax at the rate of 30% Company B, an ungeared company operating in the same business sector as Company M, has a cost of equity of 12%
Assume Modigliani and Miller's theory of capital structure with tax applies
Which calculation below shows the correct approach to calculating the new WACC following the planned changes in capital structure?
A
B
C
D
Company S is planning to acquire Company T.
The shareholders in Company T will receive new shares in Company S in an all-share consideration.
Relevant information:
The shareholders in Company T want sufficient shares to receive a 25% premium on the pre-acquisition value of their shares, based on the pre-acquisition share price.
Which of the following share-for-share offers will achieve the desired result?
A publicly funded school is focused on providing Value for Money
It pays its leaching staff less than other schools, because class sizes are generally smaller than elsewhere Despite some staff demotivation from low pay, exam pass rates are high given the close one-to-one attention many pupils receive.
On which aspect of Value for Money is the school underperforming?
A company's current earnings before interest and taxation are $5 million.
These are expected to remain constant for the forseeable future.
The company has 10 million shares in issue which currently trade at $3.60.
It also has a $10 million long term floating rate loan.
The current interest rate on this loan is 5%.
The company pays tax at 20%.
The company expects interest rates to increase next year to 6% and it's Price/Earnings (P/E) ratio to move to 9.5 times by the end of next year.
What percentage reduction in the share price will occur by the end of next year if the interest rate increase and the P/E movement both occur?
A young, capital intensive company has a large amount of tangible assets.
Intangibles, including brand name, are considered to be of negligible value at this time
Relevant data:
• The company operates a residual dividend policy.
• The industry in which the company operates is suffering from a large amount of uncertainty at present. Forecasting the future earnings or cashflows of the company is therefore extremely difficult
• There are very few quoted companies in the industry that are similar in size or in precisely the same business sectors.
Which method of valuation would be most suitable for this company?
A company generates operating profit of $17.2 million, and incurs finance costs of $5.7 million.
It plans to increase interest cover to a multiple of 5-to-1 by raising funds from shareholders to repay some existing debt. The pre-tax cost of debt is fixed at 5%, and the refinancing will not affect this.
Assuming no change in operating profit, what amount must be raised from shareholders?
Give your answer in $ millions to the nearest one decimal place.
$ ?
Which THREE of the following non-financial objectives would be most appropriate for a listed company in the food retailing industry?
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
The International Integrated Reporting Council (IIRC) was formed in August 2010 and brings together a cross-section of representatives from a wide variety of business sectors.
The primary purpose of the IIRC's framework is to help enable an organsation to communicate how it:
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 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?
A company has in a 5% corporate bond in issue on which there are two loan covenants.
• Interest cover must not fall below 3 times
• Retained earnings for the year must not fall below $3.5 million
The Company has 200 million shares in issue.
The most recent dividend per share was $0.04.
The Company intends increasing dividends by 10% next year.
Financial projections for next year are as follows:
Advise the Board of Directors which of the following will be the status of compliance with the loan covenants next year?
CI IJ has decided to move its production plant to overseas country X. This would make the product cheaper to produce. The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Company U has made a bid for the entire share capital of Company B.
Company U is offering the shareholders in Company B the option of either a share exchange or a cash alternative.
Advise the shareholders in Company B which THREE of the following would be considered disadvantages of accepting the cash consideration?
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?
On 1 January:
• Company ABB has a value of $55 million
• Company BBA has a value of $25 million
• Both companies are wholly equity financed
Company ABB plans to take over Company BBA by means of a share exchange Following the acquisition the post-tax cashflow of Company ABB for the foreseeable future is estimated to be $10 million each year The post-acquisition cost of equity is expected to be 10%
What is the best estimate of the value of the synergy that would arise from the acquisition?
A company is considering hedging the interest rate risk on a 3-year floating rate borrowing linked to the 12-month risk-free rate.
If the 12-month risk-free rate for the next three years is 2%, 3% and 4%, which of the following alternatives would result in the lowest average finance cost for the company over the three years?
A company is planning a share buyback. In which of the following circumstances would a share buyback be appropriate?
Company A has agreed to buy all the share capital of Company B.
The Board of Directors of Company A believes that the post-acquisition value of the expanded business can be computed using the "boot-strapping" concept.
Which of the following most accurately describes "boot-strapping" in this context?
KKL is a listed sports clothing company with three separate business units. KKL is seeking to sell TT’, one of these business units
TTP cwns a new. brand of trail running shoes that have Droved hugely popular with lone distance runners. The management team of TTP are frustrated by the constraints imposes b/ KKL in managing tie brand and developing. the bus ness and they believe that TTF has huge growth potential.
The management team of TTP have approached KKL with a proposal to purchase 1~P through a management layout (MDO). KKL has accepted this proposal as TTP has not proved to be a good fit' with the rest of the business and has agreed on the selling price.
Which THREE of the following factors a-e mast Likely to affect the success of the MBO?
A product costs USD10 when purchased in the USA. The same product costs USD12 when it is purchased in the UK and the price in GBP is convened to USD.
Which of the following statement concerning purchasing power parity is correct?
Company XXY operates in country X with the X$ as its currency. It is looking to acquire company ZZY which operates in country Z with the Z$ as its currency.
The assistant accountant at Company XXY has started to prepare an initial valuation of Company ZZY's equity for the first 3 years, however their valuation is incomplete. TBC' in the table below indicates that her calculations have yet to be completed.
The following information is relevant:
What is the correct figure (to the nearest million S) to include in year 3 as the present value in X$ million?
A company is based in Country Y whose functional currency is Y$. It has an investment in Country Z whose functional currency is Z$.
This year the company expects to generate Z$ 10 million profit after tax.
Tax Regime:
• Corporate income tax rate in country Y is 50%
• Corporate income tax rate in country Z is 20%
• Full double tax relief is available
Assume an exchange rate of Y$ 1 = Z$ 5.
What is the expected profit after tax in Y$ if the Z$ profit is remitted to Country Y?
G pic wishes to borrow $5 million in 6 months, for a period of 3 months. A bank has quoted the following Forward Rate Agreement (FRA) rales:
3 v 9 6.55%-6.70% 6v9 6.70%-6 90%.
G pic can borrow at 0 75% above base rate, and the base rate is currently 6.25% Concerned that base rates may rise, G pic decides that it will hedge using an FRA
At the settlement date for the FRA, the base rate has risen to 7.50%
What is the effective interest rate paid by G pic for its borrowing?
An unlisted software development company has recently reported disappointing results. This was partly due to weak economic conditions but also because of its poor competitive position. The company has a number of exciting development opportunities which would enable it to achieve significant future growth. The company's growth potential has been hindered by its inability to secure sufficient new finance.
To enable the company raise new finance the Directors are considering working forwards an IPO in 10 years and accepting finance from a venture capitalist in order support in the intervening period.
The directors are keen to retain a controlling stake in the company and full representation on the board. They therefore require venture capitalists to provide funds as a mix of debt and equity and not soley equity finance.
Which THREE of the following are most likely to disrupt the directors' plans to use venture capital finance?
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:
Company ABC is planning to bid for company DDD, an unlisted company in an unrelated industry sector to ABC.
The directors of ABC are considering a number of different valuation methods for DDD before making a bid.
Which of the following is the MOST appropriate method for ABC to use to value DDD?
A venture capitalist invests in a company by means of buying
* 6 million shares for $3 a share and
• 7% bonds with a nominal value of $2 million, repayable at par in 3 years' time
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment
The company has 8 million shares in issue
What is the minimum total equity value for the company in 3 years' time required to satisfy the venture capitalist's expected return?
Give your answer to the nearest $ million
A company has some 7% coupon bonds in issue and wishes to change its interest rate profile.
It has decided to do this by entering into a plain coupon interest rate swap with it's bank.
The bank has quoted a swap rate of: 6.0% - 6.5% fixed against LIBOR.
What will the company's new interest rate profile be?
A listed company is financed by debt and equity.
If it increases the proportion of debt in its capital structure it would be in danger of breaching a debt covenant imposed by one of its lenders.
The following data is relevant:
The company now requires $800 million additional funding for a major expansion programme.
Which of the following is the most appropriate as a source of finance for this expansion programme?
XCV can borrow at either 9.5% fixed or the risk-free rate plus 1.3%.
XCV wishes to borrow at a variable rate and thinks that a swap may enable it to do so cheaply
BNM can borrow the same principal sum as XCV It can borrow at 10 5% fixed or the risk-free rate plus 2 1 % BNM wishes to raise fixed rate debt
XCV and BNM have agreed to use an interest rate swap They will share any savings equally
Calculate the effective swap rate that will be paid by XCV.
Give your answer to one decimal place.
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?
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?
A company based in the USA has a substantial fixed rate borrowing at an interest rate of 3.5% and wishes to swap a part of this to a floating rate to take advantage of reducing interest rates Its bank has quoted swap rates of 3 4%-3 5% against 12-month USD risk-free rate.
What is the overall interest rate achieved by the company under this borrowing plus swap combination?
Which three of the following are most likely be primary objectives for a newly established, unincorporated entity in the service sector?
Which THREE of the following are the most likely exit routes that apply to a venture capitalist?
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?
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
A company has 8% convertible bonds in issue. The bonds are convertible in 3 years time at a ratio of 20 ordinary shares per $100 nominal value bond.
Each share:
• has a current market value of $5.60
• is expected to grow at 5% each year
What is the expected conversion value of each $100 nominal value bond in 3 years' time?
A company’s statement of financial position includes non-current assets which are leased, the tax regime follows the accounting treatment.
Which cash flows should be discounted when evaluating the cost of lease finance?
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 listed company in a high technology industry has decided to value its intellectual capital using the Calculated Intangible Value method (CIV).
Relevant data for the company:
• Pays corporate income tax at 30%
• Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%
• The value spread has been calculated as $26 million
Calculate the CIV for the company.
