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NEW QUESTION # 180
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?
- A. 43%
- B. 46%
- C. 45%
- D. 44%
Answer: D
NEW QUESTION # 181
A company has:
* A price/earnings (P/E) ratio of 10.
* Earnings of $10 million.
* A market equity value of $100 million.
The directors forecast that the company's P/E ratio will fall to 8 and earnings fall to $9 million.
Which of the following calculations gives the best estimate of new company equity value in $ million following such a change?
A)
B)
C)
D)
- A. Option B
- B. Option A
- C. Option D
- D. Option C
Answer: B
NEW QUESTION # 182
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?
- A. The cost of equity used in the calculation should have been 15%; no adjustment was necessary.
- B. The dividend growth rate is unsuitable given that earning growth is lower than dividend growth.
- C. The dividend cashflow used should have been $500,000 rather than $540,000.
- D. The cost of equity used in the calculation should have been 12% (15% subtract 3%).
Answer: B
NEW QUESTION # 183
A company plans to cut its dividend but is concerned that the share price will fall.
This demonstrates the _____________ effect
Answer:
Explanation:
clientele
NEW QUESTION # 184
The shares of a company in a high technology industry have been listed on a stock exchange for 10 years.
During this period, it has paid no dividends but invested all retained earnings in growth. The company is now entering a period of relatively stable growth and the directors are considering beginning to pay dividends They are reviewing the following suggestions made by members of the board:
* Pay cash dividends linked to growth in earnings
* Use a residual theory approach to establish cash dividends
* Issue scrip dividends (shares instead of cash)
* Continue to pay no dividends as dividends are irrelevant to the value of the company Which THREE of the following are correct statements for the directors to take into consideration when making a decision about future dividend policy?
- A. Ignoring taxation and administrative costs, shareholders can provide their own dividends by selling shares in the market
- B. The residual theory of dividends suggest that dividends should only be paid after all operating costs have been met.
- C. Neither cash nor scrip dividends will have an effect on earnings per share
- D. Modigliani and Miller argue that, ignoring taxation, as long as positive net present value projects are invested in, shareholder wealth will increase, regardless of dividend payments.
- E. Shareholder preferences for cash or scrip dividends will be influenced by their tax positions
Answer: A,D,E
NEW QUESTION # 185
A company aims to increase profit before interest and tax (PBIT) each year.
The company reports in A$ but has significant export sales priced in B$.
All other transactions are priced in A$.
In 20X1, the company reported:
In 20X2, the only changes expected are:
* An increase in export prices of 10%, but no change to units sold.
* A rise in the value of the B$ to A$/B$ 2.500 (that is, A$ 1 = B$ 2.5)
Is it likely that the company would still meet its objective to grow PBIT between 20X1 and 20X2?
- A. Yes, PBIT would increase by A$ 150 million.
- B. No, PBIT would fall by A$ 150 million.
- C. Yes, PBIT would increase by A$ 48 million.
- D. No, PBIT would fall by A$ 48 million.
Answer: D
NEW QUESTION # 186
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.
$ ?
Answer:
Explanation:
4.06, 4.060
NEW QUESTION # 187
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?
- A. Lease payments, tax relief on implied interest and tax relief on straight-line account depreciation.
- B. Lease payments and implied interest.
- C. Lease payments, implied interested and straight-line accounting deprediation.
- D. Lease payments and straight-line accounting depreciation.
Answer: C
NEW QUESTION # 188
A company's Board of Directors wishes to determine a range of values for its equity.
The following information is available:
Estimated net asset values (total asset less total liabilities including borrowings):
* Net book value = $20 million
* Net realisable value = $25 million
* Free cash flows to equity = $3.5 million each year indefinitely, post-tax.
* Cost of equity = 10%
* Weighted Average Cost of Capital = 7%
Advise the Board on reasonable minimum and maximum values for the equity.
- A. Minimum value = $25.0 million, and maximum value = $50.0 million
- B. Minimum value = $20.0 million, and maximum value = $35.0 million
- C. Minimum value = $25.0 million, and maximum value = $35.0 million
- D. Minimum value = $20.0 million, and maximum value = $50.0 million
Answer: C
NEW QUESTION # 189
BBA is a wholly owned subsidiary of AAB BBA operates in country B where the currency is the B$.
The following is an extract from BBA's financial statements at 31 December 20X1:
The following Information is relevant:
" The bonds were trading at $110 per $100 on 31 December 20X1. "Operating profit of BBA for the year ended 31 December 20X1 was S15 million
* The P/E ratio is 8
* Corporate income tax rate is 20%.
The tax authorities m country B Implemented thin capitalisation rules based on the level of gearing of the subsidiary, calculated as book value o( debt lo book value of equity The cut-off point for gearing used by the tax authorities for a company to be thinly capitalised is 75%.
Which of the following statements is correct as at 31 December 20X1?
- A. Gearing is 250%. thin capitalisation rules are breached
- B. Gearing is 83.33%. thin capitalisation rules are not breached
- C. Gearing Is 71.43%. thin capitalisation rules are not breached
- D. Gearing is 83.33%. thin capitalisation rules are breached
Answer: D
NEW QUESTION # 190
Company WWW is identical in all operating and risk characteristics to Company ZZZ. but their capital structures differ. Company WWW and Company ZZZ both pay corporate income tax at 20% Company WWW has a gearing ratio (debt: equity) of 1:3 Its pre-tax cost of debt is 6%.
Company ZZZ Is all-equity financed. Its cost of equity is 15%
What is the cost of equity tor Company WWW?
- A. 18.0%
- B. 17.7%
- C. 17.0%
- D. 17.4%
Answer: C
NEW QUESTION # 191
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.
Answer: D
NEW QUESTION # 192
A company needs to raise $40 million to finance a project. It has decided on a right 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 $10.00 per share.
- A. 1 new share for every 20 existing shares
- B. 1 new share for every 25 existing shares
- C. 1 new share for every 5 existing shares
- D. 1 new share for every 4 existing shares
Answer: D
NEW QUESTION # 193
PTT has a number of subsidiary companies around the world, including FTT based in Europe and CTT based in Indonesia
CTT purchases all of us raw materials from FTT CTT processes these materials and the resulting products are exported to several different countries CTT pays FTT in the Indonesian currency.
Indonesia's inflation is higher than that of FTTs home country
Which of the following statements are correct?
Select ALL that apply
- A. CTT will be exposed to translation risk because FTT will almost certainly have to reflect the changing prices in its selling price and it will be difficult for CTT to make a profit
- B. FTT will be exposed to transaction risk The Indonesian currency that it receives Is likely to decline over time because of anticipated inflation
- C. FTT will be exposed to transaction risks as the Indonesian currency will appreciate over time because of the expected inflation rates
- D. FTT could ask for ail payments to K to be made in its home currency, which would reduce exposure to currency risk
- E. FTT could investigate whether it could import anything from Indonesia in order to create a natural hedge.
Answer: B,C,D
NEW QUESTION # 194
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% 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 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
Answer:
Explanation:
34, 35,
34000000, 35000000
NEW QUESTION # 195
A company wishes to raise additional debt finance and is assessing the impact this will have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current year is $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 shares in issue with a share price of $8
The company plans to borrow an additional $200,000 on the first day of the year to invest in new project which will improve annual profit before interest and tax by $24,000.
The additional debt would carry an interest rate of 3%.
Assume the number of shares in issue remain constant but the share price will increase to $8.50 after the investment.
The rate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
- A. Interest cover will rise; P/E ratio will fall.
- B. Interest cover will fall; P/E ratio will fall.
- C. Interest cover will fall; P/E ratio will rise.
- D. Interest cover will rise; P/E ratio will rise.
Answer: C
NEW QUESTION # 196
A company has forecast the following results for the next financial year:
The following is also relevant:
* Profit after tax for the year can be assumed to be equivalent to free cash flow for the year.
* Debt finance comprises a $10 million floating rate loan which currently carries an interest rate of 5%.
* $400,000 investment in non-current assets is required to achieve required growth, all of which is to financed from next year's free cash flow.
* The company plans to pay a dividend of $150,000 next year, financed from next year's free cash flow.
The company is concerned that interest rates could rise next year to 6% which could then affect their investment plans.
If interest rates were to rise to 6% and the company wishes to maintain its dividend amount, the planned investment expenditure will decrease by:
- A. $25,000
- B. $50,000
- C. $100,000
- D. $75,000
Answer: A
NEW QUESTION # 197
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