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NEW QUESTION 44
Company W has received an unwelcome takeover bid from Company B.
The offer is a share exchange of 3 shares in Company B for 5 shares in Company W or a cash alternative of $5.70 for each Company W share.
Company B is approximately twice the size of Company W based on market capitalisation. Although the two companies have some common business interested the main aim of the bid is diversification for Company B.
Company W has substantial cash balances which the directors were planning to use to fund an acquisition.
These plans have not been announced to the market.
The following share price information is relevant.
Which of the following would be the most appropriate action by Company W's directors following receipt of this hostile bid?
- A. Write to shareholders explaining fully why the company's share price is under valued.
- B. Pay a one-off special dividend.
- C. Refer the bid to the country's competition authorities.
- D. Change the Articles of Association to increase the percentage of shareholder votes required to approve a takeover.
Answer: A
NEW QUESTION 45
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?
- A. The company will be in compliance with both covenants.
- B. The company will be in breach of both covenants.
- C. The company will be in breach of the covenant in respect of interest cover only.
- D. The company will breach the covenant in respect of retained earnings only.
Answer: D
NEW QUESTION 46
A company is owned by its five directors who want to sell the business.
Current profit after tax is $750,000.
The directors are currently paid minimal salaries, taking most of their incomes as dividends.
After the company is sold, directors' salaries will need to be increased by $50,000 each year in total.
A suitable Price/Earnings (P/E) ratio is 7, and the rate of corporate tax is 20%.
What is the value of the company using a P/E valuation?
- A. $4,970,000
- B. $4,900,000
- C. $5,250,000
- D. $5,530,000
Answer: A
NEW QUESTION 47
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?
- A. $32.78
- B. $34.67
- C. $33.33
- D. $15.00
Answer: C
NEW QUESTION 48
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 C
- B. Option A
- C. Option B
- D. Option D
Answer: B
NEW QUESTION 49
Which of the following statements is true of a spin-off (or demerger)?
- A. Allows investors to identify the true value of the demerged business.
- B. Raises finance to fund new projects.
- C. Increases the risk of a takeover bid for the core entity.
- D. Changes the ownership structure of the core entity by introducing new shareholders.
Answer: A
NEW QUESTION 50
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?
- A. It will not create an expectation for future increased dividends.
- B. It increases the number of shares issue.
- C. The shareholder can choose whether to take the cast or not.
- D. It means that the company will be able to pay lower total dividends in the future.
- E. It returns cash to shareholders so that they can choose hew to spend It
Answer: A,C,E
NEW QUESTION 51
Modigliani and Miller are the main proponents of the view that the dividend policy is irrelevant to the value of a company's shares.
They argue that a company that continually reinvests its entire earnings would generate the same shareholder wealth if it engaged in a policy of high dividends and financed its expansion with funds obtained from rights issues.
Which THREE of the following statements are assumptions that are required in order to support this proposition?
- A. The capital markets are efficient markets.
- B. There is a multiplicity of corporate and personal income tax rates.
- C. Investors act in a rational manner.
- D. There are no transaction costs involved in the issue of new shares (including rights issues).
- E. Investors do not always have access to perfect information.
Answer: A,C,D
Explanation:
Explanation
Discursive_F0
NEW QUESTION 52
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.
Answer:
Explanation:
$ ? million
8, 8000000
NEW QUESTION 53
The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.
The shareholder profile is a mix of institutional and individual small shareholders.
The board is considering either:
* A scrip dividend
* A zero dividend
Which THREE of the following would be considered disadvantages of a scrip dividend compared to a zero dividend?
- A. There will be company secretarial and additional administration involved with a scrip dividend.
- B. A scrip dividend results in distributable reserves being moved to non-distributable reserves.
- C. A scrip dividend results in more shares in issue which will create an expectation for future dividends.
- D. A scrip dividend will dilute the control of current shareholders.
- E. A scrip issue may give shareholders the impression that they are receiving something of value.
Answer: A,B,C
NEW QUESTION 54
A UK based company is considering investing GBP1 ,000,000 in a project it the USA. It is anticipated that the project will yield net cash inflows of USD580.000 each year for the next three years. These surplus cash flows will be remitted to the UK at the end of each year.
Currently GBP1.00 is worth USD1.30.
The expected inflation rates in the two countries ever the next four years are 2% in the UK and 4% in the USA.
Applying the purchasing power parity theory, which of the following represents the expected remittance at the end of year three, in GBP whole the nearest whole GBP)?
- A. GBP472,916
- B. GBP568,846
- C. GBP546,547
- D. GBP450,906
Answer: D
NEW QUESTION 55
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.
Answer:
Explanation:
$ ? million
300, 300000000
NEW QUESTION 56
Company E is a listed company. Its directors are valuing a smaller listed company, Company F, as a possible acquisition.
The two companies operate in the same markets and have the same business risk.
Relevant data on the two companies is as follows:
Both companies are wholly equity financed and both pay corporate tax at 30%.
The directors of Company E believe they can "bootstrap" Company F's earnings to improve performance.
Calculate the maximum price that Company E should offer to Company F's shareholders to acquire the company.
Give your answer to the nearest $million.
- A. 4,500
- B. 3,150
- C. 1,890
- D. 2,700
Answer: B
NEW QUESTION 57
A company intends to sell one of its business units, Company R by a management buyout (MBO).
A selling price of $100 million has been agreed.
The managers are discussing with a bank and a venture capital company (VCC) the following financing proposal:
The VCC requires a minimum return on its equity investment in the MBO of 30% a year on a compound basis over 5 years.
What is the minimum TOTAL equity value of Company R in 5 years time in order to meet the VCC's required return?
Give your answer to one decimal place.
$ ? million
Answer:
Explanation:
111.4, 111,
111.0, 111.1, 111.2,
111.3, 111.5, 111.6,
111.7
NEW QUESTION 58
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 59
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.
Answer:
Explanation:
$ ? million
7.5, 7.50
NEW QUESTION 60
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. Not recognised in 20X3 as the gain will be offset by a loss on the hedged transaction.
- B. A $10,000 profit will be recognised within other comprehensive income.
- C. Not recognised in 20X3 as the forward contract is not settled until after the year end.
- D. A $10,000 profit will be recognised within the Income Statement.
Answer: B
NEW QUESTION 61
The directors of a multinational group have decided to sell off a loss-making subsidiary and are considering the following methods of divestment:
1. Trade sale to an external buyer
2. A management buyout (MBC)
The MDO team and the external buyer have both offered the same price to the parent company for the subsidiary.
Which of the following is an advantage to the parent company of opting for a MBO compared to a trade sale as the preferred method of divestment?
- A. Retain the know edge of key management.
- B. Raise the cash more quickly.
- C. Avoid a hostile reaction from key management.
- D. Focus on the core competencies of the business
Answer: C
NEW QUESTION 62
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?
- A. The Venture Capital Fund has a legal entitlement to sell its shareholding to any third party investor if the company has not obtained a stock market listing within 5 years.
- B. The Venture Capital Fund has an option to sell its shareholding to the company at twice its original cost which can be exercised in 5 years time.
- C. The private company obtains a stock market listing on a recognised exchange within the next 5 years.
- D. The management team agrees to buy back the Venture Capital Funds shareholding in 5 years time at its original cost.
- E. The management team has an option to buy the Venture Capital Fund's shares for their nominal value which can be exercised in 5 years time.
Answer: A,B,C
NEW QUESTION 63
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?
- A. The net realisable value is usually different from the net book value shown in the financial statements.
- B. The net book value of assets is merely a record of past transactions which complies with accounting conventions.
- C. The net book value of assets can be obtained from the financial statements.
- D. Intangible assets are often not shown in the company's financial statements.
- E. The net book value of current assets is normally a reliable indicator of their realisable value.
Answer: A,B,D
NEW QUESTION 64
The Board of Directors of a listed company is considering the company's dividend/retentions policy.
The inflation rate in the economy is currently high and is expected to remain so for the foreseeable future.
The board are unsure what impact the high level of inflation might have on the dividend policy.
Which THREE of the following statements are true?
- A. The impact of inflation on the cash flows should be considered when formulating the dividend policy.
- B. Retained earnings for reinvestment will have to earn a return in excess of the inflation level.
- C. Consideration should be given to the fact that shareholders will have a desire for real growth in dividend.
- D. The high inflation rate does not need to be considered when determining the dividend policy.
- E. In periods of high inflation 100% of earnings should always be paid out as dividends so that shareholders can protect their wealth against the impact of inflation.
Answer: A,B,C
NEW QUESTION 65
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 66
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