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NEW QUESTION 27
A company's current profit before interest and taxation is $1.1 million and it is expected to remain constant for the foreseeable future.
The company has 4 million shares in issue on which the earnings yield is currently 10%. It also has a $2 million bond in issue with a fixed interest rate of 5%.
The corporate income tax rate is 20% and is expected to remain unchanged.
Which of the following is the best estimate of the current share price?
- A. $2.50
- B. $1.10
- C. $2.00
- D. $2.75
Answer: C
NEW QUESTION 28
Under traditional theory, an increase in a company's WACC would cause the value of the company to:
- A. Either increase or decrease
- B. Stay the same
- C. Decrease
- D. Increase
Answer: C
NEW QUESTION 29
A company is considering either exporting its product directly to customers in a foreign country or establishing a manufacturing subsidiary in that country.
The corporate tax rate in the company's own country is 20% and 25% tax depreciation allowances are available.
Which THREE of the following would be considered advantages of establishing the subsidiary in the foreign country?
- A. There are high customs duties payable on products entering the foreign country.
- B. There is a double tax treaty between the company's domestic country and the foreign country.
- C. Year 1 tax depreciation allowances of 100% are available in the foreign country.
- D. There are restrictions on companies wishing to remit profit from the foreign country.
- E. The corporate tax rate in the foreign country is 40%.
Answer: A,B,C
NEW QUESTION 30
Company M plans to bid for Company J. Company M has 20 million shares in issue and a current share price of $10.00 before publicly announcing the planned takeover. Company J has 10 million shares in issue and a current share price of $4.00.
The directors of Company M are considering an all-share bid of 1 Company M shares for 2 Company J shares.
Synergies worth $20m are expected from the acquisition.
What is the likely change in wealth for Company M's shareholders (in total) if the bid is accepted?
Give your answer to the nearest $ million.
$ ? million
- A. 0
- B. 1
Answer: B
NEW QUESTION 31
A company plans a four-year project which will be financed by either an operating lease or a bank loan.
Lease details:
* Four year lease contract.
* Annual lease rentals of $45,000, paid in advance on the 1st day of the year.
Other information:
* The interest rate payable on the bank borrowing is 10%.
* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.
* A salvage or residual value of $100,000 is estimated at the end of the project's life.
* Purchased assets attract straight line tax depreciation allowances.
* Corporate income tax is 20% and is payable at the end of the year following the year to which it relates.
A lease-or-buy appraisal is shown below:
Which THREE of the following items are errors within the appraisal?
- A. Using the 10% discount rate is incorrect
- B. Lease payments are timed incorrectly
- C. The bank loan repayments should be included
- D. The salvage value has been included within the lease option
- E. The project's operating cashflows should be included
- F. Tax relief on lease payments have not been lagged correctly
Answer: A,D,F
NEW QUESTION 32
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 (MBO)
The MBO 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. Avoid a hostile reaction from key management.
- B. Focus on the core competencies of the business
- C. Retain the know edge of key management.
- D. Raise the cash more quickly.
Answer: A
NEW QUESTION 33
An unlisted software development business is to be sold by its founders to a private equity house following the initial development of the software. The business has not yet made a profit but significant profits are expected for the next three years with only negligible profits thereafter. The business owns the freehold of the property from which it operates. However, it is the industry norm to lease property.
Which THREE of the following are limitations to the validity of using the Calculated Intangible Value (CIV) method for this business?
- A. The business has not yet made a profit.
- B. The intellectual property representing the software development has not been included in the accounts.
- C. Significant profits are forecast for the next three years with only negligible profits thereafter.
- D. The CIV method cannot be applied to an unlisted company.
- E. The business owns the freehold property from which it operates.
Answer: A,B,E
NEW QUESTION 34
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. No, PBIT would fall by A$ 150 million.
- B. No, PBIT would fall by A$ 48 million.
- C. Yes, PBIT would increase by A$ 150 million.
- D. Yes, PBIT would increase by A$ 48 million.
Answer: B
NEW QUESTION 35
If a company's bonds are currently yielding 8% in the marketplace, why would the entity's cost of debt be lower than this?
- A. Market interest rates have decreased.
- B. Interest is deductible for tax purposes.
- C. There should be no difference; the cost of debt is the same as the bond's market yield.
- D. The company's credit rating has changed.
Answer: B
NEW QUESTION 36
A company is reporting under IFRS 7 Financial Instruments: Disclosures for the first time and the directors are concerned about whether this will lead to the disclosure of information that could affect the company's share price.
The company is based in a country that uses the A$ but 40% of revenue relates to export sales to the USA and priced in US$.
When the company reports under IFRS 7 for the first time, the share price is most likely to:
- A. Either increase or decrease depending on market reaction to new information on how financial risk is managed.
- B. Decrease since investors place a lower value on higher risk businesses.
- C. Stay the same since US$ risk can already be quantified from segmental analysis disclosures included elsewhere in the annual report.
- D. Increase due to greater clarity of information available on the extent of US$ risks and how they are managed.
Answer: A
NEW QUESTION 37
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement
Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
- A. 22.8
- B. 22.9
Answer: A
Explanation:
NEW QUESTION 38
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. $100,000
- B. $75,000
- C. $25,000
- D. $50,000
Answer: C
NEW QUESTION 39
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?
- A. Sale of Division B to Company Z
- B. Management buy-out of Division C
- C. Closure of Division
- D. Demerger of Division C
Answer: B
NEW QUESTION 40
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.
- A. Increase in customer base.
- B. Competition authorities step in to stop a potential price monopoly.
- C. Changes to supplier relationships owing to internal changes.
- D. Cost savings from synergistic benefits and economies of scale.
- E. Decrease in employee motivation due to internal changes.
Answer: A,C,D,E
NEW QUESTION 41
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. Private placement of a bond
- B. Rights issue
- C. Retained earnings
- D. Bank overdraft
Answer: B
NEW QUESTION 42
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