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NEW QUESTION # 26
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 and straight-line accounting depreciation.
- B. Lease payments and implied interest.
- C. Lease payments, implied interested and straight-line accounting deprediation.
- D. Lease payments, tax relief on implied interest and tax relief on straight-line account depreciation.
Answer: C
NEW QUESTION # 27
Three companies are quoted on the New York Stock Exchange. The following data applies:
Which of the following statements is TRUE?
- A. Companies A and C have the same business risk
- B. Companies A and B have the same capital structure
- C. Companies A and B have the same business risk
- D. Company A has the greatest business risk
Answer: C
NEW QUESTION # 28
Which THREE of the following are benefits of integrated reporting?
- A. Promote an understanding of the interdependencies of capitals.
- B. Reduce the amount of work that is required to produce the report and accounts.
- C. Improve short term decision making.
- D. Support integrated decision-making.
- E. Improve the quality of information available to the providers of financial capital.
Answer: A,D,E
NEW QUESTION # 29
A company's annual dividend has grown steadily at an annual rate of 3% for many years. It has a cost of equity of 11%. The share price is presently $64.38.
The company is about to announce its latest dividend, which is expected to be $5.00 per share.
The Board of Directors is considering an attractive investment opportunity that would have to be funded by reducing the dividend to $4.50 per share. The board expects the project to enable future dividends to grow by
5% every year and the cost of equity to remain unchanged.
Calculate the change in share price, assuming that the directors announce their intention to proceed with this investment opportunity.
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
14.37
NEW QUESTION # 30
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. Efficiency
- B. Economy
- C. Effectiveness
- D. Environmental
Answer: B
NEW QUESTION # 31
Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:
Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.
What offer price should Company C's select?
- A. $4.00
- B. $4.75
- C. $4.50
- D. $4.25
Answer: C
NEW QUESTION # 32
An entity prepares financial statements to 30 June.
During the year ended 30 June 20X2 the following events occurred:
1 July 20X1
* The entitiy borrowed $100 million at a variable rate of interest.
* In order to protect itself against the variability of its interest cashflows, the entity entered into a pay-fixed-receive-variable interest swap with annual settlements. The fair value of the swap on this date was zero.
30 June 20X2
* The entity received a net settlement of $2 million under the swap. After this net settlement, the fair value of the swap was $5 million - a financial asset.
The entity decides to use hedge accounting for this arrangement and has designated it as a cash flow hedge.
The swap is a perfect hedge of the variability of the cash interest payments.
Which of the following describes the treatment of the settlement and the change in the fair value of the swap in the statement of profit or loss and other comprehensive income for the year ended 30 June 20X2?
- A. $7 million is recognised in other comprehensive income.
- B. $7 million is recognised in profit or loss.
- C. $5 million is recognised in profit or loss and $2 million is recognised in other comprehensive income.
- D. $2 million is recognised in profit or loss and $5 million is recognised in other comprehensive income.
Answer: D
NEW QUESTION # 33
Assume today is 31 December 20X1.
A listed mobile phone company has just launched a new phone which is proving to be a great success.
As a direct result of the product's success, earnings are forecast to increase by:
* 5% a year in each of years 20X2 - 20X6
* 3% from 20X7 onwards
Market analysts were very excited to hear the news of the success of the product and future growth forecasts.
Assuming a semi-efficient market applies, which of the following company valuation methods is likely to give the best estimate of the company's equity value today?
- A. Today's share price x number of shares in issue + retained earnings.
- B. Discounted free cash flow using the company's forecast growth rates.
- C. Today's share price x number of shares in issue.
- D. P/E valuation based on the company's long term P/E and earnings for the year ended 31 December
20X1.
Answer: C
NEW QUESTION # 34
A UK company enters into a 5 year borrowing with bank P at a floating rate of GBP Libor plus 3% It simultaneously enters into an interest rate swap with bank Q at 4.5% fixed against GBP Libor plus 1.5% What is the hedged borrowing rate, taking the borrowing and swap into account?
Give your answer to 1 decimal place.
Answer:
Explanation:
7.5%
NEW QUESTION # 35
The following information relates to Company A's current capital structure:
Company A is considering a change in the capital structure that will increase gearing to 30:70 (Debt:Equity).
The risk -free rate is 3% and the return on the market portfolio is expected to be 10%.
The rate of corporate tax is 25%
Using the Capital Asset Pricing Model, calculate the cost of equity resulting from the proposed change to the capital structure.
- A. 11.4%
- B. 12.3%
- C. 9.3%
- D. 10.1%
Answer: B
NEW QUESTION # 36
A company has:
* $6 million market value of equity
* $4 million market value of debt
* WACC of 11.04%
* Corporate income tax rate of 20%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?
- A. 10.16%
- B. 16.24%
- C. 12.00%
- D. 12.54%
Answer: C
NEW QUESTION # 37
A major energy company, GDE, generates and distributes electricity in country A.
The government of country A is concerned about rising inflation and has imposed price controls on GDE, limiting the price it can charge per unit of electricity sold to both domestic and commercial customers. It is likely that price controls will continue for the foreseeable future.
The introduction of price controls is likely to reduce the profit for the current year from $3 billion to $1 billion.
The company has:
* Distributable reserves of $2 billion.
* Surplus cash at the start of the year of $1 billion.
* Plans to pay a total dividend of $1.5 billion in respect of the current year, representing a small annual increase as in previous years. However, no dividends have yet been announced.
Which THREE of the following responses would be MOST appropriate for GDE following the imposition of price controls?
- A. Actively investigate potential new ways of generating revenue by the sale of related goods and services that are outside the scope of the price controls.
- B. Actively look for a private equity investor to introduce new and innovative business and financial strategies to the business.
- C. Raise funds by means of a rights issue in order to maintain historical dividend levels.
- D. Carry out a wide-ranging review of costs and staffing levels to identify possible cost savings and redundancies.
- E. Announce a reduction in the annual dividend to a more sustainable level given the new price controls regime.
Answer: A,D,E
NEW QUESTION # 38
Which three of the following are most likely be primary objectives for a newly established, unincorporated entity in the service sector?
- A. Increasing Revenue
- B. Maintaining sufficient liquidity in the business to avoid overtrading
- C. Providing consistently high levels service quality
- D. Increasing the dividend payment year on year
- E. Reaching an optimum capital structure
Answer: A,B,E
NEW QUESTION # 39
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. $4,900,000
- B. $4,970,000
- C. $5,530,000
- D. $5,250,000
Answer: B
NEW QUESTION # 40
An unlisted company:
* Is owned by the original founder and member of their families.
* Is growing more rapidly than other companies in the same industry.
* Pays a fixed annual divided
Which of the following methods would be the most appropriate to value this company's equity?
- A. P/E ratio of a listed company in the same industry.
- B. Asset based approach including intangibles.
- C. Divided valuation method.
- D. Discounted cash flow analysis based on forecast future free cash flows.
Answer: D
NEW QUESTION # 41
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. Reduction of 0%
- B. Reduction of 7%
- C. Reduction of 1%
- D. Reduction of 5%
Answer: B
NEW QUESTION # 42
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. Investors do not always have access to perfect information.
- C. Investors act in a rational manner.
- D. There is a multiplicity of corporate and personal income tax rates.
- E. There are no transaction costs involved in the issue of new shares (including rights issues).
Answer: A,C,E
Explanation:
Discursive_F0
NEW QUESTION # 43
A large, listed company in the food and household goods industry needs to raise $50 million for a period of up to 6 months.
It has an excellent credit rating and there is almost no risk of the company defaulting on the borrowings.
The company already has a commercial paper programme in place and has a good relationship with its bank.
Which of the following is likely to be the most cost effective method of borrowing the money?
- A. 6 month term loan
- B. Commercial paper
- C. Bank overdraft
- D. Treasury Bills
Answer: B
NEW QUESTION # 44
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. The motivation of the TTP management team to invest in future growth.
- B. The constraints imposed by KKL managing TTF's brand.
- C. The ability of the TTF management team to take over the head office functions successfully.
- D. Searing sufficient. funding for the MBO.
- E. The ability the TTP management team to develop the brand and achieve the expected growth.
Answer: C,D,E
NEW QUESTION # 45
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. The cash balance will decrease by 75% and EPS will increase by 25%.
- B. The cash balance will decrease by 20% and the EPS will increase by 25%.
- C. The cash balance will decrease by 75% and EPS will decrease by 25%.
- D. The cash balance will decrease by 20% and the EPS will decrease by 25%.
Answer: A
NEW QUESTION # 46
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