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NEW QUESTION # 12
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. It is not possible to tell from CAPM.
- B. It has greater risk than the average market risk.
- C. It has the same risk as the average market risk.
- D. It has lower risk than the average market risk.
Answer: B
NEW QUESTION # 13
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. No, gearing would increase and the gearing objective would be met before the announcement but exceeded after the announcement.
- B. Yes, gearing would fall and the gearing objective would be exceeded before the announcement but met after the announcement.
- C. No, gearing would increase but the gearing objective would be met both before and after the announcement.
- D. No, gearing would increase and the gearing objective would be exceeded both before and after the announcement.
Answer: D
NEW QUESTION # 14
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. Company B has a greater profit this year than Company A.
- B. Company B has higher gearing than Company A.
- C. Company B has higher expected future growth than Company A.
- D. Company B has higher business risk than Company A.
Answer: C
NEW QUESTION # 15
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 # 16
For which THREE of the following risk categories does IFRS 7 require sensitivity analysis?
- A. Supply chain risk
- B. Commodity risk
- C. Credit risk
- D. Liquidity risk
- E. Currency risk
- F. Interest rate risk
Answer: B,E,F
NEW QUESTION # 17
Company A, a listed company, plans to acquire Company T, which is also listed.
Additional information is:
* Company A has 100 million shares in issue, with market price currently at $8.00 per share.
* Company T has 90 million shares in issue,. with market price currently at $5.00 each share.
* Synergies valued at $60 million are expected to arise from the acquisition.
* The terms of the offer will be 2 shares in A for 3 shares in B.
Assuming the offer is accepted and the synergies are realised, what should the post-acquisition price of each of Company A's shares be?
Give your answer to two decimal places.
$ ? .
- A. 8.19, 6.18
- B. 8.19, 8.18
Answer: B
NEW QUESTION # 18
Extracts from a company's profit forecast for the next financial year as follows:
Since preparing the forecast, the company has decided to return surplus cash to shareholders by a share repurchase arrangement.
The share repurchase would result in the company purchasing 20% of the 1,250 million ordinary shares currently in issue and canceling them.
Assuming the share repurchase went ahead, the impact on the company's forecast earnings per share will be an increase of:
- A. $0.100
- B. $0.200
- C. $0.175
- D. $0.125
Answer: A
NEW QUESTION # 19
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 30% 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. $120 14 million
- B. $155.14 million
- C. $146 39 million
- D. $111 39 million
Answer: D
NEW QUESTION # 20
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.
Answer:
Explanation:
$ ?
45.2
NEW QUESTION # 21
Company R is a major food retailer. It wishes to acquire Company S, a food manufacturer.
Company S currently supplies many stores owned by Company R with food products that it manufactures.
Company S is of similar size to Company R but has a lower credit rating.
Which of the following is most likely to be a synergistic benefit to R on purchasing S?
- A. Cost savings due to reducing the range of products manufactured by Company S.
- B. Reduced competition resulting in the ability to raise retail selling prices for food products.
- C. Lower cost of borrowing due to the acquistion of a company with a different credit rating.
- D. Savings due to a reduction in purchase costs and more control over the value chain.
Answer: D
NEW QUESTION # 22
Company A is a listed company that produces pottery goods which it sells throughout Europe. The pottery is then delivered to a network of self employed artists who are contracted to paint the pottery in their own homes. Finished goods are distributed by network of sales agents.The directors of Company A are now considering acquiring one or more smaller companies by means of vertical integration to improve profit margins.
Advise the Board of Company A which of the following acquisitions is most likely to achieve the stated aim of vertical integration?
- A. A listed international logistics firm.
- B. A pottery factory in the Middle East.
- C. A company in a similar market to Company A.
- D. A company that produces accessories.
Answer: A
NEW QUESTION # 23
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. Equity finance will reduce the overall financial risk.
- B. Debt finance is always preferable to equity finance.
- C. The choice between using either equity or debt will have no impact on the amount of corporate income tax payable.
- D. Equity finance will increase pressure to pay a higher total future dividend.
- E. Debt finance will increase the cost of equity.
- F. Retained earnings has no cost, and is therefore the cheapest form of equity finance.
Answer: A,D,E
NEW QUESTION # 24
Company T has 1,000 million shares in issue with a current share price of $10 each.
Company V has 300 million shares in issue with a current share price of $5 each.
Company T is considering acquiring Company V.
Total synergy gains of $100 million have been estimated.
The purchase of Company V's shares would be by cash at a 10% premium above the current share price.
In seeking approval for the acquisition, the likely reaction from T's shareholders will be:
- A. accepted as there will be an increase in the value of the business of $1,500 million.
- B. rejected as T's shareholders will not be willing to pay more than $1,500 million for V.
- C. rejected as T's shareholders will see a decrease in their wealth overall of $50 million.
- D. accepted as there is $100 million of synergy which will all go to T's shareholders.
Answer: C
NEW QUESTION # 25
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?
- A. $10.00
- B. $9.50
- C. $8.50
- D. $9.00
Answer: B
NEW QUESTION # 26
Company AD is planning to acquire Company DC. It is evaluating two methods of structuring the terms of the bid, which will be ether a debt-funded cash offer or a share exchange
The following Information is relevant
* The two companies are of similar size and in related industries
* AB's gearing ratio measured as debt to debt plus equity, is currently 30% based on market values. This Is the company's optimum capital structure set to reflect the risk appetite of shareholders.
* The combined company is expected to generate savings and synergies
Which THREE of the following are advantages to AB's shareholders of a debt-funded cash offer compared with a share exchange?
- A. EPS Mil Increase
- B. More of the synergistic benefits of the acquisition will accrue to AB's current shareholders.
- C. Gearing will increase.
- D. Shareholder control will remain with AB's current shareholders
- E. WACC will increase f credit worthless falls too low, further increasing the returns to shareholders.
Answer: C
NEW QUESTION # 27
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. FTT could ask for ail payments to K to be made in its home currency, which would reduce exposure to currency risk
- 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. 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
- D. FTT will be exposed to transaction risks as the Indonesian currency will appreciate over time because of the expected inflation rates
- E. FTT could investigate whether it could import anything from Indonesia in order to create a natural hedge.
Answer: A,B,D
NEW QUESTION # 28
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