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Sample Questions
QUESTION NO: 1
A listed company is planning to raise $21.6 $21. 6 million to finance a new project with a positive net present value of $5 million. The finance is to be raised via vi a a rights issue at a 10% discount di scount to the current share price. There are currently 100 million milli on shares in issue, trading at $2.00 each. Taking the new project into account, what would the theoretical ex-rights price be? Give your answer to two decimal places. $ ? Answer: 2.02, 2.03
QUESTION NO: 2
When valuing an unlisted company, a P/E ratio for a similar listed li sted company may be used but adjustments to the P/E ratio may be necessary. Which THREE of the following factors would justify a reduction in the proxy p/e ratio before use? A. The relative lack of marketability of unlisted company shares. B. A lower level of scrutiny and regulation for unlisted companies. C. Unlisted companies being generally smaller and less established. D. Control premium not being included within the proxy p/e ratio used. E. The forecast earnings growth being relatively higher in the unlisted company. F. A profit item within the unlisted company's latest earnings which will not reoccur. Answer: A, B, C
QUESTION NO: 3
Company E is a listed l isted 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 sharehol ders to acquire the company. Give your answer to the nearest $million. A. 3,150 B. 1,890 C. 4,500 D. 2,700 Answer: A
QUESTION NO: 4
Company A is a large l arge listed company, with a wide range of both institutional and private shareholders. It is planning a takeover offer for Company B. Company A has relatively low cash reserves and its gearing ratio of 40% is higher hi gher than most similar companies in its industry. Which TWO of the following would be the most feasible ways of Company A structuring an offer for Company B? A. Cash offer, funded by borrowings. B. Share for share exchange. C. Cash offer, funded from existing cash resources. D. Cash offer, funded by a rights issue. E. Debt for share exchange. Answer: B, D
QUESTION NO: 5
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. Decrease in employee motivation due to internal changes. D. Changes to supplier relationships owing to internal changes. E. Cost savings from synergistic benefits and economies of scale.
Answer: A, C, D, E
QUESTION NO: 6
A listed company plans to raise $350 million to finance a major expansion program The cash flow projections for the program are subject to considerable variability. Brief details of the program have been public knowledge for a few weeks. The directors are considering two financing options, either a rights issue at a 20% discount to current share price or a long term bond. The following data is relevant: The company's share price has fallen by 5% over the past 3 months compared with a fall in i n the market of 3% over the same period. The directors favor the bond option. However, the Chief Accountant has provided arguments for a rights issue. Which TWO of the following arguments in favor of a right issue are correct? fi nance in the future. A. The issue of bonds might limit the availability of debt finance i n the share price makes a rights issue more attractive to the company. B. The recent fall in C. The rights issue will lead to less pressure on the operating cash flows of the program. D. The WACC will decrease assuming Modigliani and Miller's Theory of Capital Structure without taxes applies. E. The administrative costs of a rights issue will be lower. Answer: A, C
QUESTION NO: 7
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 breach the covenant in respect re spect of retained earnings only.
D. The company will be in breach of the covenant in respect of interest cover only. Answer: C
QUESTION NO: 8
The ex div share price of a company's shares is $2.20. An investor in the company currently holds 1,000 shares. The company plans to issue a scrip dividend of 1 new share for every 10 shares currently held. After the scrip dividend, what will be the total wealth of the shareholder? Give your answer to the nearest whole $. $?. Answer: 2200
QUESTION NO: 9
Company T is a listed l isted company in the retail sector. Its current profit before interest and taxation is $5 million. mil lion. This level of profit is forecast to be maintainable in future. Company T has a 10% corporate bond in issue with a nominal value of $10 million. This currently trades at 90% of its nominal value. Corporate tax is paid at 20%. The following information is available: Which of the following is a reasonable expectation expectation of the equity value in the event of an attempted takeover? A. $32.0 million B. $41.6 million C. $65.0 million D. $50.2 million Answer: B
QUESTION NO: 10
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 fi xed 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%. A. Interest cover will fall; P/E ratio will fall. B. Interest cover will fall; P/E ratio will rise. C. Interest cover will rise; P/E ratio will rise. D. Interest cover will rise; P/E ratio will fall. Answer: B
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