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NEW QUESTION # 198
Company M's current profit before interest and taxation is $5.0 million.
It has a long-term 10% corporate bond in issue with a nominal value of $10 million.
The rate of corporate tax is 25%.
It plans to continue to pay out 50% of its earnings in dividends and earnings are expected to grow by 3% each year in perpetuity.
Its cost of equity is 10%.
Using the dividend growth model, advise the Board of Directors of Company M which of the following provide a reasonable valuation of Company M's equity?
- A. $44.1 million
- B. $50.1 million
- C. $22.1 million
- D. $73.6 million
Answer: C
NEW QUESTION # 199
A company has accumulated a significant amount of excess cash which is not required for investment for the foreseeable future.
It is currently on deposit, earning negligible returns.
The Board of Directors is considering returning this excess cash to shareholders using a share repurchase programme.
The majority of shareholders are individuals with small shareholdings.
Which THREE of the following are advantages of the company undertaking a share repurchase programme?
- A. It reduces excess cash which might have been attractive to predators.
- B. Institutional investors generally prefer a constant predictable income in the form of dividends.
- C. It reduces the amount of cash for potential future investment opportunities.
- D. Individual shareholders can realise their investment if they wish.
- E. The earnings per share should increase for the shareholders who do not sell their shares.
Answer: A,D,E
NEW QUESTION # 200
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 # 201
A company is concerned about the interest rate that it will be required to pay on a planned bond issue.
It is considering issuing bonds with warrants attached.
Advise the directors which of the following statements about warrants is NOT correct?
- A. Warrants give the holder the right to buy ordinary shares in the company at a fixed price at a future date.
- B. Warrants are a debt sweetener attached to the bond to drive down the interest rate payable on the bond.
- C. Warrants can potentially be very expensive because they can involve the issue of shares at a discount in the future if exercised.
- D. Warrants can be sold back to the issuing company for the nominal value of the share if no longer required by the bond holder.
Answer: D
NEW QUESTION # 202
A listed company follows a policy of paying a constant dividend. The following information is available:
* Issued share capital (nominal value $0.50) $60 million
* Current market capitalisation $480 million
The shareholders are requesting an increased dividend this year as earnings have been growing. However, the directors wish to retain as much cash as possible to fund new investments. They therefore plan to announce a
1-for-10 scrip dividend to replace the usual cash dividend.
Assuming no other influence on share price, what is the expected share price following the scrip dividend?
Give your answer to 2 decimal places.
$ ?
Answer:
Explanation:
3.64, 3.63, 3.65
NEW QUESTION # 203
RST wishes to raise at least $40 million of new equity by issuing up to 10 million new equity shares at a minimum price of $3.00 under an offer for sale by tender. It receives the following tender offers:
What is the maximum amount that RST can raise by this share issue?
(Give your answer to the nearest $ million).
Answer:
Explanation:
49
NEW QUESTION # 204
Company A is planning to acquire Company B at a price of $ 65 million by means of a cash bid.
Company A is confident that the merged entity can achieve the same price earnings ratio as that of Company A.
What does Company A expect the value of the merged entity to be post acquisition?
- A. $187.5 million
- B. $207.0 million
- C. $156.0 million
- D. $122.5 million
Answer: D
NEW QUESTION # 205
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. Treasury Bills
- D. Bank overdraft
Answer: B
NEW QUESTION # 206
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 # 207
WX, an advertising agency, has just completed the all-cash acquisition of a competitor, YZ. This was seen by the market as a positive strategic move byWX.
Which THREE of the following will WX's shareholders expect the company's directors to prioritise following the acquisition?
- A. The realisation of anticipated post-acquisition synergies.
- B. The integration and retention of key employees of YZ.
- C. The retention of YZ's key customers.
- D. The development of a dividend policy to meet the expectations of the YZ's shareholders.
- E. The regulatory approval required to complete the acquisition.
Answer: A,B,E
NEW QUESTION # 208
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 # 209
An analyst has valued a company using the free cash flow valuation model.
The analyst used the following data in determining the value:
* Estimated free cashflow in 1 year's time = $100,000
* Estimated growth in free cashflow after the first year = 5% each year indefinitely
* Appropriate cost of equity = 10%
The result produced by the analyst was as follows:
Value of equity = $100,000 (1+0.05)/0.10 = $1,050,000
The analyst made a number of errors in determining the value.
By how much has the analyst undervalued the company?
- A. $2,100,000
- B. $950,000
- C. $2,000,000
- D. $1,050,000
Answer: B
NEW QUESTION # 210
A consultancy company is dependent for profits and growth on the high value individuals it employs.
The company has relatively few tangible assets.
Select the most appropriate reason for the net asset valuation method being considered unsuitable for such a company.
- A. It accounts for the intangible assets at historical value.
- B. It does not account for the intangible assets.
- C. It accounts for intangible assets at net realisable value.
- D. It does not account for tangible assets.
Answer: B
NEW QUESTION # 211
Company BBB has prepared a valuation of a competitor company, Company BBD. Company BBB is intending to acquire a controlling interest in the equity of Company BBD and therefore wants to value only the equity of Company BBD.
The directors of Company BBB have prepared the following valuation of Company BBD:
Value of Equity = 4.63 + 5.14 + 5.56 = S15.33 million
Additional information on Company BBD:
Which THREE of the following are weaknesses of the above valuation?
- A. The valuation is understated as forecast future growth has been ignored beyond year 3.
- B. The valuation is overstated as the directors have failed to deduct tax from the free cash flows.
- C. The valuation is understated as the directors have failed to include a perpetuity factor in the calculations.
- D. The approach used calculates the value of the total entity not the value of equity.
- E. Free cash flows to all investors should be discounted at the cost of equity of 10% rather than WACC of 8%.
Answer: B,C,D
NEW QUESTION # 212
Company ABC is planning to bid for company DDD, an unlisted company in an unrelated industry sector to ABC.
The directors of ABC are considering a number of different valuation methods for DDD before making a bid.
Which of the following is the MOST appropriate method for ABC to use to value DDD?
- A. Discounting DDD's forecast cash flows using ABC's cost of equity.
- B. Applying an industry P/E ratio to DDD's forecast earnings.
- C. Applying Company ABC's P/E ratio to DDD's forecast earnings.
- D. Using DDD's tangible assets.
Answer: B
NEW QUESTION # 213
Company X plans to acquire Company Y.
Pre-acquisition information:
Post-acquisition information:
Total combined earnings are expected to increase by 10%
Total combined P/E multiple will remain at 10 times
Which of the following share-for-share exchanges will result in an increase of 10% in Company X's share price post-acquisition?
- A. 1 share in Company X for 2 shares in Company Y
- B. 1 share in Company X for 2.75 shares in Company Y
- C. 3 shares in Company X for 5 shares in Company Y
- D. 2 shares in Company X for 1 shares in Company Y
Answer: C
NEW QUESTION # 214
Companies A, B, C and D:
* are based in a country that uses the K$ as its currency.
* have an objective to grow operating profit year on year.
* have the same total levels of revenue and cost.
* trade with companies or individuals in the eurozone. All import and export trade with companies or individuals in the eurozone is priced in EUR.
Typical import/export trade for each company in a year are as follows:
Which company's growth objective is most sensitive to a movement in the EUR/K$ exchange rate?
- A. Company A
- B. Company D
- C. Company B
- D. Company C
Answer: C
NEW QUESTION # 215
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 breach of the covenant in respect of interest cover only.
- B. The company will be in compliance with both covenants.
- C. The company will breach the covenant in respect of retained earnings only.
- D. The company will be in breach of both covenants.
Answer: C
NEW QUESTION # 216
Company P is a large unlisted food-processing company.
Its current profit before interest and taxation is $4 million, which it expects to be maintainable in the future.
It has a $10 million long-term loan on which it pays interest of 10%.
Corporate tax is paid at the rate of 20%.
The following information on P/E multiples is available:
Which of the following is the best indication of the equity value of Company P?
- A. $80 million
- B. $24 million
- C. $40 million
- D. $48 million
Answer: B
NEW QUESTION # 217
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The F3 certification exam is suitable for finance professionals who are looking to progress in their careers, including financial managers, accountants, financial analysts, and management accountants. F3 exam is divided into two parts, Part A and Part B, and consists of multiple-choice questions, objective test questions, and case studies. F3 exam is challenging and requires significant preparation, but it is a valuable investment for those seeking to enhance their career prospects. The F3 certification provides candidates with a competitive edge in the job market and demonstrates their commitment to professional development and excellence in the field of finance.
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