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?
Which TWO of the following statements about debt instruments are correct?
Company A is planning to acquire Company B. Both companies are listed and are of similar size based on market capitalisation No approach has yet been made to Company B's shareholders as the directors of Company A are undecided about the most suitable method of financing the offer Two methods are under consideration a share exchange or a cash offer financed by debt.
Company A currently has a gearing ratio (debt to debt plus equity) of 30% based on market values. The average gearing ratio (debt to debt plus equity) for the industry is 50% Although no formal offer has been made there have been market rumours of the proposed bid. which is seen as favorable to Company
The financial assistant of a geared company has prepared the following calculation of the company's equity value:
Useful information;
* Tax rate - 20%
* Cost of equity = 12%
* Weighted average cost of capital (WACC) 10%
" Debt finance of the company comprises a $6 million 7% undated bond trading at par Valuation workings.
Which of the following errors has been made by the financial assistant?
An unlisted company is attempting to value its equity using the dividend valuationmodel.
Relevant information is as follows:
* A dividend of$500,000 has just been paid.
* Dividend growth of 8% is expected for the foreseeable future.
* Earnings growth of 6% is expected for the foreseeable future.
* The cost of equity of a proxy listed company is 15%.
* The risk premium required due tothe companybeing unlisted is 3%.
The calculationthat has been performedis as follows:
Equity value = $540,000 / (0.18 - 0.08) = $5,400,000
What is thefaultwith the calculation that has been performed?
CompanyA has made an offer to acquire CompanyZ.
Both companies are quoted and their current market share prices are:
* CompanyA- $4
* CompanyZ- $5
Shareholders in companyZhave been given three alternative offers:
* Cash of $5.50 per share
* Shareforshareexchangeonthebasisof3for2
* 10.5% longdatedbondforevery20shares
The bond is has a nominal value of $100 and the expected yield on bonds of similar risk is 10%.
You are advising a CompanyZshareholder on the three offers.
She requires a 15% premium if she is to accept the offer.
In providing your advice, whichof the following statements is correct?
A listed company in a high technology industry has decided to value its intellectual capitalusing the Calculated Intangible Value method (CIV).
Relevant data for the company:
* Pays corporate income tax at 30%
* Cost of equity is 9%, pre-tax cost of debt is 7% and the WACC is 8%
* The value spread has been calculated as $26 million
Calculate the CIV for the company.
A company wishes to raise additionaldebtfinance and isassessingthe impact thiswill have on key ratios.
The following data currently applies:
* Profit before interest and tax for the current yearis $500,000
* Long term debt of $300,000 at a fixed interest rate of 5%
* 250,000 sharesin issuewith a share price of $8
The companyplansto borrow an additional $200,000 on the first day of the yearto invest in new project whichwillimprove annualprofit before interest and tax by $24,000.
The additionaldebtwould carry an interest rate of 3%.
Assume the number of shares in issue remain constant but theshare price will increase to $8.50 after the investment.
Therate of corporate income tax is 30%.
After the investment, which of the following statements is correct?
WhichTHREEof the following are themost likely exit routesthat apply to aventure capitalist?
TTT pic is a listed company. The following information is relevant:
TTT pic's board is considering issuing new 6% irredeemable debt to re-purchase equity. This is expected to change TTT pic's debt to equity mix to 40: 60 by market value. The corporate tax rate is 20%.
What will be TTT pic's WACC following this change in capital structure?
The Board of Directors of a listed company have decided that it needs to increase its equity capital to ensure it is in a more stable financial position.
The shareholder profile is a mix of institutional and individual small shareholders.
The board is considering either:
* A scrip dividend
* A zero dividend
Which THREE of the following would be considereddisadvantagesof a scrip dividend compared to a zero dividend?
A company in country T is considering either exporting its product directly to customers in country P or establishing a manufacturing subsidiary in country P.
The corporate tax rate in country T is 20% and 25% tax depreciation allowances are available
Which TIIRCC of the following would be considered advantages of establishing a subsidiary in country T?
A listed company with a growing share priceplans to finance a four-yearresearchprojectwith debt.
The main criterion for the finance is to minimise the annual cashflow payments on the debt.
The research will be sold at the end of the project.
Which of the following would be the most suitable financing method for the company?
A companyproposes to value itself based on the net present value of estimated future cash flows.
Relevant data:
* The cash flow for the next three years is expected to be 100 million each year
* The cash flow after year 3 will grow at 2% to perpetuity
* The cost of capital is 12%
The value of the companyto the nearest $ million is:
Country X's short-term interest rates are slightly higher than its long-term rates. Which THREE of the following statements are correct?
