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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Financial Risk Management and Treasury | 10% | - Risk management techniques
|
| Topic 2: Investment Appraisal and Decisions | 25% | - Investment evaluation techniques
|
| Topic 3: Corporate Finance | 30% | - Financing decisions
|
| Topic 4: Mergers, Acquisitions and Business Valuation | 10% | - Valuation and deal structure
|
| Topic 5: Financial Strategy Framework | 25% | - Financial objectives and stakeholder value
|
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NEW QUESTION # 100
A listed company with a growing share price plans to finance a four-year research project with 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?
Answer: A
Explanation:
The project lasts four years and will be sold at the end; the firm wants to minimise annual cashflow payments on the debt.
Bank loans and finance leases usually require amortising payments (interest + principal) # higher annual cashflows.
Standard bonds pay full coupon at market rate # higher annual interest than bonds with attached warrants.
Bonds with warrants allow investors extra value via the warrant, so the coupon can be set lower, cutting annual interest payments; principal is typically repaid at maturity, matching the project sale.
NEW QUESTION # 101
Two unlisted companies TTT and YYY are being valued. The companies have similar capital structures and risk profiles and operate in the same industry sector It is easier to value TTT than to value YYY because there have recently been several well-publicised private sales of TTT shares.
Relevant company data:
What is the best estimate of YYY's share price?
Answer: B
NEW QUESTION # 102
Company J is in negotiations to acquire Company K and believes it can turn around Company K's performance to match its own.
The following information is available for the two companies:
Select the maximum price for each share that Company J should place on Company K during negotiations.
Answer: D
Explanation:
Value of Company J at present
Earnings J = $80m
P/E J = 15
Equity value of J=80×15=$1,200m\text{Equity value of J} = 80 \times 15 = \$1{,}200\text{m} Equity value of J=80×15=$1,200m Current value and number of shares of Company K Earnings K = $50m P/E K = 10 Current equity value of K=50×10=$500m\text{Current equity value of K} = 50 \times 10 = \$500\text{m} Current equity value of K=50×10=$500m Current share price K = $2, so:
Number of K shares=5002=250m shares\text{Number of K shares} = \frac{500}{2} = 250\text{m shares} Number of K shares=2500=250m shares Value of K if it is re-rated to J's P/E J believes it can turn K around so that the market applies J's P/E of 15 to K's earnings:
Post-acquisition value of K=50×15=$750m\text{Post-acquisition value of K} = 50 \times 15 = \$750\text{m} Post-acquisition value of K=50×15=$750m Maximum total price J should pay To avoid destroying value, J should not pay more than the value it expects K to have in the merged group, i.e.
$750m.
Maximum price per share for K
Max price per K share=750250=$3.00\text{Max price per K share} = \frac{750}{250} = \$3.00 Max price per K share=250750=$3.00 So the highest price J should place on each of K's shares in negotiations is $3.0, answer C.
NEW QUESTION # 103
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?
Answer: C
Explanation:
Use CAPM:
10%=1%+#(7%#1%)#0.10=0.01+0.06###=0.09/0.06=1.510\% = 1\% + \beta(7\% - 1\%) \Rightarrow 0.10 =
0.01 + 0.06\beta \Rightarrow \beta = 0.09/0.06 = 1.510%=1%+#(7%#1%)#0.10=0.01+0.06###=0.09/0.06=1.5.
Beta > 1 # higher risk than the market.
NEW QUESTION # 104
Company M is a listed company in a highly technical service industry.
The directors are considering making a cash offer for the shares in Company Q, an unquoted company in the same industry.
Relevant data about Company Q:
* The company has seen consistent growth in earnings each year since it was founded 10 years ago.
* It has relatively few non-current assets.
* Many of the employees are leading experts in their field. A recent exercise suggested that the value of the company's human capital exceeded the value of its tangible assets.
The directors and major shareholders of Company Q have indicated willingness to sell the company.
Before negotiations become too advanced, the directors of Company M are considering the benefits to their company that would follow the acquisition.
Which THREE of the following are the most likely benefits of the acquisition to Company M's shareholders?
Answer: A,B,C
Explanation:
A - Access to technical expertise: Q's staff are leading experts and human capital is very valuable; acquiring this is a clear benefit.
D - Gain economies of scale: Both firms operate in the same technical service industry, so combining operations can reduce average costs and share overheads.
E - Improve EPS: Q has shown consistent earnings growth; if acquired at a reasonable price, this growth can enhance M's earnings and potentially its EPS.
Diversification benefits (B) are limited because they are in the same industry, and intangible assets such as human capital are not strong collateral for borrowing (C).
NEW QUESTION # 105
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