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| Section | Weight | Objectives |
|---|---|---|
| Sources of Long-term Funds | 25% | - Capital structure theories and WACC
- Debt finance
|
| Financial Risks | 20% | - Risk measurement and assessment
|
| Financial Policy Decisions | 15% | - Strategic financial objectives and stakeholder impact
|
| Business Valuation | 40% | - Valuation methods
- Investment appraisal
|
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NEW QUESTION # 35
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?
Answer: A
NEW QUESTION # 36
A company is financed as follows:
* 400 million $1 shares quoted at $3.00 each.
* $800 million 5% bonds quoted at par.
The company plans to raise $200 million long term debt to finance a project with a net present value of
$100 million.
The bank that is providing the debt is insisting on a maximum gearing level covenant.
Gearing will be based on market values and calculated as debt/(debt + equity).
What is the lowest figure for the gearing covenant that the bank could impose without the company breaching the agreement?
Answer: C
Explanation:
Equity: 400m shares at $3 # $1,200m
Existing debt: $800m
New debt raised: $200m
Project NPV: $100m
Step 1 - Initial firm value:
= 1,200 + 800 = $2,000m
Step 2 - After raising $200m debt and investing in project:
Debt becomes = 800 + 200 = $1,000m
Firm value increases by NPV of 100 # new firm value = 2,000 + 100 = $2,100m Wait - careful: raising debt also adds cash before investment, then project adds NPV:
After raising debt: 2,000 + 200 = 2,200
After investing in project with NPV 100: +100 # 2,300m total firm value So final:
Firm value = 2,300m
Debt = 1,000m
Equity (by MV) = 2,300 - 1,000 = 1,300m
Step 3 - Gearing ratio (market value):
Gearing = Debt / (Debt + Equity)
= 1,000 / (1,000 + 1,300)
= 1,000 / 2,300 # 43.48%
To avoid an immediate breach, the bank's maximum gearing must be at least above 43.48%.
The lowest option that does this is 44%.
NEW QUESTION # 37
The directors of a unlisted manufacturing company have prepared a valuation of their company using the price-earning method.
Their calculation is:
Value if the company's equity = $6 million x 10 =$60 million where.
* $6 million is the company's reported profit before interested and tax in the most recent accounting period and
* 10 is the average price-earnings ratio for all listed companies
Which THREE of the following are weakness of this valuation?
Answer: B,C,D
NEW QUESTION # 38
CI IJ has decided to move its production plant to overseas country X. This would make the product cheaper to produce. The technology used to make the product is very advanced and some of the skilled staff would have to move to country X.
The Production Director has identified that there are some political risks in moving to county X.
For each of the political risks of moving to country X shown below, select the correct method for reducing the risk.
Answer:
Explanation:
Explanation:
"The government of country X could refuse to grant visas to GHJ's staff who need to move to country X."
# Method: Employ at least 80% local people in the production plant
Relying mainly on local employees reduces dependence on foreign staff and makes visa refusal less damaging and less likely politically.
"The government of country X could introduce high taxes for outside companies which would make it difficult for GHJ to continue production in country X."
# Method: Take out a loan with a bank in country X
Local banks become important stakeholders. If high taxes threaten GHJ's viability and ability to service the loan, the local bank has an incentive to lobby the government, reducing this political risk.
"Local staff could find out how to make the product and use that knowledge to start a production plant of their own."
# Method: Import partly completed products from GHJ's home country
Keeping key stages of production or core technology in the home country limits how much know-how local staff can copy.
"The government of country X could refuse to renew visas for staff brought from GHJ's home country."
# Method: Employ at least 80% local people in the production plant
Again, the more the operation depends on local staff, the less vulnerable it is to visa non-renewal and the more politically acceptable the operation is.
NEW QUESTION # 39
Which THREE of the following would be of most interest to lenders deciding whether to provide long-term debt to a company?
Answer: B,D,E
Explanation:
A - Quality of current management: affects risk of default and how well the business is run.
B - Current gearing ratio: shows how much existing leverage there is and the risk of over-gearing.
E - Interest cover on existing debt: key indicator of the firm's ability to service interest payments.
EPS (C) and dividend cover (D) are more relevant to equity investors than to new long-term lenders.
NEW QUESTION # 40
......
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