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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Financial Policy Decisions | 15% | - Development of Financial Strategy
|
| Topic 2: Financial Risks | 20% | - Interest Rate Risk Management
|
| Topic 3: Sources of Long-Term Funds | 25% | - Equity Finance
|
| Topic 4: Business Valuation | 40% | - Post-Transaction Issues
|
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NEW QUESTION # 158
Two companies that operate in the same industry have different Price/Earnings (P/E) ratios as follows:
Which of the following is the most likely explanation of the different P/E ratios?
Answer: D
NEW QUESTION # 159
A company is owned by its five directors who want to sell the business.
Current profit after tax is $750,000.
The directors are currently paid minimal salaries, taking most of their incomes as dividends.
After the company is sold, directors' salaries will need to be increased by $50,000 each year in total.
A suitable Price/Earnings (P/E) ratio is 7, and the rate of corporate tax is 20%.
What is the value of the company using a P/E valuation?
Answer: C
Explanation:
Current profit after tax (PAT) = $750,000.
After sale, extra directors' salaries (pre-tax) = $50,000.
Tax rate = 20% # tax saving on extra salaries = 50,000 × 20% = 10,000.
So reduction in PAT = 50,000 # 10,000 = $40,000.
Maintainable PAT = 750,000 # 40,000 = $710,000.
Using P/E of 7:
Value = 710,000 × 7 = $4,970,000.
NEW QUESTION # 160
The Board of Directors of a listed company wish to estimate a reasonable valuation of the entire share capital of the company in the event of a takeover bid.
The company's current profit before taxation is $4.0 million.
The rate of corporate tax is 25%.
The average P/E multiple of listed companies in the same industry is 8 times current earnings.
The P/E multiple of recent takeovers in the same industry have ranged from 9 times to 10 times current earnings.
The average P/E multiple of the top 100 companies on the stock market is 15 times current earnings.
Advise the Board of Directors which of the following is a reasonable estimate of a range of values of the entire share capital in the event of a bid being made for the whole company?
Answer: D
Explanation:
Profit before tax = $4.0m
Tax at 25% # earnings = $4.0m × (1 # 0.25) = $3.0m
For a takeover, the most relevant comparators are recent takeover P/E multiples in the same industry: 9-10x.
Minimum value = 3.0 × 9 = $27m
Maximum value = 3.0 × 10 = $30m
NEW QUESTION # 161
A UK company enters into a 5 year borrowing with bank P at a floating rate of GBP Libor plus 3% It simultaneously enters into an interest rate swap with bank Q at 4.5% fixed against GBP Libor plus 1.5% What is the hedged borrowing rate, taking the borrowing and swap into account?
Give your answer to 1 decimal place.
Answer:
Explanation:
7.5%
NEW QUESTION # 162
Company A has a cash surplus.
The discount rate used for a typical project is the company's weighted average cost of capital of 10%.
No investment projects will be available for at least 2 years.
Which of the following is currently most likely to increase shareholder wealth in respect of the surplus cash?
Answer: B
Explanation:
A company with no projects for 2 years and a WACC of 10% should not lock surplus cash into investments earning less than 10%, as that destroys shareholder value. The best way to maximise shareholder wealth is to return the surplus so shareholders can invest at their own required return.
NEW QUESTION # 163
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