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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Sources of Long-term Funds | 25% | - Debt finance
- Equity finance
|
| Topic 2: Financial Risks | 20% | - Types of financial risk
- Risk measurement and assessment
|
| Topic 3: Financial Policy Decisions | 15% | - Strategic financial objectives and stakeholder impact
|
| Topic 4: Business Valuation | 40% | - Impairment testing and value management - Valuation methods
|
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NEW QUESTION # 253
A listed company is considering either a one-off special divided or a share repurchase scheme to reduce its surplus cash level.
Identify TWO advantages that a one-off special payment has over a share repurchase scheme.
Answer: B,C
Explanation:
Compared with a share repurchase, a one-off special dividend:
is administratively simpler to arrange,
returns surplus cash directly to shareholders (all shareholders receive cash, ownership proportions are unchanged).
Answers: D and E
NEW QUESTION # 254
A company has:
* $6 million market value of equity
* $4 million market value of debt
* WACC of 11.04%
* Corporate income tax rate of 20%
According to Modigliani and Miller's theory of capital structure with tax, what is the ungeared cost of equity?
Answer: C
Explanation:
Working
Market value of equity E=6mE = 6mE=6m; debt D=4mD = 4mD=4m; so total V=10mV = 10mV=10m.
DV=410=0.4T=20%=0.20\frac{D}{V} = \frac{4}{10} = 0.4 \qquad T = 20\% = 0.20VD=104=0.4T=20%=0.
20
Under Modigliani-Miller with tax, the relationship between ungeared cost of equity KuK_uKu and the after- tax WACC is:
WACC=Ku (1#TDV)\text{WACC} = K_u\,(1 - T \tfrac{D}{V})WACC=Ku(1#TVD)
So:
Ku=WACC1#TDV=11.04%1#0.20×0.4=11.04%0.92=12.00%K_u = \frac{\text{WACC}}{1 - T\frac{D}
{V}} = \frac{11.04\%}{1 - 0.20 \times 0.4} = \frac{11.04\%}{0.92} = 12.00\%Ku=1#TVDWACC=1#0.20×0.
411.04%=0.9211.04%=12.00%
So the ungeared cost of equity is 12.00%.
NEW QUESTION # 255
Company A is identical in all operating and risk characteristics to Company B, but their capital structures differ.
Company B is all-equity financed. Its cost of equity is 17%.
Company A has a gearing ratio (debt:equity) of 1:2. Its pre-tax cost of debt is 7%.
Company A and Company B both pay corporate income tax at 30%.
What is the cost of equity for Company A?
Answer: A
NEW QUESTION # 256
A listed company in a high growth industry, where innovation is a key driver of success has always operated a residual dividend policy, resulting in volatility in dividends due to periodic significant investments in research and development.
The company has recently come under pressure from some investors to change its dividend policy so that shareholders receive a consistent growing dividend. In addition, they suggested that the company should use more debt finance.
If the suggested change is made to the financial policies, which THREE of the following statements are true?
Answer: B,C,D
NEW QUESTION # 257
Company ABE is an unlisted company that has been trading for 10 years. During this period, it has seen substantial growth in revenue and earnings. For the company to continue its growth it needs to raise new finance The directors are considering an initial public offering (IPO).
The following information is relevant to Company ABE:
A listed company of similar size and in the same industry as Company ABE had earnings per share in the last financial year of $1 80 Its shares are currently trading at a price / earnings ratio of 12.
The directors of Company ABE have asked for advice on what price they might expect if the company is listed on the stock exchange by means of an IPO.
Using the information provided what is an estimated issue price for each share in Company ABE?
Give your answer to 2 decimal places.
Answer:
Explanation:
$25.20 per shareShares in issue = 50mRevenue = $650mPre-tax profit = $150mTax rate = 30%
Comparable listed company: EPS = $1.80, P/E = 12Earnings after taxEarnings=150×(1#0.30)=150×0.70=$105m\text
{Earnings} = 150 \times (1 - 0.30) = 150 \times 0.70 = \$105\text{m}Earnings=150×(1#0.30)=150×0.
70=$105m EPS for ABEEPS=105/50=$2.10\text{EPS} = 105 / 50 = \$2.10EPS=105/50=$2.10 Apply peer P
/E of 12Issue price#2.10×12=$25.20\text{Issue price} \approx 2.10 \times 12 = \$25.20Issue price#2.
10×12=$25.20 Estimated IPO issue price (to 2 d.p.): $25.20 per share
NEW QUESTION # 258
......
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