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| Section | Weight | Objectives |
|---|---|---|
| Financial Policy Decisions | 15% | - Strategic Financial Objectives
|
| Financial Risks | 20% | - Risk Identification and Assessment
|
| Business Valuation | 40% | - Mergers and Acquisitions
|
| Sources of Long-Term Funds | 25% | - Debt Finance
|
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NEW QUESTION # 410
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: C,D,E
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 # 411
A listed company has suffered a period of falling revenues and profit margins. It has been obliged to issue a profit warning to the market and its share price has fallen sharply. The company relies heavily on debt finance and is discussing with its banks possible refinancing options to assist with a restructuring programme.
Which THREE of the following are likely to be of MOST interest to the company's banks when they review the refinancing requests?
Answer: A,B,C
NEW QUESTION # 412
A venture capitalist invests in a company by means of buying:
* 9 million shares for $2 a share and
* 8% bonds with a nominal value of $2 million, repayable at par in 3 years' time.
The venture capitalist expects a return on the equity portion of the investment of at least 20% a year on a compound basis over the first 3 years of the investment.
The company has 10 million shares in issue.
What is the minimum total equity value for the company in 3 years' time required to satisify the venture capitalist's expected return?
Give your answer to the nearest $ million.
$ million.
Answer: A
NEW QUESTION # 413
The Senior Management Team of ABC, an owner-managed, capital intensive start-up engineering business, is considering the options for its dividend policy. It has so far been a successful business and is expanding quickly Once in place, the Senior Management Team anticipates that its current investment plans will yield returns for many years to come The first agenda item at every meeting currently concerns arranging and funding new equipment and premises.
Which of the following dividend policies is likely to be the most suitable?
Answer: D
Explanation:
For a capital-intensive, fast-growing, owner-managed start-up with many investment opportunities, the most suitable policy is to retain earnings to finance all positive NPV projects first, and only pay dividends out of any leftover (residual) earnings. That's exactly what a residual dividend policy does.
NEW QUESTION # 414
Which THREE of the following long term changes are most likely to increase the credit rating of a company?
Answer: A,D,E
Explanation:
We're looking for long-term changes that would improve a company's credit rating (i.e. reduce perceived credit risk and increase capacity to service debt):
A). Increase in interest cover (EBIT / interest) # higher coverage, safer for lenders # positive.
B). Decrease in (Net debt)/(EBITDA) # lower leverage relative to earnings # positive.
C). Increase in free cash flow from operations # more internally generated cash to pay interest and repay debt # positive.
D). Decrease in (Book debt)/(Book equity) is also a good sign in reality, but the question restricts us to three; exam focus is usually on coverage and cash flow-based ratios, so A, B and C are the best three.
E). Decrease in dividend cover (earnings / dividend) means paying a larger proportion of earnings out as dividends # less retained profit and weaker protection for creditors # negative for credit rating.
So the three most likely to improve the rating: A, B, C.
NEW QUESTION # 415
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