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| Section | Weight | Objectives |
|---|---|---|
| Topic 1: Financial Policy Decisions | 15% | - Strategic financial objectives and stakeholder impact
|
| Topic 2: Business Valuation | 40% | - Investment appraisal
|
| Topic 3: Financial Risks | 20% | - Risk management techniques
|
| Topic 4: Sources of Long-term Funds | 25% | - Equity finance
- Debt finance
|
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NEW QUESTION # 201
BBA is a wholly owned subsidiary of AAB BBA operates in country B where the currency is the B$.
The following is an extract from BBA's financial statements at 31 December 20X1:
The following Information is relevant:
" The bonds were trading at $110 per $100 on 31 December 20X1. "Operating profit of BBA for the year ended 31 December 20X1 was S15 million
* The P/E ratio is 8
* Corporate income tax rate is 20%.
The tax authorities m country B Implemented thin capitalisation rules based on the level of gearing of the subsidiary, calculated as book value o( debt lo book value of equity The cut-off point for gearing used by the tax authorities for a company to be thinly capitalised is 75%.
Which of the following statements is correct as at 31 December 20X1?
Answer: C
NEW QUESTION # 202
ART manufactures traditional scooters. It has an equity beta of 1.4 and is financed entirely by equity. It plans to continue to be all-equity financed in future.
It is considering producing a range of electric scooters
GGG is a comparable quoted electric scooter manufacturer GGG has an equity beta of 2 4 reflecting its high level of gearing (the ratio of debt to equity is VI using market values).
The risk-free rate is 5%, and the market premium is 6%.
The rate of corporation tax is 20%
What is the recommended discount rate that ART should use to assess the project to manufacture electric scooters?
Answer:
Explanation:
13%
1. De-gear GGG's equity beta to get its asset betaGGG's data:Equity beta #e=2.4\beta_e = 2.4#e=
2. 4Gearing D/E=1D/E = 1D/E=1 (market values)Tax rate T=20%T = 20\%T=20%Formula:#a=#e1+(1#T) DE\beta_a = \frac{\beta_e}{1 + (1-T)\frac{D}{E}}#a=1+(1#T)ED#e #a=2.41+0.8×1=2.41.8=43#1.33\beta_a
= \frac{2.4}{1 + 0.8 \times 1} = \frac{2.4}{1.8} = \frac{4}{3} \approx 1.33#a=1+0.8×12.4=1.82.4=34#1.33 This asset beta represents the business risk of electric scooters.2. Re-gear for ART's capital structureART is and will remain all-equity financed, so for the project:#project=#a#1.33\beta_{\text{project}} = \beta_a
\approx 1.33#project=#a#1.33 3. Use CAPM to get the discount rateGiven:Risk-free rate Rf=5%R_f = 5\% Rf=5%Market risk premium (Rm#Rf)=6%(R_m - R_f) = 6\%(Rm#Rf)=6%Required return=Rf+#project (Rm#Rf)=5%+1.33×6%=5%+8%=13%\text{Required return} = R_f + \beta_{\text{project}}(R_m - R_f) =
5\% + 1.33 \times 6\% = 5\% + 8\% = 13\%Required return=Rf+#project(Rm#Rf)=5%+1.33×6%=5%+8%
=13% Recommended discount rate (nearest whole %): 13%
NEW QUESTION # 203
G pic wishes to borrow $5 million in 6 months, for a period of 3 months. A bank has quoted the following Forward Rate Agreement (FRA) rales:
3 v 9 6.55%-6.70% 6v9 6.70%-6 90%.
G pic can borrow at 0 75% above base rate, and the base rate is currently 6.25% Concerned that base rates may rise, G pic decides that it will hedge using an FRA At the settlement date for the FRA, the base rate has risen to 7.50% What is the effective interest rate paid by G pic for its borrowing?
Answer: B
Explanation:
G plc will borrow at base + 0.75% # 7.50% + 0.75% = 8.25%.
To hedge, as a future borrower it uses the 6v9 FRA offer rate = 6.90%.
Difference between actual base and FRA = 7.50% # 6.90% = 0.60%.
Interest difference over 3 months on $5m = 0.006 × ¼ × 5,000,000 = $7,500 (received from FRA).
Net interest paid = 8.25% interest # 0.60% benefit = 7.65% effective rate.
NEW QUESTION # 204
Three companies are quoted on the New York Stock Exchange. The following data applies:
Which of the following statements is TRUE?
Answer: B
Explanation:
Correct answer: D. Companies A and B have the same business risk
Business risk is measured by asset beta.
A and B both have asset beta = 1.16, so same business risk.
C has higher asset beta (1.20), so highest business risk.
NEW QUESTION # 205
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:
NEW QUESTION # 206
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