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| Section | Objectives |
|---|---|
| Sources of Long-Term Finance | - Hybrid financial instruments - Equity and debt financing |
| Dividend Policy | - Dividend theories - Dividend decisions and shareholder value |
| Mergers, Acquisitions and Corporate Restructuring | - Valuation principles - Synergies and takeover strategies |
| Financial Strategy Formulation | - Strategic financial objectives - Corporate financial planning |
| Financial Risk Management | - Foreign exchange risk - Interest rate risk |
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NEW QUESTION # 420
A venture capitalist is considering investing in a management buy-out that would be financed as follows:
* Equity from managers
* Equity from a venture capitalist
* Mezzanine debt finance from a venture capitalist
* Senior debt from a bank
The venture capitalist is planning to work with the management to grow the business in anticipation of an initial public offering within five years.
However, the cash forecast shows a potential shortage of funds in the first year and the venture capitalist is evaluating the potential impact of cash being generated in the first year being significantly lower than forecast.
The most important risk that a shortage of cash would create for the management buyout is that the new company has insufficient funds to:
Answer: C
Explanation:
In an MBO structure, senior bank debt has first claim on cash flows. Failure to pay interest on this debt can trigger default, covenants being breached, and potentially insolvency or loss of control.
Director bonuses (B) and dividends to the VC (C) are discretionary and can usually be postponed.
Inability to invest in new projects (D) is harmful for growth but less immediately threatening than defaulting on senior debt.
So the most critical cash use that must be covered is interest on bank debt.
NEW QUESTION # 421
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: D
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 ร 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 ร 7 = $4,970,000.
NEW QUESTION # 422
AA is considering changing its capital structure. The following information is currently relevant to AA:
The gearing rating raising the new debt finance will be 50%.
Which THREE of the following statement about the impact of AA's change in capital structure are true under Modigliani and Miler's capital structure theory with tax.
Answer: B,D
NEW QUESTION # 423
Select the most appropriate divided for each of the following statements:
Answer:
Explanation:
NEW QUESTION # 424
Company C invests heavily in Research and Development an need to raise $45 million to finance future projects. It has decided to use equity finance raised by a tender offer, The following tender offers have been received from potential investors:
Company C wishes to select an offer price that will project shareholders from a significant dilution of control but still raise the required amount of finance.
What offer price should Company C's select?
Answer: D
NEW QUESTION # 425
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