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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 |
| Financial Risk Management | - Interest rate risk - Foreign exchange risk |
| Financial Strategy Formulation | - Strategic financial objectives - Corporate financial planning |
| Mergers, Acquisitions and Corporate Restructuring | - Synergies and takeover strategies - Valuation principles |
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NEW QUESTION # 178
A company based in the USA has a substantial fixed rate borrowing at an interest rate of 3.5% and wishes to swap a part of this to a floating rate to take advantage of reducing interest rates Its bank has quoted swap rates of 3 4%-3 5% against 12-month USD risk-free rate.
What is the overall interest rate achieved by the company under this borrowing plus swap combination?
Answer: C
Explanation:
Company pays 3.5% fixed on its borrowing and enters a swap at 3.4-3.5% vs 12-month USD risk-free rate.
To move from fixed to floating, it will receive fixed 3.4% and pay floating (risk-free):
Net interest:
3.5%#3.4%+rf=rf+0.1%3.5\% - 3.4\% + \text{rf} = \text{rf} + 0.1\%3.5%#3.4%+rf=rf+0.1% Answer to Q102: C - 12-month USD risk-free rate plus 0.1%
NEW QUESTION # 179
A company has a loss-making division that it has decided to divest in order to raise cash for other parts of the business.
The losses stem from a combination of a lack of capital investment and poor divisional management.
The loss-making division would require new capital investment of at least $20 million in order to replace worn out and obsolete assets.
If this investment was carried out, the present value of the future cashflows, excluding the investment expenditure, is expected to be $15 million.
Which TWO of the following divestment methods are most likely to be suitable for the company?
Answer: A,D
Explanation:
The division is loss-making, with poor management and obsolete assets. It needs a $20m investment, but PV of future cash flows is only $15m # negative NPV of -$5m if retained.
The company wants to raise cash, so methods that don't raise cash (de-merger, spin-off) are inappropriate.
Trade sale (C): sell the division to another company that may be better able to invest/manage it - brings in cash.
Liquidation (D): close the division and sell the assets - also raises cash and avoids further losses.
MBO (A) is unlikely, since current management is identified as part of the problem.
NEW QUESTION # 180
A company is considering whether to lease or buy an asset.
The following data applies:
* The bank will charge interest at 7.14% per annum
* The asset will cost $1 million
* Tax-allowable depreciation is available on a straight line basis over 5 years
* There is no residual value
* Corporate tax is paid at 30% in the year when the profit is earned
What is the NPV of the buy option?
Give your answer to the nearest $000.
Answer:
Explanation:
$ ?
$740,000 (negative NPV of buy option)Under CIMA F3's lease-or-buy framework, the buy option is evaluated by discounting the after-tax cash flows associated with owning the asset. When an asset is purchased, the immediate cash outflow is the purchase price, but ownership provides a benefit through tax- allowable depreciation, which creates an annual tax shield (a reduction in tax payable). Because corporate tax is paid in the same year that profit is earned, the depreciation tax shield arises each year from Year 1 to Year 5.
Step 1: Initial cost (Year 0 outflow)Asset cost = $1,000,000 (cash outflow at time 0).Step 2: Annual tax depreciation and tax shieldStraight-line over 5 years, no residual value:Depreciation = 1,000,000/5=200,0001
{,}000{,}000 / 5 = 200{,}0001,000,000/5=200,000 per year.Tax shield each year = 200,000×30%=60,000200
{,}000 \times 30\% = 60{,}000200,000×30%=60,000.Step 3: Discount rateCIMA F3 applies the after-tax cost of debt when valuing tax-deductible flows funded by borrowing:After-tax discount rate = 7.14%×(1#0.30)=4.
998%#5%7.14\% \times (1 - 0.30) = 4.998\% \approx 5\%7.14%×(1#0.30)=4.998%#5%.Step 4: Present value of tax shields (5-year annuity at 5%)Annuity factor = 1#(1.05)#50.05=4.32948\frac{1 - (1.05)
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