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| Section | Weight | Objectives |
|---|---|---|
| Business Valuation | 40% | - Valuation methods
- Investment appraisal
|
| Financial Risks | 20% | - Types of financial risk
- Risk measurement and assessment
|
| Financial Policy Decisions | 15% | - Strategic financial objectives and stakeholder impact
|
| Sources of Long-term Funds | 25% | - Capital structure theories and WACC
|
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NEW QUESTION # 211
The Government of Eastland is concerned that competition within its private healthcare industry is being distorted by the dominant position of the market leader, Delta Care. The Government has instructed the industry regulator to investigate whether the industry is operating fairly in the interests of patients.
Which of the following factors might the industry regulator review as part of their investigation?
Select ALL that apply.
Answer: A,B,C,E
Explanation:
The regulator has been asked to see whether competition is being distorted by a dominant firm. Under competition / antitrust principles, regulators normally look at:
Profits (A): persistently high profits may indicate market power or abuse of dominance.
Market shares (B): high and stable market share for one firm can signal dominance and lack of effective competition.
Prices across the industry (C): higher-than-expected or similar prices between competitors may indicate weak competition or collusion.
Entry barriers (E): high barriers (e.g. licences, regulation, capital intensity, brand strength) reduce competitive pressure and help a dominant firm maintain power.
Medical treatment efficacy (D) relates to quality of clinical outcomes, which is important for health regulators, but it is not primarily a competition issue, so it's less relevant to whether the market is operating
"fairly" in a competition sense.
NEW QUESTION # 212
A company wishes to raise new finance using a rights issue to invest in a new project offering an IRR of 10% The following data applies:
* There are currently 1 million shares in issue at a current market value of $4 each.
* The terms of the rights issue will be $3.50 for 1 new share for 5 existing shares.
* The company's WACC is currently 8%.
What is the yield-adjusted theoretical ex-rights price (TERP)?
Give your answer to 2 decimal places.
Answer:
Explanation:
$ ?
4.06, 4.060Existing shares = 1,000,000 at $4 # value = $4.0mRights terms: 1 new share for 5 existing at $3.50 New shares = 1,000,000 / 5 = 200,000Funds raised = 200,000 × 3.50 = $0.7mTotal shares after issue =
1,200,000Project:IRR = 10%WACC = 8%Assume funds raised ($0.7m) are invested in a project returning
10% indefinitely.PV of project using WACC:PV=Investment×IRRWACC=0.7×0.100.08=0.7×1.25=0.
875 million\text{PV} = \text{Investment} \times \frac{\text{IRR}}{\text{WACC}} = 0.7 \times \frac{0.10}
{0.08} = 0.7 \times 1.25 = 0.875 \text{ million}PV=Investment×WACCIRR=0.7×0.080.10=0.7×1.25=0.
875 million Total equity value after investment:V=4.0+0.875=4.875 millionV = 4.0 + 0.875 = 4.875 \text{ million}V=4.0+0.875=4.875 million Yield-adjusted TERP:TERP=4.8751.2=4.0625#4.06\text{TERP} = \frac
{4.875}{1.2} = 4.0625 \approx \mathbf{4.06}TERP=1.24.875=4.0625#4.06
NEW QUESTION # 213
On 1 January 20X1 a company entered into a S200 million interest rate swap with a bank at a fixed rate of 4% against the 6-month risk-free rate to hedge the interest rale risk on a floating rate borrowing.
6-month risk-free rate was as follows:
What is the net settlement due under the swap contract on 1 July 20X1?
Answer: D
Explanation:
Notional principal = $200m
Pay fixed 4%, receive floating (6-month risk-free).
For the first 6 months, the floating rate fixed on 1 Jan = 5% p.a.
Difference = 5% # 4% = 1%
Settlement for 6 months:
0.01×200 m×612=$1 000 0000.01 \times 200\,\text{m} \times \frac{6}{12} = \$1\,000\,0000.01
×200m×126=$1000000
Floating > fixed, so the company receives this amount under the swap.
Correct answer: D. $1,000,000 net receipt to the company.
NEW QUESTION # 214
A large, quoted company that is all-equity financed is planning to acquire a smaller unquoted company that is also all-equity financed.
The acquiring company's directors are using the dividend valuation model to value the target company before making an offer.
Relevant data for the target company:
* Dividends paid in the last financial year $2 million
* Book value of net assets $15 million
* Shares in issue 1 million
The acquiring company's cost of capital is 10%.
Its directors believe they can improve the target company's performance in the long term.
They estimate there will be no growth in the first year of the acquisition but from year 2 onwards there will be a 4% growth each year in perpetuity.
What is the maximum price the acquiring company should offer for each of the shares in the target company?
Answer: C
Explanation:
We use the Dividend Valuation Model (DVM) with a one-year zero-growth period followed by constant growth:
Last year's dividend = $2m # with 1m shares, DPS# = $2.00.
No growth in year 1 # D# = $2.00.
From year 2, dividends grow at 4% in perpetuity #
D# = 2.00 × 1.04 = $2.08
Using the Gordon growth model from year 2 onwards:
P1=D2ke#g=2.080.10#0.04=2.080.06#34.67P_1 = \frac{D_2}{k_e - g} = \frac{2.08}{0.10 - 0.04} = \frac{2.08}{0.06} # 34.67P1=ke#gD2=0.10#0.042.08=0.062.08#34.67
Now discount D# and P# back to today at 10%:
P0=D11.10+P11.10=2.001.10+34.671.10#1.82+31.52#33.34P_0 = \frac{D_1}{1.10} + \frac{P_1}{1.10} = \frac{2.00}{1.10} + \frac{34.67}{1.10} # 1.82 + 31.52 # 33.34P0=1.10D1+1.10P1=1.102.00+1.1034.67#1.
82+31.52#33.34
Rounded: $33.33 per share # Option A.
NEW QUESTION # 215
PTT has a number of subsidiary companies around the world, including FTT based in Europe and CTT based in Indonesia CTT purchases all of us raw materials from FTT CTT processes these materials and the resulting products are exported to several different countries CTT pays FTT in the Indonesian currency.
Indonesia's inflation is higher than that of FTTs home country
Which of the following statements are correct?
Select ALL that apply
Answer: A,B,C
NEW QUESTION # 216
......
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