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| Section | Weight | Objectives |
|---|---|---|
| Financial Policy Decisions | 15% | - Strategic Financial Objectives
|
| Sources of Long-Term Funds | 25% | - Equity Finance
|
| Business Valuation | 40% | - Post-Transaction Issues
|
| Financial Risks | 20% | - Interest Rate Risk Management
|
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NEW QUESTION # 139
Company A is based in Country A where the functional currency is the A$. Currently all sales are to domestic customers in Country A. However, the company is planning to expand internationally by acquiring Company B, a distribution company in Country B, to enable it to sell goods worldwide The functional currency of Country B is the BS Company A will invoice its international customers in their local currency.
Wage increases in Country B are forecast to be modest, due to high unemployment levels, but overall inflation in Country B is forecast to be significantly higher than in Country A Which TWO of the following statements about the economic risk of the acquisition of Company B are true?
Answer: E
NEW QUESTION # 140
A company is currently all-equity financed.
The directors are planning to raise long term debt to finance a new project.
The debt:equity ratio after the bond issue would be 40:60 based on estimated market values.
According to Modigliani and Miller's Theory of Capital Structure without tax, the company's cost of equity would:
Answer: B
Explanation:
A company introduces debt; under Modigliani & Miller without tax the overall WACC is unchanged, so as gearing (D/E) rises the cost of equity must increase to compensate shareholders for higher financial risk.
NEW QUESTION # 141
A company's Board of Directors is assessing the likely impact of financing future new projects using either equity or debt.
The directors are uncertain of the effects on key variables.
Which THREE of the following statements are true?
Answer: C,D,E
Explanation:
In CIMA F3, capital structure choice affects tax, risk and shareholder expectations. Debt interest is tax- deductible whereas dividends are not, so using more debt reduces taxable profit. Therefore statement A ("no impact on tax") is false. Retained earnings are not "free": shareholders could have taken that cash and invested elsewhere, so the cost of retained earnings equals the cost of equity - B is false.
As gearing rises, equity becomes riskier because fixed interest must be paid before any earnings go to shareholders. Under Modigliani-Miller with or without tax, this raises the cost of equity, so D is true.
Replacing debt with equity reduces the probability of default and so reduces overall financial risk, making E true.
Issuing more equity increases the number of shares; investors will expect dividends on those shares in future, so total dividend outflows are likely to rise even if DPS stays the same. This added distribution pressure makes F true. C ("debt is always preferable") is rejected in F3 because of higher financial risk and potential increase in WACC beyond an optimal gearing level.
NEW QUESTION # 142
XYZ has a variable rate loan of $200 million on which it is paying interest of Liber ' 3%.
XYZ entered into a swap with AG bank to convert this to a fixed rate 8% loan. AB bank charges an annual commission of 0.4% for making this arrangement
Calculate the net payment from KYZ to AB bank at the end of the first year if Libor was 2% throughout the year.
Give your answer in $ million, to one decimal place.
Answer: A
Explanation:
NEW QUESTION # 143
Which TWO of the following situations offer arbitrage opportunities?
Answer: B
NEW QUESTION # 144
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